Surcharge purchaser duty and land tax surcharge (“the surcharges”) is currently operating in respect of a foreign person purchasing and owning a residential land in NSW.
Determining who is a foreign person is less straightforward than it might seem, particularly with respect to discretionary trusts.
Surcharge purchaser duty is payable by a foreign person who acquires residential land in NSW at a rate of 8% on top of the usual duty. Additionally, surcharge land tax at a rate of 2% of the land value on top of the ordinary land tax rate is also payable by a foreign person who owns residential land in NSW. A land value threshold does not apply to this surcharge.
The legislation defines a “foreign person” as:
- an individual who is not an Australian citizen or ordinarily resident in Australia. To be ordinarily resident in Australia, an individual must (a) have actually been in Australia for 200 or more days in the 12 months prior to incurring the tax liability and (b) not be subject to any limitation as to the time they can continue to live in Australia (such as permanent visa holders or New Zealand citizens);
- a company, a trustee of a trust or a general partner of a limited partnership where an individual who is not ordinarily resident in Australia holds a substantial interest of 20% or more; and
- two or or more persons each of whom are not ordinarily resident in Australia or a foreign corporation hold an aggregate interest of at least 40%.
Many discretionary trusts will considered to be a “foreign person” under the legislation because most trusts have a very broad class of beneficiaries.
An Australian trustee of a trust will be deemed a “foreign person” if one of the potential beneficiaries of the trust holds a 20% beneficial interest in the trust. In a discretionary trust if there is at least one foreign person within the class of possible beneficiaries then the legislation deems the foreign person to have a 100% beneficial interest in the income and property of the trust. As such, the discretionary trust will be deemed a “foreign person” and liable to pay surcharge purchasers duty and surcharge land tax. It is irrelevant that no distribution was, or will be, made to the “foreign” beneficiary.
To avoid the surcharges, the Trust Deed must be amended to exclude any foreign person from the classes of possible beneficiaries. Such amendment must be irrevocable and normally be made before relevant surcharges apply.
We are happy to assist you in amending the Trust Deed of your family trust to avoid the surcharges.