Does your discretionary trust own residential land in NSW?
Amend your trust deed before 31 December 2020 – avoid surcharge land tax and surcharge purchaser duty
If you own residential land in New South Wales in the capacity as a trustee of a discretionary trust, you will be assessed as a foreign person and become liable for the land tax surcharge if your trust does not exclude foreign people from being a potential beneficiary of the trust. Now is the time to review and update your trust deed!
On 24 June 2020, amendments to the Duties Act 1997 (NSW) (“Duties Act”), Land Tax Act 1956 (NSW) (“Land Tax Act”) and the Land Tax Management Act 1956 (NSW) came into effect and impacted upon the trustees of discretionary trusts who own or intend to purchase residential property in New South Wales.
As a result of these amendments, the trustee of a discretionary trust is taken to be a foreign person in that capacity for the purposes of duty and land tax if the trust does not prevent a foreign person from being a beneficiary of the trust
Unless the terms of the trust deed are compliant, trustees can expect to pay surcharge land tax as a foreign owner of residential land, in addition to standard land tax. The surcharge rate is 2 per cent from the 2018 land tax year onwards.
Trustees looking to purchase residential land may be liable for surcharge purchaser duty as a foreign purchaser, in additional to standard transfer duty (also known as stamp duty). Surcharge purchaser duty is currently 8 per cent on the value of the residential land.
It is common for a discretionary trust deed to name classes of potential beneficiaries, for example, the children, spouses, grandchildren and extended relatives of a named beneficiary. The classes of potential beneficiaries may be extensive and not known at the time that the trust was created (e.g. future spouses of future children and descendants) and therefore the potential beneficiaries may include foreign persons.
It is important to review your trust deed and confirm whether your trust allows a foreign person to be a potential beneficiary.
A transitional period applies now up until midnight on 31 December 2020 for trustees to update their trust deed to avoid being assessed as a foreign person.
To avoid being treated as a foreign person for the purposes of duty and land tax, the discretionary trust must prevent a foreign person from being a beneficiary of the trust, pursuant to section 104JA(2) of the Duties Act and section 5D(2) of the Land Tax Act, by meeting the requirements in subsection (3) of the respective Acts, as follows:
(3) A discretionary trust is considered to prevent a foreign person from being a beneficiary of the trust if (and only if) both of the following requirements are satisfied—
(a) no potential beneficiary of the trust is a foreign person (the no foreign beneficiary requirement),
(b) the terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person (the no amendment requirement).
Now is the time for trustees to review their trust deed and assess whether foreign persons are excluded as potential beneficiaries. Existing land owners should update their trust deed before 31 December 2020 to avoid being a foreign person for the purposes of surcharge land tax. Trustees intending to purchase residential property should make the necessary amendments to their trust deed before any purchase.
Gavin Parsons and Associates can assist you with reviewing your trust deed and making the necessary amendments to the trust deed.
Contact Gavin Parsons and Associates on (02) 9262 4471 or Gavin@gpalaw.com.au if you have any enquiries about land tax, transfer duty or property law.