Acquiring property through a discretionary trust, commonly referred to as a family trust, can offer several advantages such as asset protection, tax planning flexibility, and succession control. A discretionary trust structure enables separation of legal ownership and beneficial control, allowing trustees to manage property for the benefit of a defined class of beneficiaries.
What Is a Discretionary Trust?
A discretionary trust grants the trustee broad discretion in distributing income and capital among beneficiaries, making it particularly attractive for families and business owners seeking flexibility.
Benefits of Using a Discretionary Trust
Trusts may hold various asset types, including real property such as
- Residential dwellings or commercial premises
- Cash and term deposits
- Shares and securities
- Managed funds or
- Digital assets such as cryptocurrency and business interests.
While the trust structure remains consistent, the regulatory and taxation implications can differ depending on the nature and use of the property.
Legal Consideration in Victoria
Foreign Beneficiary Rules
A critical legal consideration when acquiring real property via a discretionary trust is the treatment of foreign beneficiaries. In Victoria, a trust may be deemed a “foreign trust” if any beneficiary or class of beneficiaries qualifies as a foreign person, even if no distribution is ever made to that beneficiary and irrespective of any intention to make a distribution to that beneficiary. This classification can trigger:
- Foreign Purchaser Additional Duty of up to 8% on the dutiable value when you acquire residential property.
- Annual Land Tax Surcharge may apply where land is held in a discretionary trust in Victoria.
FIRB Approval and Compliance
The Foreign Investment Review Board (FIRB) Approval may be required for property acquisitions where the discretionary trust is considered foreign. FIRB adopts a conservative approach to discretionary trusts, ordinarily treating the trust as foreign in circumstances where any potential beneficiary is a foreign person, regardless of whether a distribution is likely. Consequently, the inclusion of even one foreign person as a potential beneficiary or a broad class of beneficiaries may subject the trust to FIRB scrutiny. Non-compliance with FIRB requirements can result in penalties or forced divestment.
To mitigate these risks, many purchasers elect to amend their trust deeds to exclude foreign persons as beneficiaries. Such amendments must be executed prior to the property acquisition and must be legally effective to satisfy both FIRB and state revenue authorities. However, this approach may constrain the trust’s flexibility, particularly in succession planning.
Given the complexity and potential financial exposure, it is imperative to obtain comprehensive legal and tax advice before proceeding with a property acquisition via a discretionary trust. A thorough review of the trust deed is essential.
Strategic Implications
While discretionary trusts offer significant strategic advantages in property ownership, they must be carefully structured and managed to avoid unintended consequences. With appropriate planning and expert guidance, purchasers can harness the benefits of trust-based ownership while mitigating associated risks.
- Tax planning
- Asset protection
- Succession control
- Compliance with FIRB and state laws
Why Legal Advice Is Essential
Given the complexity and potential financial exposure, obtaining comprehensive legal and tax advice is critical. A thorough review of the trust deed is essential before proceeding with any property acquisition.
Key Takeaways
- Discretionary trusts provide flexibility and asset protection.
- Foreign beneficiary rules can trigger significant duties and FIRB requirements.
- Amendments to trust deeds may help but can reduce flexibility.
- Expert legal and tax advice is non-negotiable.
If you need advice on buying property through a discretionary trust in Victoria, contact our property law team for expert guidance on 9822 8588.
