5. Discretionary Trusts

Transitional provisions were established to allow discretionary trust deeds to be amended to prevent transactions becoming inadvertently liable for surcharge purchaser duty.

Dutiable surcharge transaction between 24 June 2020 and before midnight on 31 December 2020

If there is a dutiable surcharge transaction between 24 June 2020 and before midnight on 31 December 2020, the trustee of a discretionary trust will not be liable for surcharge purchaser duty if the trust deed was amended before midnight on 31 December 2020, to exclude foreign persons from becoming beneficiaries of the trust. This amendment requires an irrevocable clause.

Where there is a dutiable transaction on and from 1 January 2021, the abovementioned amendment is sufficient to make the trust not liable to Surcharge Purchaser Duty.  However, if there are further amendments to that trust deed the documents must be sent to Revenue NSW for review.

Discretionary trust deeds amended before 24 June 2020

Where such a discretionary trust is amended before 24 June 2020, to exclude foreign persons from becoming beneficiaries of the trust, the trustee of the trust will not be liable for surcharge purchaser duty regardless of the date of the dutiable transaction. This amendment does not require an irrevocable clause.

Where there is an amendment as set out in the preceding paragraph, this is sufficient to make the trust not liable for surcharge purchaser duty.  However, if there is a dutiable transaction on and from 1 January 2021 and there have been further amendments to the “excluded foreign beneficiaries clause” of that trust deed, there may be a liability to surcharge purchaser duty. Matters of this nature must be sent to Revenue NSW for review.

Dutiable transactions entered into before 21 June 2016

Surcharge Purchase Duty does not apply to these transactions

References

• Commissioner’s Practice Note CPN 004 v2 – Foreign surcharges and discretionary trusts
• Clause 139 of Schedule 1 of the Duties Act 1997 – Surcharge Purchaser Duty – discretionary trusts

Potential beneficiaries are not limited to persons named in the trust instrument. The term extends to the members of any class of persons to whom or for whose benefit trust property can be distributed or applied pursuant to the exercise of the discretions of the trustee under the trust.

Potential beneficiaries are often 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. They could be foreign persons for the purposes of surcharge purchaser duty and surcharge land tax. In such circumstances, it follows that the trustee of a discretionary trust will be a foreign person.

A person is a 'potential beneficiary' of a discretionary trust if the exercise or failure to exercise a discretion under the terms of the trust can result in any property of the trust being distributed to or applied for the benefit of the person.

References

• Commissioner’s Practice Note CPN 004 v2 – Foreign surcharges and discretionary trusts
• Clause 139 of Schedule 1 of the Duties Act 1997 – Surcharge Purchaser Duty – discretionary trusts
• Section 104JA of the Duties Act 1997 – Special Provisions for discretionary trusts

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

It is generally not sufficient that named beneficiaries are merely prevented from receiving distributions, e.g. through a general clause excluding foreign persons from receiving distributions. This is because the named beneficiaries might have the power to appoint a new appointer or appoint or remove trustees and the trust may still be capable of amendment in a manner that would result in a foreign person being a potential beneficiary.

References

• Commissioner’s Practice Note CPN 004 v2 – Foreign surcharges and discretionary trusts

A hybrid trust is generally a combination of a discretionary trust and unit trust.

For the purposes of Surcharge Purchaser Duty, a hybrid trust is treated the same as a discretionary trust.

A substantial interest or an aggregate substantial interest may exist as a result of holding interests in other corporations or trusts under the tracing provisions in section 19 of the Foreign Acquisitions and Takeovers Act 1975. The tracing process can be applied multiple times through a number of entities.

Example

A is a foreign person who holds a substantial interest in Company B. This makes company B a foreign person.

Company B has a substantial interest in Trust C. The trustee of Trust C is considered a foreign person.

Trust C has a substantial interest in Company D. This makes company D a foreign person.

Company D purchases residential-related property in NSW

Through the tracing provisions, it is determined that each party is a foreign person.
This transaction is liable for Surcharge Purchaser Duty

References

• Revenue Ruling G009 – Definition of a foreign person
• Chapter 2A of the Duties Act 1997 – Duty charged on certain residential land transactions involving foreign persons.
• Foreign Acquisitions and Takeovers Act 1975 (the FAT Act)
• Foreign Acquisitions and Takeovers Regulation 2015 (the FAT Regulation)
• Department of Home Affairs - Visa information and international movement records

Refund if property transferred to persons who are no longer foreign on transfer

When a purchaser/transferee is a foreign person at the liability date, Transfer duty and Surcharge Purchaser Duty must be paid within 3 months from the liability date.

A trustee of a discretionary trust may apply for a refund of Surcharge Purchaser Duty if they are no longer a foreign person at settlement.
At the date of settlement the trust must satisfy the following:

1. No potential beneficiary of the trust is a foreign person (the "no foreign beneficiary requirement")
   
   AND
2. The terms of the trust must not be capable of amendment in a manner that would result in a foreign person being a potential beneficiary (the "no amendment requirement")

The refund request can only be made once settlement has occurred and must be made within 5 years of the initial assessment.

Refer to section 104ZF of the Duties Act 1997.

What evidence is required for refund?

• Cover letter requesting the refund with confirmation of the date the individual became Ordinarily resident of Australia.
• Evidence confirming date of settlement
• Copy of the complete contract for sale or dutiable instrument (if there is no agreement)
• Copy of the Duties Notice of Assessment
• Title search showing transferee/s on title
• Purchaser/Transferee declaration form that was provided with original assessment (ODA076i)
  
  AND
  
  Evidence to confirm the trustee is no longer a foreign person:
• Copy of the executed discretionary trust deed
• Copy of all instruments that amend or vary the trust

Please note:
It is recommended practitioners processing transactions on EDR, sight or obtain proof of status documentation to confirm the purchaser/transferees are not considered foreign persons. Transactions lodged with Revenue NSW via eDuties must provide all evidence at the time of lodgement.

For more information refer to Documentary Evidence and Record Keeping.

The Duties Client Identification (CI) and Proof of Status factsheet and evidentiary requirements list the evidence required for all Duties transactions.

When residential-related property is being acquired, evidence confirming proof of status may be required for each liable party (individual, corporation, partnership, or trust).

The method of lodgment determines the initial information required before processing or lodging.

Transactions processed on EDR

To ensure an accurate assessment of Surcharge Purchaser Duty it is recommended practitioners processing transactions on EDR, sight or obtain proof of status documentation to confirm the purchaser/transferees are not considered foreign persons.

Transactions lodged with Revenue NSW

Transactions lodged with Revenue NSW via eDuties must provide all evidence at the time of lodgement.

Transactions selected for Audit

Transactions that have been processed on EDR and selected for audit must provide Duties Client Identification (CI) and Proof of Status documentation along with the evidentiary requirements for that transaction.

References

• Purchaser/Transferee Declaration – Explanatory notes and supporting evidence (ODA 76 EN)
• Section 48 of the Taxation Administration Act 1996 – Requirement to keep proper records
• Section 53 of the Taxation Administration Act 1996 – Period of retention