Discretionary Trust – Save on Government imposts

Trust Changes

Do you own, or are you planning on purchasing, residential land in NSW in a trust? If yes, you need may need to amend your trust deed before 31 December 2019 or pay surcharge land tax and duty backdated to 2017.

What do the changes from the bill mean?

For your discretionary trust, the changes mean that unless the terms of the trust deed irrevocably prevent a foreign person from being a beneficiary, then the trust will incur surcharge purchaser duty and surcharge land tax on any residential property the trust owns in NSW.

If you don’t review and amend your trust deed before 31 December 2019 you may be liable to pay additional purchaser duty on residential property purchased since 2016 and additional land tax from the 2017 year onwards.

It is important to note that “residential land” can include land that is not yet used for residential purposes but could be used for residential purposes in the future. For example, if you have a vacant block of land which is not yet developed but is zoned residential or principally for residential purposes.

Who is a foreign person under the bill?

A foreign person is an individual who is not ordinarily resident in Australia or other entities which have foreign control. If a person is not a citizen of Australia there are several criteria that a person needs to meet to be ordinarily resident in Australia.

Tax Implications

    If a discretionary trust:
  • has purchased residential land in New South Wales after 21 June 2016; or
  • is in the process of purchasing residential land in NSW; or
  • might in the future purchase residential land in NSW;
  • and the trust deed does not irrevocably exclude foreign beneficiaries then additional surcharge purchaser duty (currently at 8%) is payable.

Additionally, surcharge land tax, currently 2%, will be payable on any New South Wales residential land owned by a trust which does not exclude foreign beneficiaries for the 2017, 2018 and 2019 years. Importantly there is no threshold limit applied when calculating the land tax surcharge.  Surcharge land tax is calculated on the full value of the residential land held by the trust. For example, if the land value is $200,000, then the land tax surcharge for the 2019 year will be $4,000, on top of any other land tax payable.

What to consider in amending your trust deed

Care needs to be taken in amending the discretionary trust deeds to irrevocably exclude foreign beneficiaries.

It is becoming increasingly common for family members to be spread around the world and as trusts can exist for up to 80 years in New South Wales, consideration needs to be given as to the long-term implications of amending a trust deed to exclude foreign beneficiaries.

If a person whom you wish to benefit from the trust ceases to be an Australian citizen or ordinarily resident in Australia, do you want them to be forever excluded from being a beneficiary of the trust?

The terms of the trust deed must also be carefully considered before changing the beneficiaries to make sure you do not inadvertently trigger a resettlement of the trust. A resettlement of a trust may result in adverse duty and taxation consequences.

If, for example, the default beneficiary of your discretionary trust ceased to be an Australian citizen or ordinarily resident in Australia and was excluded as a beneficiary, that would likely be a resettlement of the trust, giving rise to duty and tax on the property held by the trust.

You might look again at your need for a trust.

What to do next

If you have control of a discretionary trust that owns residential land in NSW or you are planning to use a trust to purchase residential land in NSW, please contact Fullstack or your lawyer immediately to discuss the implications and options.

Changes to trust deeds must be completed by 31 December 2019 in order to avoid retrospective duty and land tax.

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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech & online companies.

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