Media Release | 2 September 2015

Caution needed when buying property in trusts

In an alarming move, the Victorian State Revenue Office has confirmed our fear that Foreign Purchaser Additional Duty (FPAD) will be applied to many stock-standard discretionary trusts. This will result in trust acquisitions of Victorian residential property being exposed to an additional 3% of duty.

Trust deeds should be reviewed and possibly amended prior to acquiring a property.

What is FPAD?

Recent amendments to Victoria’s Duties Act have imposed an additional amount of duty of 3% on certain post 1 July 2015 acquisitions of land by foreign purchasers.

The additional duty is payable on acquisitions of existing residential premises by a foreign purchaser.

Also, the additional duty is imposed where a foreign purchaser acquires land (other than existing residential property) and they form an intention to build a residence on that land.

Upon forming that intention, the purchaser must notify the SRO within 14 days. They must then pay an amount of additional duty of 3% of the value of the land (measured at the time of acquisition) within 30 days of forming the intention.

The additional duty also extends to purchases of certain landholder companies and trusts.

Application to discretionary trusts

The definition of a foreign purchaser includes the trustee of a foreign trust. In our view, this will encompass a large percentage of discretionary trusts.

A foreign trust means a trust in which one of the following has a ‘substantial interest in the trust estate’:

  1. a foreign corporation;
  2. a foreign natural person; and
  3. another person that holds the substantial interest as trustee of another foreign trust.

A foreign natural person is broadly a natural person who is not an Australian citizen or certain visa holders.

The amendments go on to provide a definition of what constitutes a ‘substantial interest in a trust estate’. Relevantly for discretionary trusts, the amendments state:

If, under the terms of a foreign trust, a trustee has a power or discretion as to the distribution of the capital of the trust estate to a person or a member of a class of person, any such person is taken to have a beneficial interest in the maximum percentage of the capital of the foreign trust estate that the trustee is empowered to distribute to that person.

What this means is that if, as is so often the case, the trust deed provides:

  • an extensive definition of the class of beneficiaries; and
  • the trustee with broad discretion as to who may receive distributions of capital

it is likely that there will be a foreign natural person with a substantial interest in the trust estate. This will make the trust a foreign trust.

For instance, the standard Hall & Wilcox discretionary trust deed includes a broad definition of the beneficiary class which extends to:

the parents, grandparents, brothers, sisters, Spouses, uncles, aunts and Children of the Primary Beneficiary or the Primary Beneficiaries, the Spouses, Children and grandchildren of those parents, grandparents, brothers and sisters, the Spouses, Children, grandchildren and great grandchildren of the Children of the Primary Beneficiary or the Primary Beneficiaries and the Children and grandchildren of the Spouses of the Primary Beneficiary or Primary Beneficiaries.

In modern, multi-cultural Australia we believe most families will have at least someone within this class who is a foreign natural person. As such, we believe most discretionary trusts will be foreign trusts and subject to the extra 3% duty.

What should be done

Prior to acquring land in a discretionary trust, where the land contains existing residential premises or it is intended to build residential premises, the deed should be reviewed to see if the trust is a foreign trust.

Advice should be sought about whether it is possible to either amend the terms of an existing trust or prepare a bespoke trust deed that ensures it is not a foreign trust.  In addition, for existing trusts resettlement issues must be considered before making any amendments.

Please contact us if you require any assistance.

Contact

Oliver Jankowsky

Partner & Head of International Practice

Ed Paton

Partner & Head of SE Asia Practice

Eugene Chen

Partner & Head of China Practice

Melanie Smith

Director - Business Development, Marketing and Communications

Natalie Bannister

Partner & Commercial National Practice Leader

Rhett Slocombe

Partner & Insurance National Practice Leader

Katie McKenzie

DIRECTOR - PEOPLE & CULTURE

James Bull

Special Counsel and Head of Frank

Melanie James

People & Culture Manager

Jacqui Barrett

Partner & Head of US Practice

Paul O’Donnell

Consultant & Head of Energy

Christopher Brown

Partner & Head of UK Practice

Lauren Parrant

Senior People & Culture Advisor, as at 1 July 2022

Melinda Woledge

Marketing & Communications Manager

Jasmine Koh

Senior Associate and Head of Frank

Alison Choy Flannigan

Partner & Leader, Health & Community

Billie Kerkez

Manager – Smarter Recovery Solutions

Peter Jones

Senior Commercial Counsel

You might be also interested in...

Thinking | 1 Sep 2015

The NSW Court of Appeal find quad bike provider guilty of negligence

​Alameddine v Glenworth Valley Horse Riding Pty Ltd [2015] NSWCA 219 Background Alissa Alameddie, the plaintiff, commenced proceedings against the defendant, Glenworth Valley Horse Riding (Glenworth) in relation to an injury she suffered while participating in a quad bike trail ride at the defendant’s premises on 21 May 2011. The plaintiff’s mother organised and paid […]

Thinking | 4 Sep 2015

Talking Tax – Issue 3

Key developments Rio Tinto loses appeal in GST case re ITCs This was a test case regarding whether section 11-15(2) of the GST Act contains a ‘principal purpose’ test. Under section 11-15(2)(a), taxpayers cannot claim an input tax credit for acquisitions of supplies that would be input taxed. The Full Federal Court found that the […]