Update on NSW Purchaser Duty and Land Tax Surcharges on Trustees of Discretionary Trusts
On 26 February 2020, the NSW Parliament passed the State Revenue Legislation Further Amendment Bill 2020 (the Bill). The Bill codifies Revenue NSW’s existing approach to applying the foreign persons Surcharge Purchaser Duty and Surcharge Land Tax in respect of real property acquired or held in NSW by some Discretionary Trusts.
Specifically, the Trustee of a Discretionary Trust may be liable for the foreign person surcharges if any one of the potential beneficiaries of the trust is a foreign person. This applies to all potential beneficiaries under the various categories of beneficiaries provided for under the relevant Trust Deed - not just the named beneficiaries.
A foreign person is defined to include an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holding a substantial interest.
The effect of the Bill insofar as it applies to Surcharge Purchaser Duty is that a Trustee of a Discretionary Trust will be taken to be a foreign Trustee (and so is liable for surcharge purchaser duty as the buyer of residential land) if the terms of the Trust Deed do not prevent a foreign person from being a beneficiary under the Trust. If, however the terms of the Trust Deed specifically prevent a foreign person from being a beneficiary, then the Trustee will not be considered to be a foreign person for surcharge purchaser duty purposes.
A mirror position has been taken in regard to Surcharge Land Tax Surcharge. That is, a Trustee of a Discretionary Trust will be taken to be a foreign person (and so is liable for surcharge land tax as the owner of residential land) if the terms of the Trust Deed do not prevent a foreign person from being a beneficiary. The Bill provides that Surcharge Land Tax will be applied from the 2017 land tax year onwards.
However, if the terms of the Trust Deed specifically prevent a foreign person from being a beneficiary, the Trustee will not be considered to be a foreign person for Surcharge Land Tax purposes.
The Savings provisions contained in the Bill provide that Trustees of Discretionary Trusts that hold (or may in the future acquire) real property in NSW have until midnight on 31 December 2020 to irrevocably amend the relevant Trust Deed so as to specifically:
- prevent potential beneficiaries that are foreign persons from receiving distributions as to income and/or capital under the Trust; and,
- remove from the Trust Deed any existing named beneficiary who is a foreign person. It is not sufficient for any named or specified beneficiary who is a foreign person to simply be prevented from receiving a distribution in any particular year.
- Even if the Surcharge duty and/or tax has already been paid, the Bill provides that Trustees who amend the provisions of the Trust Deed before midnight on 31 December 2020 are entitled to a refund of any Surcharge duty and/or tax that has been paid.
- Amendments made to Discretionary Trust Deeds after midnight on 31 December 2020 will have no effect in terms of avoiding the imposition of Surcharge Purchaser Duty and Surcharge Land Tax, retrospectively applied from the 2017 land tax year onwards.
The takeaway for those Trustees who missed the boat on the previously nominated deadline of 31 December 2019 is that it is not too late to take action to avoid the imposition of Surcharge Purchaser Duty and Surcharge Land Tax.
While there is still time to amend your Discretionary Trust Deed, the clock is ticking and we recommend taking action as quickly as possible.
If you require assistance with this, please do not hesitate to contact a member of Coleman Greig’s Commercial Advice team, who would be more than happy to assist you.