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DBA Lawyers’ discretionary trust –– managing the extra duty and land tax surcharges on foreigners

By Shaun Backhaus, Lawyer and Daniel Butler , Director DBA Lawyers

DBA Lawyers can supply a discretionary trust deed to exclude foreign persons from being beneficiaries. We do not automatically exclude foreign persons as this may exclude beneficiaries forever and may have substantial long-term implications. Moreover, with eight different jurisdictions with different legislation and with different definitions of who is, broadly speaking, a ‘foreign person’, this can prove complex and problematic to cover in any event. Thus, we need to obtain specific instructions from each client so that we can tailor each discretionary trust to exclude foreign persons having regard to the relevant jurisdiction(s) and where the property is held or may in the future be held. We outline our reasoning below.

Foreign persons no longer automatically excluded

Broadly, extra:

  • duty is payable on the purchase of residential real estate by a trustee of a discretionary trust by a foreign purchaser; or
  • land tax is payable on residential real estate held by a trustee of a discretionary trust with certain foreign beneficiaries.

For your convenience, we have prepared a summary of the extra duty and land tax that applies to trustees of discretionary trusts in the various Australian states and territories. These extra taxes have given rise to considerable complexity and some trustees without an appropriately drafted trust deed have been getting assessed on these extra taxes in various jurisdictions around Australia. Indeed, there are many suppliers of trust deeds (especially those not supplied by a law firm with tax and trusts expertise) that have not yet developed appropriate strategies to cover these extra taxes.

As discussed above, there are eight different jurisdictions, with different legislation and with different definitions and more states are planning to impose similar taxes. Thus, there is no consistency by the different jurisdictions on the definition of a foreign person and how the relevant legislation will be applied in practice. As such, DBA Lawyers believes it is necessary to ensure that each client wanting to exclude foreign persons from their trust deed considers what legislation is likely to apply and obtain a deed that caters to their specific circumstances.

Why be careful?

Once established, a discretionary trust can last for up to 80 years in most Australian jurisdictions, with the exception of a trust covered by applicable South Australian law. As well as being costly and difficult to carry out, any variation to a discretionary trust deed carries with it a risk of resettlement of the trust which can result in substantial duty being imposed and other unforeseen consequences. Because of this, it is important that any trust deed is correctly and appropriately drafted from the outset to limit the chance of a variation being required in the future.

Further, the exclusion of foreign persons from being eligible beneficiaries of a discretionary trust (that is usually intended to include an expansive range of potential beneficiaries including close family members, relatives, eligible trusts, eligible companies and charities, etc) should not be undertaken without proper consideration of all the consequences. Clients should ensure that they are aware of who is likely to be excluded from being a beneficiary by excluding foreign persons as this may have unintended consequences.

For example, in seeking to save on land tax applicable to an absentee owner in Victoria (broadly a ‘foreign person’ for Victorian land tax purposes), the Victorian foreign land tax surcharge provisions refer to the specified or named beneficiaries of the trust. Thus, to save on land tax you may need to exclude one or more specified or named beneficiaries of the trust. However, by doing so the State Revenue Office of Victoria may then argue that the trust has been resettled and therefore assess duty on the full value of all dutiable property held in the trust. Query, was the land tax saving worth the duty cost and did the drafter of the deed consider or even know about the potential downstream consequences.

This is a real danger area for non-qualified advisers who are not registered lawyers doing legal work especially with the raft of new methods available. Such methods include having a subscription service to prepare legal documentation for clients which, on first blush, appears very attractive to many accountants, financial planners and other advisers where they can simply go to the web and insert data and become the preparer of the deed. While this all appears smooth sailing, these advisers, among other things, have committed an offence under applicable state and territory legal practice rules, are likely to be exposed for professional negligence without any professional indemnity insurance (if they have drafted and supplied a legal document for a fee without being a qualified and registered lawyer) and may do a disservice to their clients. Moreover, those advisers that belong to a professional body that has ethical standards, are also likely to be at risk under those standards that preclude their members carrying out any legal work.

Please note that added complexity arises as a person may change their status from time to time. For example, there may be situations where a foreign person becomes an Australian citizen in which case they would no longer meet the definition of a foreign person as contained in say the Duties Act 2000 (Vic). Similarly, a person holding a permanent visa may no longer continue to hold that visa and then be a foreign person for the purposes of the Duties Act 2000 (Vic). Moreover, added complexity arises as a trust may have properties in more than one jurisdiction which can result in multiple different definitions in different legislation applying at the same time to the property the subject to the legislation of the relevant jurisdiction.

If you wish to exclude a foreign person from a discretionary trust

To ensure that the discretionary trust deeds that DBA Lawyers provide are drafted for our clients’ specific requests, we ask that any clients who specifically wish to exclude foreign persons notify us of their intentions in their instructions. Our order forms and online ordering portal have specific notes to assist in completing your order.

We include a tick box for those that wish to exclude foreign beneficiaries in our order forms/portal. We also include the following notes:

*Additional State and Territory taxes — foreign beneficiaries

Additional duty and land tax may be payable by a trustee in respect of real property and certain other dutiable property in most States and Territories in Australia. This primarily applies to residential property.

To minimise this risk, DBA Lawyers’ trust deed can be specifically drafted to exclude ‘foreign beneficiaries’.

If you want to distribute to foreign beneficiaries, we recommend that you first obtain our advice before ordering.

We can then prepare a deed tailored to your specifications for an additional fee. Naturally, please let us know if you require any advice as it is vital that the right deed be obtained from the commencement of a trust.

We will then contact our clients to ascertain their needs and will tailor our deed to their specific instructions having regard to the jurisdiction(s) that are applicable. Our normal ordering process will prompt our clients to consider this issue.

Our approach to providing discretionary trust deeds is designed to ensure our clients obtain a deed that satisfies their needs and reduces the risk of incurring unnecessary tax imposts.

Given that a trust may last many years it is likely that the relevant laws and revenue office policies and practices will change over time and this may still result in additional taxes being imposed. Accordingly, the issue of whether a trust is a foreign trust must be considered on an ongoing basis and at least prior to any transaction involving real estate that might incur land transfer duty and land tax. Naturally, we generally recommend that expert advice be obtained before any substantial asset is acquired.

What is foreign purchaser duty and land tax surcharge?

In a number of Australian jurisdictions, foreign trusts are now subject to foreign purchaser surcharge duty or its equivalent where the trustee acquires residential property. Foreign trusts would pay the usual rate of duty plus the additional surcharge duty. For example, in Victoria duty on the acquisition of dutiable property (ie, real estate) is typically around 5.5% and the surcharge for foreign trusts is 7% resulting in an overall duty rate of around 12%.

As noted above, since the specific legislative definitions markedly differ from jurisdiction to jurisdiction and the practices and policies of the relevant revenue offices also differ, they can have a significant impact on the way the law is interpreted and applied by those offices and their practices and policies may not coincide with a generally accepted legal view. Some jurisdictions may even allow the relevant revenue commissioner to determine and deem that a trust is a foreign trust, despite not otherwise meeting the standard definition under the relevant legislation.

Further, in Victoria, New South Wales, the Australian Capital Territory and Queensland, the trustee of an absentee trust (or its equivalent terminology) is subject to a land tax surcharge or equivalent on residential real estate for all the trust’s non-exempt properties.

The table below is a summary of the states and territories in Australia that have a duty surcharge and/or a land tax surcharge for foreign purchasers. While the below table is correct as at the date of preparation of this article, ongoing further changes are likely. Clients should consider their obligations to pay these taxes as part of any transaction and in respect of land tax on an ongoing annual basis. Advisers, in particular, should seek out a quality supplier of trust deeds that is on top of this area as ‘cheap is not always cheerful!’.

Expert advice should be sought if in any doubt as the tax and legal implications can be substantial.

State/TerritoryIs there a foreign person duty surcharge?Is there a foreign person land tax surcharge?
VicYesYes
NSWYesYes
QldYesYes
SAYesNo
WAProposed from 1 January 2019No
ACTNoYes
TasYesNo
NTNoNo

*           *           *

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Note: DBA Lawyers hold SMSF CPD training at venues all around Australia and online. For more details or to register, visit www.dbanetwork.com.au or call Marie on 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

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