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Trustees of trusts who purchase residential-related property in NSW may be liable to pay an additional surcharge purchaser duty on top of any transfer duty.
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A trustee of a trust may need to pay surcharge purchaser duty to Revenue NSW when they acquire residential-related property in New South Wales (NSW).
Surcharge purchaser duty rules can apply differently depending on the type of trust acquiring the residential-related property.
Before you acquire residential land in NSW, check what type of trust it is and how foreign person status is determined for that trust type.
Revenue NSW recommends getting advice from a qualified legal or tax professional before you buy residential-related property through a trust.
Who is a foreign trustee
The trustee of a trust is considered a foreign person for surcharge purchaser duty in NSW if any beneficiary is:
a beneficial interest in the income or property of the trust, or
an interest in a unit in a unit trust.
What is an associate
When working out whether the trust has a substantial interest or aggregate substantial interest (and whether surcharge purchaser duty applies), a beneficiary’s interest may be combined with the interests of their associates.
An associate includes certain individuals, companies, partnerships, trusts and superannuation funds.
A person holds a substantial interest in a trust if the person, together with any one or more associates, holds a beneficial interest of at least 20% of the units, income or property of the trust.
Example
The Doggy Daycare Trust is a fixed unit trust that purchases a residential property in NSW.
The trust has 4 equal unitholders:
3 Australian citizens, and
1 individual, Diego, who is not ordinarily resident in Australia.
Each unitholder holds 25% of the trust.
Diego holds a substantial interest in the trust as his interest is greater than 20%.
Because an individual who is not ordinarily resident in Australia holds a substantial interest, the trustee is treated as a foreign person for surcharge purchaser duty. Surcharge purchaser duty is payable on the acquisition.
A single foreign person holding 20% or more can trigger liability for surcharge purchaser duty, even if all other unitholders are Australian.
Aggregate substantial interest
Two or more persons hold an aggregate substantial interest in a trust if the persons, alone or together with one or more associates, hold an aggregate interest of at least 40% of the units, income or property of the trust.
Example
The trustee of the Kitty Kat Trust purchases a residential property in NSW.
Of the 100 units issued, Kim holds 15 units, Kylie holds 10 units and Katrina holds 15 units.
Kim, Kylie and Katrina — are foreign persons because they are not ordinarily resident in Australia.
Together, Kim, Kylie and Katrina hold 40% of the issued units. This means they hold an aggregate substantial interest in the trust.
Because Kim, Kylie and Katrina are foreign persons and together hold an aggregate substantial interest, the trustee of the Kitty Kat Trust is treated as a foreign person for surcharge purchaser duty.
Surcharge purchaser duty is payable on the acquisition.
Tracing a substantial interest
Tracing provisions in the Duties Act 1997 are used to determine whether a foreign person owns, or has an underlying beneficial interest in, property for surcharge purchaser duty purposes.
When applying these provisions, it is necessary to look beyond the immediate purchaser — such as an Australian company or trust — and trace through the layers of ownership and beneficial interest.
At each level, you must assess whether a foreign individual, corporation, or trust holds a substantial interest or an aggregate substantial interest in the relevant entity.
This tracing process continues through successive layers of ownership until it can be determined whether the purchasing trustee is ultimately foreign.
Example
The Pelican Trust is a fixed unit trust. The trustee of this trust purchases a residential property in NSW.
One of its unitholders is Seagull Pty Ltd, which holds 30% of the units beneficially.
A foreign person, Chip holds 100% of the shares in Seagull Pty Ltd.
As a result:
Seagull Pty Ltd is considered foreign as Chip holds a substantial interest and is a foreign person.
The trustee of the Pelican Trust is a foreign person because Seagull Pty Ltd holds a substantial beneficial interest.
The trustee of the Pelican Trust will pay surcharge purchaser duty on this purchase.
Discretionary trusts
A discretionary trust can include any trust under which the trustee has discretion in relation to the distribution of income and capital.
This would be most family trusts and could include hybrid trusts, capital protected trusts and some unit trusts.
This means that if your trust has any discretionary elements Revenue NSW may treat it as a discretionary trust for surcharge purposes.
When is a trustee of a discretionary trust a foreign person
The foreign status of a trustee of a discretionary trust is not determined by whether a foreign beneficiary holds a substantial interest or aggregate substantial interest.
Instead, the trustee is considered a foreign person and will be liable to pay surcharge purchaser duty unless the trust meets both of the following requirements:
No beneficiary or potential beneficiary of the trust is a foreign person.
The terms of the trust must not be capable of amendment that would result in a foreign person being a potential beneficiary.
If either requirement is not met, surcharge purchaser duty applies—even if you do not intend to distribute any income or capital to foreign persons.
It is also irrelevant whether the trustee exercises its discretion to distribute income or capital to a foreign person.
If, before 24 June 2020, a trust satisfied the no foreign beneficiary requirement under section 104JA of the Duties Act 1997, the trustee will be exempt from surcharge purchaser duty and surcharge land tax without having to satisfy the no amendment requirement.
Discretionary trusts may be amended to prevent named and potential discretionary beneficiaries that are foreign persons from receiving distributions as to income and/or capital of the trust.
Should the trust deed contain named beneficiaries who are foreign persons, such beneficiaries must be removed from the trust deed as beneficiaries.
It is not sufficient that named beneficiaries are merely prevented from receiving distributions, such as through a general clause excluding foreign persons from being beneficiaries.
Any amendments to the trust deed must also be irrevocable.
Unit trusts
A unit trust is a trust where beneficiaries hold fixed units. A unitholder’s entitlement to trust income or capital is generally based on the units they hold.
For unit trusts, foreign person status is determined by the 20% (substantial interest) or 40% (aggregate substantial interest) thresholds.
If units in a unit trust are held by the trustee of a discretionary trust, we may need to look through that trustee to apply the discretionary trust rules.
In practice, this can mean the unit trust may be treated as foreign where the overlying discretionary trust has a foreign beneficiary or potential beneficiary, and the discretionary trust has not been validly amended to exclude foreign persons.
Bare trusts
A bare trust is a simple legal arrangement where the beneficiary has an immediate and absolute right to both the capital and income of the trust, with the trustee holding assets solely on their behalf.
The trustee of a bare trust will be liable for surcharge purchaser duty when they acquire residential-related property, and the beneficiaries of the trust are foreign person(s) who hold at least a 20% substantial interest or 40% aggregate substantial interest.
Trusts created by a will
A testamentary trust is a trust created by a will.
It comes into existence on the death of the will-maker. Depending on its terms, a testamentary trust may be a discretionary trust and may be subject to surcharge purchaser duty if the trustee is treated as a foreign person.
Australian testamentary trusts
An Australian testamentary trust is a discretionary trust arising from a will or codicil or the administration of an intestate estate where the deceased was not a foreign person immediately before death.
The trustee of an Australian testamentary trust is not a foreign trustee even if the trust does not prevent a foreign person from being a beneficiary of the trust if:
the will or codicil was executed on or before 31 December 2020
the deceased died intestate before, or within two years after 24 June 2020, or
an order of a court varying the application of the provisions of a will or codicil or of the rules governing the distribution of an intestate estate was made on or before 31 December 2020.
Superannuation trusts
Superannuation funds (including self-managed super funds (SMSFs)) are not automatically exempt from surcharge purchaser duty when they acquire residential-related property in NSW.
A superannuation fund is generally treated as a fixed trust for these purposes.
This means the 20% (substantial interest) and 40% (aggregate substantial interest) thresholds are relevant (rather than the discretionary trust rules).
If no member is a foreign person, the trustee will generally not be treated as a foreign person.
Trust deed variations
A variation to a trust will be subject to duty if it is:
a transfer of dutiable property
change in beneficial ownership of dutiable property
a declaration of trust over identified dutiable property, or
an acknowledgement of trust over identified dutiable property.
Declaration of trust
A declaration of trust is a formal document in which a person states that they hold property on trust for someone else — the beneficiary.
It is one of the ways in which a trust over residential-related property can be created or acknowledged, and it can independently trigger a liability for surcharge purchaser duty.
A declaration of trust over residential-related property is liable to surcharge purchaser duty where any beneficiary:
is a foreign person, and
holds a substantial or aggregated substantial beneficial interest in the trust.
A beneficiary can be an individual, corporation, trust, or government.
How duty may be assessed across related transactions
Depending on the circumstances, a declaration of trust may be treated as a separate dutiable transaction. We will assess duty based on the facts and the relevant transaction.
In some cases, surcharge purchaser duty may already have been assessed and paid on an earlier transaction (for example, on a contract for the purchase of the land). Where that occurs, we will take this into account when assessing any later declaration of trust or transfer of the same property.
You should not assume that paying surcharge purchaser duty on the contract means no duty can apply to a later declaration of trust. Whether duty is payable, and on which transaction, will depend on how and when the trust is created or acknowledged and how the transactions are structured.
If surcharge purchaser duty was not assessed and paid on the contract, we may assess it on the declaration of trust (or acknowledgement of trust) or on another relevant dutiable transaction, depending on the circumstances.
Residential premises that are not dwellings
If a trustee of a trust acquires a residential-related property that is used for certain purposes, they may not be liable for surcharge purchaser duty.
Examples of these types of property include:
hotels, motels and inns
hostels and boarding houses
student accommodation
aged care and other care facilities
bed and breakfast accommodation
caravan and home parks, and
separately titled rooms, apartments, serviced apartments, cottages and villas that are used for short-term accommodation.
Your solicitor or conveyancer (legal representative) must lodge an application with Revenue NSW for assessment.
Revenue Ruling G009: Definition of a foreign person outlines how Revenue NSW determines ‘foreign person’ status for surcharge purchaser duty and surcharge land tax, covering individuals, corporations and trusts.
If you realise that you paid the incorrect amount of duty or did not meet conditions that applied after your transaction, we encourage you to make a voluntary disclosure.
Foreign persons who own residential property in NSW may also be liable for surcharge land tax.
Contact us
Call the duties team on 1300 139 814 or +61 2 7808 6916 if you are overseas. Staff are available Monday to Friday, 8.30am to 5.00pm AEST (excluding public holidays).
