Commissioner's practice note: Foreign surcharges and discretionary trusts

Purpose

This practice note outlines how surcharge purchaser duty and surcharge land tax will be applied in certain situations where land is held by a discretionary trust.

Background

Surcharge purchaser duty applies to acquisitions of NSW residential land by foreign persons, and surcharge land tax applies to foreign persons who are owners of residential land in NSW. Surcharge purchaser duty and surcharge land tax (together, the foreign surcharges) are payable in addition to any other duty or land tax payable.

Where an interest in a property is acquired by or held on trust by a discretionary trust, the trustee of the trust may be liable for foreign surcharges if any one of the potential beneficiaries is a foreign person.

For a discretionary trust, each beneficiary to whom the trustee has discretion to distribute the income or property is deemed to have the maximum percentage interest in the income or property over which the trustee may exercise a discretion to distribute.

This Commissioner's Practice Note further expands on Revenue Ruling G010 Version 2, and should be read in conjunction with the ruling. As outlined in the ruling, the Chief Commissioner can exercise a discretion to give retrospective effect to amendments to trust deeds that remove the trustee's power to make distributions to any person who is a foreign person for the purposes of the foreign surcharges.

Commissioner’s practice note

Potential beneficiaries are generally nominated by class rather than name for a number of reasons including change of circumstances or they do not exist at the time the trust deed is executed. Where there are no existing potential beneficiaries who are foreign persons, the foreign surcharges will not apply.

Example 1

Mr & Mrs Jones (both Australian Citizens) are primary beneficiaries of the Jones Family Trust. Other primary beneficiaries include their two children Mark & Peter who are under the age of 10. The trust has potential beneficiaries who include future spouses and children of Mark and Peter and no other potential beneficiaries.

The trust has no existing foreign beneficiaries and therefore the trustee is not liable for the foreign surcharges. The trust deed does not need to be amended.

Example 2

Mr & Mrs Jones (both Australian Citizens) are primary beneficiaries of the Jones Family Trust. Potential beneficiaries include their children, their spouses, grandchildren, aunties & uncles (all Australian citizens), the lineal descendants of the specified beneficiaries and a company whose shareholders and directors are Mr & Mrs Jones.

The trust has no existing foreign beneficiaries and therefore the trustee is not liable for the foreign surcharges. The trust deed does not need to be amended.

Example 3

Mr & Mrs Jones (both Australian Citizens) are primary beneficiaries of the Jones Family Trust. Potential beneficiaries include their children, their spouses, grandchildren, aunties & uncles (all Australian citizens), the lineal descendants of the specified beneficiaries and a charity operating in Australia for the benefit of persons ordinarily resident in Australia.

The trust has no existing foreign beneficiaries and therefore the trustee is not liable for the foreign surcharges. The trust deed does not need to be amended.

Example 4

Mr & Mrs Jones (both Australian Citizens) are primary beneficiaries of the Jones Family Trust. Potential beneficiaries include their children, their spouses, grandchildren, aunties & uncles (all Australian citizens), the lineal descendants of the specified beneficiaries and any entities whether formed in Australia or elsewhere such as corporations, charities etc.

The trust has potential existing foreign beneficiaries and in order for the trustee not to be liable for foreign surcharges, the trust deed will need to be amended.

Example 5

Mr & Mrs Jones (both permanent residents but not ordinarily resident for the 2018 tax year) are beneficiaries of the Jones Family Trust. Potential beneficiaries include their children, their spouses, grandchildren, aunties & uncles, the lineal descendants of the specified beneficiaries.

Mr & Mrs Jones were overseas and were not in Australia for more than 200 days in 2017. Mr & Mrs Jones are classified as foreign for the 2018 tax year.

The trust is liable for surcharge land tax for the 2018 tax year. If Mr and Mrs Jones are in Australia for more than 200 days during 2018, they will not be foreign persons for the 2019 tax year and not liable for surcharge land tax for the 2019 tax year.

Example 6

Mr & Mrs Jones (both Australian Citizens) are beneficiaries of the Jones Family Trust. Potential beneficiaries include their children, their spouses, grandchildren, aunties & uncles (all Australian citizens), the lineal descendants of the specified beneficiaries and any entities whether formed in Australia or elsewhere such as eligible corporations, charities etc. The trust deed also has an excluded class of beneficiaries and this class includes any beneficiary who is a foreign person.

As all foreign persons, entities and charities are excluded, the trustee will not be liable for foreign surcharges.

Named beneficiaries

Should the trust deed contain named or specified beneficiaries that are foreign persons, the Chief Commissioner will usually require that such beneficiaries are removed from the trust deed as beneficiaries. If the named foreign beneficiaries are not removed, the trustee will generally be liable for foreign surcharges.

Note: It is not sufficient that named beneficiaries are merely prevented from receiving distributions, e.g. through a general clause excluding foreign persons from being beneficiaries.

Amendments

To be exempt from the foreign surcharges, amendments made must prevent potential beneficiaries that are foreign persons from receiving distributions as to income and/or capital under the trust. Any amendments made must also be irrevocable.

Revenue Ruling G010 Version 2 clarifies that all amendments must be irrevocable. If the amendments were made prior to the 19th September 2017 (when the amended ruling was posted on our website) , the Chief Commissioner will accept amendments without the irrevocable clause for surcharge purchaser duty if the dutiable transactions occurs on or before 31 December 2018 and for surcharge land tax for the 2018 land tax year.