Thinking | 24 February 2020

Talking Tax – Issue 181

No longer being practical - the removal of the ‘practical approach’ for foreign purchaser additional duty in Victoria

The Victorian Commissioner of State Revenue (Commissioner) has announced that from 1 March 2020, the ‘practical approach’ previously taken for discretionary trusts with potential foreign beneficiaries will no longer be applied.  This means that a discretionary trust may be considered a ‘foreign trust’ for duty purposes because someone in the wide pool of general beneficiaries is a ‘foreign person’, even if none of the named beneficiaries of the trust are foreign persons and the trustee had no intention to distribute trust property to a foreign beneficiary!

Broadly, the consequence of being a ‘foreign trust’ for duty purposes is that when the trust acquires an interest in residential property in Victoria, it is likely to incur the foreign purchaser additional duty (currently 8%) in addition to standard duty rates.  For example, if a family trust is used to acquire a residential property in Melbourne worth $1 million, the trust may be required to pay the State Revenue Office $80,000 of foreign purchaser additional duty, in addition to $55,000 of duty at general rates.

However, this surcharge would not apply if the trust deed contains a clause that specifically precludes the trustee from making distributions from the capital of the trust to foreign natural persons, foreign corporations or trustees of foreign trusts that otherwise fall within the classes of eligible beneficiaries (Foreign Beneficiaries).  We note that an Australian citizen living overseas is not a ‘foreign natural person’ for these purposes and can still benefit from the trust.

Before establishing a new trust or amending an existing trust deed to include such an exclusion clause, trustees and their advisors must consider the following:

  • Is there an intention for Foreign Beneficiaries to benefit under the trust? If so, an exclusion clause would not be appropriate.
  • Is such an exclusion clause permitted by and consistent with the other clauses of the trust deed?
  • Is the trustee willing to take on the administrative burden of checking the citizenship/residency status of potential beneficiaries before making any distributions of trust property (which may include looking through companies and trusts to determine the citizenship status of their beneficial owners)?

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.

TR 2019/D7 Income tax: when are deductions allowed for employees' transport expenses?

Draft Taxation Ruling 2019/D7 (Draft Ruling) was released on Friday the 13th of December 2019 - but it’s not bad luck!  The Draft Ruling provides the ATO’s view on when an employee can deduct transport expenses under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).

Broadly, this Draft Ruling is one of two further guides from the ATO following the previous Taxation Ruling 2017/D6 (TR 2017/D6) that dealt with the tax deductibility of travel expenses.  The Draft Ruling covers travel by airline, train, taxi, car, bus, boat or other vehicles.  Further guidance or a ruling will be issued by the ATO later in 2020 that will cover the deductibility of accommodation, meals and incidental expenses.

The Draft Ruling provides guidance about deductibility in a number of scenarios that were not previously covered, such as the transportation of bulky equipment and on-call and standby arrangements.  Additionally, there are updated examples regarding employees working between two different offices, employees working from home and situations with point of hire Fly-In Fly-Out workers.

The finalised ruling will have retrospective and prospective application.  The Draft Ruling is open for comment until 28 February 2020.  If you think this ruling may impact you or your clients, please contact us to discuss.

An employee can only deduct a transport expense under section 8-1 of ITAA 1997 to the extent that:

  • they incur the expense in gaining or producing their assessable income;
  • the expense is not of a capital, private or domestic nature; and
  • the applicable substantiation requirements in Division 28 and Division 900 of ITAA 1997 are satisfied.

Transport expenses that are incurred for ordinary travel between home and a regular place of work are not tax deductible.  However, transport expenses may be deductible when incurred by an employee travelling between work locations.  The Draft Ruling explains a number of exceptions to these general rules and other specific factual scenarios.

Interaction with Fringe Benefit Tax

The Draft Ruling may also be used as guidance for the application of the Fringe Benefits Tax Assessment Act 1986 (Cth) in determining whether such expenses paid by the employer would have been 'otherwise deductible' if incurred by the employee.

Safe travels!

Tax agents or legal representatives can now access information to act for a deceased taxpayer

An administrative nightmare for tax agents and legal personal representatives of deceased estates has now been formally remedied.  On 29 January 2020, the Australian Taxation Office registered Taxation Adminstration (Remedial Power - Disclosure of Protected Information by Taxation Officers) Determination 2020 (Instrument).  The Instrument modifies the confidentiality rules in the Taxation Administration Act 1953 (Cth) (TAA) so that an ATO officer can disclose protected information of a deceased person to the registered tax agent, BAS agent or legal practitioner of an executor or administrator of the deceased estate.

Previously under the TAA, a taxation officer could disclose protected information of a deceased person to that individual’s tax agent, BAS agent or legal practitioner (among others) but not to the agent or practitioner representing the legal personal representative of the deceased estate, which created practical difficulties for the legal personal representative when acting for a deceased taxpayer.

The Tax Institute highly recommended the then-draft Instrument and said the change would have a negligible implementation cost since it is consistent with the way the law has been interpreted and administered in the past.

Given that many people are already reluctant to take on the responsibility of being an executor or administrator of a deceased estate, it makes sense that this task is made a little easier by being able to share or direct confidential tax information of the deceased with the executor or administrator’s agent or lawyer.

This article was written with the assistance of Graduate Lawyer, Tamara Charlwood. 

Contact

Jim Koutsokostas

Jim is a experienced lawyer and Chartered Tax Advisor, providing expert advice on corporate and trust tax matters.

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