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Understand when a trustee of a discretionary trust is liable for surcharge purchaser duty, including the application of tracing provisions.
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Determining Surcharge Purchaser Duty Liability for Discretionary Trusts
A trustee’s foreign status is determined by the foreign status of the beneficiaries.
When a trustee of a discretionary trust is acquiring residential-related property in NSW, additional consideration must be given when determining Surcharge Purchaser Duty liability.
The information within this guide provides a general overview of the treatment of Discretionary Trusts for Surcharge Purchaser Duty. The relevant legislation, Practice Notes and Revenue Rulings below must be read in conjunction with this guide.
A trustee is considered a foreign person if any beneficiary is an individual not ordinarily resident in Australia, a foreign corporation, or a foreign government has a substantial interest or aggregated substantial interest in the trust.
Discretionary trusts give the trustee discretion to distribute the income or property to any beneficiary or potential beneficiary. Any beneficiary or potential beneficiary is deemed to have the maximum percentage interest in the income or property and therefore are considered to hold a substantial interest.
This includes all beneficiaries of the discretionary trust, not only beneficiaries who are takers in default.
Please note: The trust details must be completed in section 4.1 of the Purchaser/Transferee Declaration when any purchaser/transferee is acting as trustee. This information must also be entered when processing the transaction via Electronic Duties Returns (EDR).
Special provisions for discretionary trusts
A trustee will be liable to pay Surcharge Purchaser Duty unless the trust satisfies the following criteria.
No potential beneficiary of the trust is a foreign person (the "no foreign beneficiary requirement")
AND
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")
If the above criteria are not met before the liability date, the trustee is considered a foreign trustee and Surcharge Purchaser Duty is payable. An application for reassessment may be submitted if the trustee is no longer considered a foreign person at the time of settlement/completion under section 104ZF of the Duties Act 1997
Refer to the transitional provisions for more information regarding discretionary trust deed amendments from 21 June 2016 to 31 December 2020.
Generally, superannuation trusts and special disability trusts do not need to contain a prohibition on foreign persons becoming beneficiaries.
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
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.
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.
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
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:
No potential beneficiary of the trust is a foreign person (the "no foreign beneficiary requirement")
AND
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.
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.
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.
