The Victorian State Revenue Office (SRO) has introduced new provisions broadening the scope of which trusts are considered foreign.
This could have serious implications if you are considering acquiring property in Victoria after 1 March 2020 through a discretionary trust.
- What is foreign purchaser additional duty?
- Since 1 July 2015, foreign purchasers are required to pay additional stamp duty (currently 8%) above the regular stamp duty already payable for acquisitions in Victoria.
- Individuals, companies and trusts may be considered foreign.
2. What is a foreign trust?
- A trust will be deemed a foreign trust if a beneficiary is foreign and has a substantial interest in the trust estate (having a beneficial interest of more than 50%).
- In the case of discretionary trusts where no interest is specified for a beneficiary, each beneficiary is taken to have the maximum capital of the trust estate that the trustee is empowered to distribute to that beneficiary (up to 100%).
- It is important to note that most discretionary trust deeds have a broad class of beneficiaries which may mean that any remote relatives are considered beneficiaries of the trust, even if not intended.
3. What is the SRO’s current position for discretionary trusts?
- Where the purchaser is a trustee of a discretionary trust the SRO has previously applied what is known as the ‘practical approach’ to determine whether the trust is foreign.
- This approach treats discretionary trusts that have foreign beneficiaries who have neither received any distribution nor are likely to receive any future distribution as not being ‘foreign trusts’.
- As such, additional duty has not been payable in these instances as the trust has not been considered a foreign purchaser.
4. What is changing & how does it affect you?
- For contracts entered into, and nominations made after 1 March 2020, the State Revenue Office will no longer continue to apply the ‘practical approach’.
- Instead, all discretionary trusts that have potential foreign beneficiaries will be considered foreign trusts and foreign additional stamp duty will apply.
- The effect of this is that these changes may cause discretionary trusts whose deeds do not expressly exclude foreign beneficiaries from receiving distributions from the trust estate to be considered foreign trusts.
5. What should you do?
Subject to your personal circumstances and obtaining appropriate legal and taxation advice:
- Consider the structure of your acquisition of property in Victoria prior to signing a Contract of Sale.
- Consider that any new discretionary trust that is established for your acquisition includes a clause that excludes distributions to foreign beneficiaries.
- If you have already signed a Contract of Sale, consider the nomination of a substitute purchaser.
- Consider whether you are able to amend your existing discretionary trust deed to exclude distributions to foreign beneficiaries.
- Consider whether your current structure or trust deed is appropriate for your acquisition.
At Burke Lawyers, we provide expert legal advice specifically tailored to assist you in purchasing property, including advice for foreign investment, stamp duty, trusts and the commercial structure to be established or already in place for your acquisition.
To discuss further, please contact Kristy Muhlhan, Principal, who heads up our Property and Property Development Team and Stewart Davis, Lawyers at Burke Lawyers on email@example.com; and firstname.lastname@example.org respectively, or +61 3 9822 8588.