Time to review all Discretionary Trusts

Time to review all Discretionary Trusts

Key Takeaways:

  • In NSW, foreign persons pay surcharge purchaser duty (8%) and surcharge land tax (2%) on residential property, in addition to ordinary rates.
  • From 24 June 2020, the a trustee of a discretionary trust holding residential property in NSW will be deemedto be a foreign person and subject to surcharge rates – unless the trust deed specifically excludes foreign persons as beneficiaries (no foreign beneficiary) and irrevocably prevents foreign persons becoming beneficiaries in future (no amendment).
  • Trustees have until 31 December 2020 to review and amend all discretionary trust deeds to satisfy the “no foreign beneficiary” and “no amendment” requirements.
  • Trustees can apply for exemption/refund of surcharge paid if trust deed is varied as above before 31 December 2020.

The State Revenue Legislation Further Amendment Act 2020 (the Act) received royal assent on 24 June 2020. One of the key changes implemented by the Act is the imposition of surcharge duty and land tax on trustees of a discretionary trust.

A trustee of a discretionary trust is taken to be a “foreign person” (and therefore liable for surcharge purchaser duty) if the terms of the trust do not specifically prevent a foreign person from being a beneficiary of the trust. In other words, a trustee who is deemed a foreign trustee will pay an additional 2% in land tax and additional 8% in stamp duty on residential property.

The new measures also contain transitional provisions that have retrospective effect to the time the surcharges were introduced in 2016/2017. Accordingly, if a trustee incurred the surcharge purchaser duty and surcharge land tax between the 2017 tax year and now, they can claim a refund/exemption from the surcharge, provided they vary the trust deed before midnight on 31 December 2020 to:

  • prevent a foreign person from being a being a beneficiary of the trust (no foreign beneficiary requirement); and
  • not allow for any amendments to be made to the trust to allow a foreign person to become a beneficiary in future (no amendment requirement).

As most standard discretionary trust deeds include a broad class of discretionary beneficiaries for tax planning, there is a possibility that a class may include a foreign person. Don’t get caught out! Make these changes before 31 December 2020 so as to not inadvertently be subject to the surcharge!

If you have any questions on how this might affect you, please contact our office today.

Important Disclaimer: The material contained in this publication is of general nature only and is based on the law as of the date of publication. It is not, nor is intended to be legal advice. If you require further information on the content of this publication, please contact our office on 9299 0112.