From 1st March 2020, the State Revenue Office are changing their interpretation on the way they apply the foreign purchaser duty to discretionary trusts. Previously we have been able to apply a practical approach which meant as long as a foreign person had not been a beneficiary, the trust wouldn’t be treated as a foreign purchaser/land owner for stamp duty and land tax purposes. Therefore the trust would pay the lower rate for stamp duty and land tax.
The new changes that have been implemented relate to residential properties purchased or held by discretionary trusts (this includes family trusts).
In Victoria and New South Wales the strict interpretation of the rules now state that when purchasing a residential property, discretionary trusts only need to have the potential for a foreign beneficiary, to be deemed a foreign purchaser (this will capture many existing trusts) and as a result pay stamp duty at the higher surcharge rate.
From a land tax perspective, in Victoria the interpretation on whether or not the higher rate for absentee owners would apply remains unchanged and only applies if there are named beneficiaries who are foreign, however New South Wales are using the new interpretation of potential foreign beneficiaries to determine their absentee owners liable for a higher rate of Land Tax.
For existing Trusts, the State Revenue Office have suggested that including an irrevocable clause in your trust deed to exclude distributions to foreign persons would bring discretionary trusts back to paying the lower rate of stamp duty and where applicable land tax as well. We also need to consider the intentions of any new trusts being setup and whether this clause should be included when established.
Given this is a complex area, if you have any questions please call our office to discuss your specific situation to make sure you are minimising your state tax obligations when purchasing or holding residential property in discretionary trusts.
Contributed by Adam Burgess.