With effect from 1 July 2015, the Victorian State Revenue Office imposed additional duty obligations on “foreign” purchasers of residential property. Additional land transfer duty (stamp duty) was 3% for the first year, another 7% from 1 July 2016 to 30 June 2019, and 8% after that.
NSW has also made legislative moves that will target “foreign” trustees of discretionary trusts owning residential property (more below).
In imposing the extra duty to foreigners, the Victorian SRO used the concept of “controlling interest” in determining if an entity such as a corporation or a trust was foreign or not (the trigger being a more than 50% interest).
Applying the provisions to trusts, where a “foreign purchaser” had a beneficial interest in more than 50% of the capital of the estate of the trust, the trust would have been considered to be a foreign trust for the purposes of the additional duty.
An initial concession
For discretionary trusts each beneficiary is taken to have a beneficial interest in the maximum percentage of the capital of the trust estate that the trustee is entitled to distribute.
For discretionary family trusts, the general beneficiaries may include a wide class of family members. This gave rise to an issue where any one of those beneficiaries is a “foreign natural person”, which means the trust would be a foreign trust for the purposes of the provisions.
In response to initial stakeholder representations after the provisions were introduced, the Victorian SRO adopted what it called a “practical approach” in respect of family discretionary trusts. The approach said, in part, that “trusts that have foreign beneficiaries who have not and who are, based on available information, unlikely in the future to receive any distributions, will not be considered a foreign trust”.
No longer practical
The practical approach displayed initially however is about to be reversed. It seems that after four years, the SRO believes the special rules for discretionary trusts are better understood by all (or at the very least all advisers on Victorian state taxes).
Accordingly, from 1 March 2020, the State Revenue Office will no longer apply the practical approach. Instead, the special rules for discretionary trusts will be applied to all discretionary trusts (including family discretionary trusts), so that if the discretionary trust has any potential foreign beneficiary, the trust will generally be a foreign trust for the purpose of the provisions.
Note that the SRO says it will continue to apply the “practical approach” in relation to dutiable transactions where contracts of sale were entered into (or nominations were made in a sub-sale context) before 1 March 2020.
Its suggestion, which may or may not retain practicality (depending on the circumstances of each discretionary trust), is to consider using a different purchase vehicle (that is not a foreign purchaser). Another option, the SRO suggests, is to amend the trust deed so that there are appropriate restrictions on foreign persons as potential beneficiaries (for example, include an express exclusion clause for foreigners). Importantly, any amendment will have to be done prior to the dutiable transaction completing (that is, prior to settlement).
Other states to follow?
Note that in October 2019, the NSW government introduced legislation, the State Revenue Legislation Further Amendment Bill 2019 (NSW), which is not yet law. Among other measures, this basically deems any trustee a foreign trustee unless the trust deed specifically prevents a foreign person from even being a “potential beneficiary”.
In NSW, the “surcharge purchaser duty” (8% in addition to the duty otherwise payable) and “surcharge land tax” (2% in addition to the land tax otherwise payable) are aimed at foreign persons and applies to discretionary trusts.