Thinking | 13 July 2020

Act now! Foreign surcharges for trusts holding NSW residential property

By Jim Koutsokostas

The NSW Government’s changes to surcharges for ‘foreign persons’ for duty and land tax are now law. These changes apply to NSW residential land held by discretionary trusts.

In our Talking Tax update on 8 November 2019, and our further update on 11 December 2019, we discussed the proposed measures. Despite a long delay, the law commenced on 24 June 2020.

Surcharge purchaser duty (since June 2016) and surcharge land tax (since the 2017 land tax year) have applied to ‘foreign persons’ acquiring or holding NSW residential property. Currently, surcharge purchaser duty is 8% and surcharge land tax is 2%, in addition to ordinary rates.

The new measures provide that a trustee of a discretionary trust holding NSW residential property is deemed a foreign person unless the trust deed expressly excludes foreign persons as beneficiaries and irrevocably prevents foreign persons from becoming beneficiaries.

Effectively, a discretionary trust that does not exclude foreign persons as beneficiaries will be liable to foreign person surcharge purchaser duty and surcharge land tax even if the trust has never distributed to a foreign person, and intends to never distribute to a foreign person.

As most standard discretionary trust deeds include a broad class of discretionary beneficiaries for tax planning, the class may include a foreign person, and the new measures are likely to be an issue.

The new measures also contain transitional provisions that have retrospective effect to the time the surcharges were introduced in 2016/17. Accordingly, if a trustee incurred the surcharge purchaser duty and surcharge land tax, they can claim a refund of the surcharge. However, for this to apply, the trust deed must be varied before 31 December 2020.

In our view, there is a risk that Revenue NSW will re-assess relevant discretionary trusts for prior transactions or years to include surcharge purchaser duty or surcharge land tax if they find that the deed for the relevant trust has not been amended by 31 December 2020.

Additionally, where a trustee of a discretionary trust has acquired NSW residential land and payment of the duty is due prior to 31 December 2020, the trust deed should be varied prior to the due date (and preferably before settlement, if possible).

In light of the new measures, we are advising clients and their advisers to urgently review their discretionary trust deeds where the trust holds NSW residential property and, if necessary, seek advice about varying the terms to comply with the requirements as soon as possible.

Careful consideration should also be given to interests that a discretionary trust holds in residential property indirectly (such as through an interest in another trust or shares in a company).

The duty and land tax surcharge provisions operate differently in different jurisdictions. Although NSW is particularly time-sensitive, trustees should also review their discretionary trust deeds where the trust holds land outside NSW.

Contact a member of Hall & Wilcox’s Private Clients team or Tax team for further information or if you have clients with trusts affected by the changes.

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