Discretionary trusts owning residential property – a timely reminder?

Foreign surcharge taxes on residential property 

NSW, in joining with the Federal Government’s financial squeeze on foreign owners of Australian residential property, currently collects an 8% purchase tax (‘surcharge purchaser duty’) on purchase and an extra 0.75% land tax (‘surcharge land tax’, due to rise to 2% for 2018) where the property is not a principal place of residence.

Who do the surcharges apply to?

Both surcharges will apply if the land in NSW is owned by a foreign person. An Australian citizen is not a foreign person under the NSW definition and so would not be affected by these rules, but any other individual will be unless they can show they are ‘ordinarily resident’ in Australia. This requires them to have a minimum physical presence in Australia and not have a time limit on any visa to stay.

How does it apply to residential property owned by trusts?

One of the difficult areas is where a trust has NSW residential property in its structure including associated entities. Can a trustee be liable to either of the surcharges?
If any of the potential beneficiaries of the trust is a foreign person then the surcharges could apply.
Generally therefore any person who can benefit under a trust and is not an Australian citizen could cause the surcharges to apply. There are many possible cases where this could be triggered, including the obvious case where a trust beneficiary left Australia years ago and has children born in another country – those children might cause the trustee to be liable for the surcharges.

What do you need to do if your trust is affected by these provisions?

If you have an Australian resident trust which owns residential property in NSW in its structure, we suggest that you contact Bentleys to discuss your circumstances. If necessary we will arrange for the structure to be reviewed by a lawyer to determine whether there are actual or potential foreign persons included in the trust beneficiaries, and the impact on the structure. Company beneficiaries with foreign person shareholders also need to be considered as part of the review, as under the associate rules these may also be treated as a foreign person.
We are aware RevenueNSW is checking Australian trusts and companies for compliance in this area.

How can you prevent the surcharges applying or seek a refund?

RevenueNSW advise that you can apply for exemption for the discretionary caught by these provisions if action is taken to irrevocably amend the deed to remove foreign persons from ever benefitting. RevenueNSW guidelines suggest this must be done within 6 months of the taxing date being 31 December 2018 and you should notify them of your intention to amend the deed before this date. Complying with this time limit is crucial as RevenueNSW will revoke the exemption and levy the appropriate surcharges.

Do these provisions apply to trusts created by a will?

If you have a discretionary testamentary trust owning residential property in NSW the principal place of residence exemption only applies for two years from the date of death after which, surcharge land tax may apply if there is a potential foreign beneficiary of the trust. 

What next?

As the 2018 surcharge land tax assessment will be calculated on residential property owned at 31 December 2018, you should not delay in reviewing existing arrangements.
Your Bentleys team has extensive experience advising on and dealing with the practical aspects of acquiring property in Australia. We can guide you through working out how the RevenueNSW surcharge rules may affect you and what the next steps might be to put this right.

If you believe you may be affected by these provisions please contact your Bentleys advisor to discuss your next steps.

The above information is general in nature only and should not be trusted as advice. You should seek independent advice specific to your own particular circumstances.