The Victorian State Revenue Office (SRO) has come out with an announcement that from 1 March 2020 it will no longer apply its practical approach in determining whether a discretionary trust is a foreign trust for stamp duty purposes.
From 1 March 2020, any discretionary trust that does not specifically exclude foreign beneficiaries will automatically be considered a foreign trust. This means that when purchasing property in such a trust, the 8% foreign purchaser surcharge will automatically apply, resulting in a duty rate of 13.5%.
This strict determination of what is a foreign trust replaces the existing practical approach adopted by the SRO in the past 4 years since the introduction of the foreign purchaser surcharge. The practical approach currently considers discretionary trusts with foreign beneficiaries who have not received any trust distributions, and on available information are unlikely to receive any in the future, not to be foreign trusts.
The implications of the change in approach by the SRO are that a discretionary trust will be deemed a foreign trust even if it does not presently have any foreign beneficiaries or any evidence of distribution to foreign beneficiaries in the past, unless the trust deed explicitly excludes foreign beneficiaries. Foreign beneficiaries are not limited to individuals and include foreign corporations and other trusts.
Most discretionary trust deeds contain standard provisions for the beneficiary classes to capture persons in various ways related to any specified beneficiary. For this reason, most discretionary trusts in Victoria will be considered foreign trusts due to the technical possibility for them to extend to foreign persons. Whilst in the past few years it was a cautionary approach to vary a discretionary trust to exclude foreign beneficiaries to manage the exposure to the foreign purchaser surcharge, such action is now a necessity for trustees of discretionary trusts contemplating a purchase of property after 1 March 2020 where there is no reason to keep the class of beneficiaries broad to include foreign persons.
The SRO has confirmed that this announcement of a changed approach will not apply in circumstances where contracts of sale (or nominations) have been made before 1 March 2020.
This changed approach by the SRO is not dissimilar to the recent announcements in NSW under a proposed legislative amendment to the duties legislation (that is yet to be passed by the NSW Legislative Council). The proposal will see discretionary trusts deemed to be foreign trusts unless the trust deed prevents a foreign person from being a beneficiary of the discretionary trust. Under the proposed amendments, taxpayers were allowed a transitional period of time to amend trust deeds before the end of 2019. Given the delay in passing the amendments, the transitional period deadline is expected to be extended into 2020. If the legislative amendments are passed, the variations of trust deeds will need to be made in a particular manner to essentially make the exclusion of beneficiaries irrevocable, in other words, the exclusion cannot be reversed at a future time.
Additionally, the proposed legislative amendment in NSW will have implications not only for stamp duty but also land tax purposes. Therefore, the required variation of discretionary trust deeds will not only be relevant for trusts that are looking to acquire property in NSW, but also for the annual land tax assessments which will impose the absentee land tax surcharge of 2% for any landholding discretionary trust that does not exclude the possibility for foreign beneficiaries.
In Victoria, the SRO’s change in approach in determining a foreign trust for the stamp duty foreign purchaser surcharge will not implicate the determination of what is an absentee trust for the 2% land tax absentee owner surcharge. For Victorian land tax purposes, a discretionary trust will be an absentee owner and thus liable for the absentee owner surcharge if it has at least one specified beneficiary that is a foreign person.
As the foreign purchaser surcharge applies in all Australian states and territories (except the Northern Territory), excluding foreign beneficiaries safeguards any unintended duty consequences when acquiring property by a discretionary trust. Gadens can assist with adequate variations of trust deeds to ensure the risks of additional duty and land tax are managed.
Biljana Apostolova, Partner
Erin Murray, Lawyer