Talking Tax – Issue 181

Foreign purchaser additional duty provisions were introduced in Victoria with effect from 1 July 2015 and can apply to individuals, companies and all types of trusts that are characterised as foreign purchasers. 

Under the relevant provisions of the Duties Act 2000 (Vic), a discretionary trust is a ‘foreign trust’ if:

• the trustee has the ability to make a distribution of more than 50% of the capital of the estate of the trust to a ‘foreign person’ (alone or together with their associates); or
• the Commissioner has made a determination that a ‘foreign person’ has the capacity to determine or influence the outcome of decisions about the administration and conduct of the trust.

Given that most discretionary trusts have broad classes of beneficiaries, it is likely that a foreign person will be an eligible beneficiary of the trust and the trustee will have discretion to make a distribution of more than 50% of the trust capital to that person, despite never having done so and never intending to do so.  Accordingly, under the current rules, that trust would technically be a foreign trust.

Since the introduction of these harsh provisions, the Commissioner has been applying what is colloquially known as a ‘practical approach’ when discretionary trusts acquire interests in residential property.  The practical approach meant that foreign purchaser additional duty was not charged where it could be shown that no ‘foreign persons’ have benefitted from the trust and there is no intention for a ‘foreign person’ to benefit from the trust. 

It is the view of the Commissioner that, four years on since the introduction of the foreign purchaser additional duty provisions, the foreign purchaser rules for discretionary trusts are now better understood by tax advisers.  Therefore, the State Revenue Office (Victoria) has announced that as of 1 March 2020, it will strictly apply the foreign purchaser additional duty provisions of the Duties Act 2000 (Vic), which results in most discretionary trusts being a ‘foreign trust’ unless their trust deed specifically precludes the trustee from making distributions of capital of the trust to a ‘foreign person’. 

This change follows a similar approach announced by Revenue NSW in late 2019 (as discussed in Talking Tax Issues 177 and 180).  This approach is also likely to be followed by Tasmania, based on its similar provisions in this regard.  The other jurisdictions with foreign purchaser surcharges only look to named beneficiaries, takers in default and/or the trustee, which is a bit easier to manage than the entire pool of potential beneficiaries.

Accordingly, clients planning on purchasing residential property in Victoria in a discretionary trust (with no intention to make any distributions to foreign persons) should consider inserting an exclusion clause into the trust deed – if it does not have one already – that precludes ‘foreign persons’ from being potential beneficiaries of the trust.  It is important to note that although this duty surcharge only currently relates to residential property (and in the case of Tasmania, also primary production land), clients sometimes don’t realise when they are acquiring an interest in ‘residential property’, for instance when they acquire a significant interest in another entity that owns residential property.

The State Revenue Office (Victoria) will continue to apply the ‘practical approach’ to dutiable transactions where contracts of sale were entered into (or nominations were made in a sub-sale context) before 1 March 2020.  Any amendment to a trust deed will have to be done prior to the dutiable transaction completing (ie prior to settlement).

Please contact Jim Koutsokostas if you would like to discuss the terms of your discretionary trust deed or if you have queries relating to the foreign purchaser additional duty regime.