Foreign persons and trusts: surcharge duty and land tax
Since 2015, most Australian states and territories have introduced surcharge purchaser duty and surcharge land tax on residential property held by or for the benefit of foreign persons. In New South Wales and Victoria in particular, a discretionary trust can be caught if a foreign person merely sits within its class of potential beneficiaries, whether or not any distribution has been made. The test differs in other states.
The surcharge rates vary by jurisdiction but are significant: surcharge purchaser duty can be up to 9% of the property value (on top of ordinary duty), and surcharge land tax can be up to 5% per year of the land value. For a trust holding NSW residential land with a land value of $1 million, the annual surcharge land tax alone can be $50,000.
The issue arises because most discretionary trust deeds define the class of beneficiaries very broadly, typically including any person or entity that the trustee determines from time to time. If the deed does not specifically exclude foreign persons, the trust is treated as a ‘foreign trust’ for the purposes of the surcharge, regardless of whether any foreign person has actually benefited.
The solution is a deed of variation that amends the trust deed to irrevocably exclude foreign persons from the class of beneficiaries. The variation must be properly drafted and executed to be effective. Some states have specific requirements for the wording of the exclusion clause, and retrospective variations may not always be recognised.
CoSec Partners prepares foreign persons exclusion variations for $418 per deed including GST, drafted and signed off by Key Legal, an independent external law firm. We recommend all trusts that hold or may acquire residential property review their deeds for foreign person exposure as a matter of priority.
Frequently asked questions
My trust has never distributed to a foreign person. Am I still caught?
Very possibly, particularly in New South Wales and Victoria, where the test looks at who could potentially benefit under the deed, not at who actually has. Other states apply different tests. Because typical family trust deeds define beneficiaries very broadly, the trust is deemed foreign unless the deed expressly and irrevocably excludes foreign persons.
Does one deed of variation cover every state?
Not reliably. Each state defines a foreign person under its own legislation and has its own requirements for the exclusion. A clause drafted to satisfy New South Wales may not satisfy Victoria or Queensland. Where a trust holds land in more than one state, the amendment has to be drafted against each relevant Act.
When does the exclusion need to be in place?
Before the trigger event, which is the acquisition for surcharge duty and the relevant assessment date for surcharge land tax. Once the surcharge has been levied, a later amendment does not unwind the liability, so a deed review should precede any residential property purchase.
This article is general information only and does not constitute legal, financial, or tax advice. While we endeavour to keep content accurate and current, laws and regulations change frequently. For advice specific to your circumstances, please consult a qualified professional adviser. CoSec Partners Pty Ltd accepts no liability for actions taken based on this content.