With the imposition of foreign purchaser duty continuing to be implemented around the country there is a need to determine how this additional tax will apply to SMSFs.
Most jurisdictions imposing some form of ‘foreign purchaser duty’ include a ‘foreign trust’ or ‘trustee of a foreign trust’ in the relevant definition of a foreign person/purchaser. Usually, a foreign trust is a trust where one or more foreign individual persons have a particular level of interest in the trust (eg, interest in 50% of the capital of the trust) which is deemed to be a ‘substantial’ or ‘controlling’ interest.
The definition of a ‘foreign individual/natural person’ differs between jurisdictions. As an example, in Victoria this will mean a natural person who is not any of the following:
- an Australian citizen;
- permanent visa holder; or
- a New Zealand citizen who is the holder of a special category visa.
In a fixed or unit trust situation, it should be relatively simple to determine if a trust is a foreign trust by determining the relevant entitlements of the beneficiaries.
The issue facing discretionary trusts is that typically each beneficiary is deemed by the relevant legislation to have an interest in the whole of the trust (due to the trustee’s ability to exercise a discretion as to the distribution of the income or capital of the trust in their favour). For a detailed explanation of how a discretionary trust can unwittingly become a foreign trust see here.
Beneficiary of an SMSF
In the context of an SMSF, it is not immediately clear who a beneficiary is at all times. For example, the range of beneficiaries of an SMSF includes more than the members, however the extent of the interests of beneficiaries is not always obvious.
An SMSF might be described as a type of contingent fixed interest trust with a potential discretionary element in relation to death benefit payments. SMSF members have a beneficial interest in the trust, however, this is subject to the legislative restrictions regarding access to superannuation. Broadly, an SMSF may not fit into what would usually be considered a ‘fixed trust’ by revenue authorities.
A member’s dependants or beneficiaries who may benefit under a member’s will (estate) following their death may also have a beneficial interest that is contingent and arises on the death of the member. However, this interest will be subject to any exercise of discretion by an SMSF trustee in regards to the payment of a death benefit unless a binding death benefit nomination (‘BDBN’) is in place. Accordingly, the interest of a dependant or the member’s estate (‘legal personal representative) is contingent.
Why does it matter?
The additional duty surcharge that applies to foreign purchasers differs between jurisdictions (see the summary table at end of the article). If an SMSF is a foreign trust, and it purchases relevant real property (usually residential property) it will be subject to the additional duty surcharge.
For example, the usual duty payable on a $1 million property in Victoria is $55,000 (5.5%). If the foreign purchaser surcharge applies, this would add an additional 8% or $80,000 of duty making the total duty payable $135,000 after 1 July 2019. 7% additional duty applies before 1 July 2019.
Responses by the revenue authorities
As there is a dearth of guidance from the revenue authorities about this issue, we contacted each revenue office and asked them whether this duty surcharge applies to SMSFs (ie, can an SMSF be a foreign trust for the purposes of the foreign purchaser duty legislation) and if so, how they would determine this.
The laws relating to this tax differs from jurisdiction to jurisdiction. However, we found that most jurisdictions followed a similar approach. The responses we received will be discussed at our August SMSF Strategy Seminars. To secure your place, see here.
(7% prior to
1 July 2019)
|Foreign control or interest threshold||More than 50%||At least 20%||50% or more||50% or more||At least 50%||50% or more|
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
22 July 2019