By Domenic Festa (Accredited Tax Specialist and Chartered Tax Adviser)

 

Background

Various states around Australia have introduced provisions to impose surcharge on foreign person, both in respect of purchaser duty and land tax.

Each of the states include special rules for discretionary trusts to prevent discretionary trusts being used to avoid operation of these provisions. These special rules are not limited in their application to trusts intended to benefit foreign persons, but also apply to trusts in which no beneficiary is a foreign person.

Some of the largest providers of discretionary trust deeds have included standard provisions which are aimed at satisfying the special rules for discretionary trusts. This article demonstrates the seriously adverse consequences from adopting the standard provisions, which in many cases are unnecessary.

Statutory Provisions

The provisions in the different jurisdictions are not uniform in relation to the type of land to which they apply, the identification of ‘foreign’ persons that cause the trust to be subject to surcharge, and the requirements of the terms of the trust deed.

The land that is subject to surcharge in the different jurisdictions is:

Purchaser Duty Land Tax
QLD AFAD residential land All land
NSW Residential-related property Residential land
Victoria A land-related interest in residential property All land

With respect to the category of beneficiaries that are caught by the provisions if foreign person, an outline of the operation of the different jurisdictions is:

  • QLD:
    • Purchaser Duty (AFAD) and Land Tax: at least 50% of the trust interests (predominantly default beneficiaries) are held by foreign individuals, foreign corporations, trustee of foreign trusts or their related persons.
  • NSW:
    • Purchaser Duty: Under s104JA, a trustee of a discretionary trust is foreign trustee unless the trust prevents a foreign person from being a beneficiary of the trust, which requires that the trust satisfies the “no foreign beneficiary” and “no amendment” requirements. A person is a potential beneficiary if by exercise or failure to exercise a discretion property can be distributed or applied to the person, unless the terms of the trust prevent property being distributed or applied (s104JA (5)). Note the definition in the Foreign Acquisitions and Takeovers Act 1975 (FATA) would apply in determining whether a trustee beneficiary is a foreign person.
    • Land Tax – Section 5D essentially the same as s104JA in Duties Act except that trustee is taken to be a foreign person in that capacity not a foreign trustee.
  • VIC:
    • Purchaser Duty: Section 3 defines foreign trust as a trust in which a substantial interest is held by a foreign corporation, foreign person or trustee of another foreign trust. A person has a substantial interest if trustee has a discretion to distribute more than 50% of the capital of the trust estate to the person, associated persons and other foreign persons (Section 3B).
    • Land Tax: s 46IA (1B): An absentee trust is a trust under which at least one absentee beneficiary, for a discretionary trust, is a specified beneficiary. Specified beneficiary is a beneficiary who is specifically named in the trust deed or specifically declared in writing as a beneficiary to whom income or property is distributed on the exercise or failure to exercise a discretion. An absentee beneficiary is a natural person absentee, absentee corporation or a beneficiary as trustee of an absentee trust (Section 3).

In essence the jurisdictions focus on:

  • QLD: foreign persons have at least 50% of default beneficiary entitlements (no restriction on discretionary beneficiaries);
  • NSW: no foreign beneficiary/no amendment requirement. A foreign person is not and cannot become a beneficiary;
  • VIC:
    • Purchaser Duty – foreign person is a beneficiary to whom at least 50% of capital may be distributed;
    • Land Tax – foreign person is an absentee beneficiary who is a named beneficiary, default beneficiary or declared in writing to be entitled to income or capital.

Trust Deed Provisions

In an effort to comply with the exclusions required by the statutory provisions, it has become standard practice to include in trust deeds for discretionary trusts, provisions similar to the following:

  1. DEFINITIONS

Excluded Person means the following (even if any of them is named or would otherwise be or be included in a class of Beneficiary):

(a) the Settlor; and/or

(b) any Foreign Person;

Foreign Person means:

(a) a foreign person or foreign trust for the purposes of Chapter 4 of the Duties Act 2001 (Qld);

(b) a foreign person or foreign trust for the purposes of Division 4 of Part 3 of the Land Tax Act 2010 (Qld);

(c) a foreign person or a foreign trustee for the purposes of Chapter 2A of the Duties Act 1997 (NSW); [some deeds use the term ‘foreign trust’ instead of ‘foreign trustee’]

(d) a foreign natural person, a foreign corporation or a foreign trust as defined in section 3 of the Duties Act 2000 (Vic);

(e) a person holding a controlling interest in a foreign corporation or a substantial interest in a foreign trust for the purposes of sections 3A and 3B of the Duties Act 2000 (Vic) respectively;

(e) an absentee person as defined in section 3 of the Land Tax Act 2005 (Vic);

(f) an absentee person holding an absentee controlling interest in a corporation for the purposes of section 3A of the Land Tax Act 2005 (Vic) (unless an exemption under section 3B of that Act applies);

(k) any potential Beneficiary of this Trust who would or might cause this Trust to be or become a foreign person or a foreign trust for the purposes of any of the above provisions;

(l) any potential Beneficiary of this Trust who would or might cause this Trust to be or become a foreign person or a foreign trust for the purposes of any other statute.

  1. EXCLUSION FROM BENEFITS

2.1        Excluded Persons

Every Excluded Person is specifically excluded from all or any benefits under this Trust. The Trustee must not:

(a) make any determination in favour of or any distribution of Income or capital in favour of any Excluded Person;

(b) pay, distribute, apply or Set Aside any Property of the Trust (including money) to or for the benefit of any Excluded Person.

2.2        Irrevocable

This clause 2 is irrevocable and is not capable of being amended.

The intention behind these deed provisions is clear, in the event the trust acquires property that is liable for surcharge in any of the states, they will satisfy the requirements of the legislation including the New South Wales no foreign beneficiary/no amendment requirements. Despite this noble objective, in our view these provisions result in dire consequences.

Critical Analysis

The hallmark of a discretionary trust is flexibility. As was said in Stein v Sybmore Holdings [2006] NSWSC 1004:

“In [a family discretionary trust], there is a well-understood context of law (often tax law) which the trusts are clearly intended to take advantage of – it is often not difficult to conclude that keeping advantages of that type is within the spirit of the settlor’s intentions, or if that context of law were to change, it might be possible to conclude that it is within the spirit of the settlor’s intention the trust should accommodate itself to whatever the new law was. ”

  • Exclusions of the kind included in the trust deed provisions outlined above impose a restraint on that flexibility.
  • Jurisdictions: each jurisdiction has a different exclusion requirement. By including a provision of the kind outlined above, all the exclusions are being adopted resulting in exclusions much broader than that required. For example, if a trust acquires land only in Queensland, it is not necessary to exclude absentee persons as defined in Victoria.
  • Business and investment trusts: for trusts that operates a business or holds non-land investments, none of the exclusions apply. The trust deed provision imposes an unnecessary impediment on the trust.
  • Non-NSW trusts: for trusts that do not hold land in NSW, the no amendment requirement does not apply and is an unnecessary impediment.
  • NSW trusts: NSW provisions only apply to residential land. For trusts that do not own residential land the provisions do not apply.
  • NSW – foreign trustee:
  • the term foreign trustee in the NSW provisions is only applicable to a trust that acquires residential land (s104S).
  • The definition of foreign trustee in s104JA is such that any discretionary trust that does not satisfy the no foreign beneficiary/no amendment requirements will be a foreign trustee. In satisfying this definition it is not necessary that a foreign trustee is excluded as a beneficiary, rather, any trust beneficiary that is a foreign person under FATA must be excluded. FATA does not have no foreign beneficiary/no amendment requirements.
  • The inclusion of the term ‘foreign trustee’ in the definition of foreign beneficiary in the above trust deed provisions is therefore unnecessary and causing an unnecessary impediment.
  • The inclusion of the term ‘foreign trustee’ also has the effect that any trust beneficiary that does not satisfy the no foreign beneficiary/no amendment requirements is also be excluded as a beneficiary. This will be the case even if a trust does not own any land to which the provisions apply.

CONCLUSION

  • Trust deed provisions of the kind outlined in this article, do not apply in many cases.
  • In particular, the no foreign beneficiary/no amendment requirements only apply for trusts that acquire or own residential land in NSW. The specification in the trust deed provisions that the foreign beneficiary exclusion is irrevocable is unnecessary for all trusts that only carry on a business or hold non-land investments in NSW, only own land in non-NSW jurisdictions, or own non-residential land in NSW.
  • The inclusion of ‘foreign trustee’ means that any trust beneficiary will be excluded as an eligible beneficiary unless it includes the NSW no foreign beneficiary/no amendment requirements, which is otherwise unnecessary. Trusts established before 2019 are unlikely to include those requirements, and will therefore be excluded as eligible beneficiaries.
  • The preferable course is a conditional provision that does not apply from establishment of the trust (since it will not own any relevant property), but commences to apply only for the jurisdiction that is necessary from the time of acquiring land subject to surcharge in that jurisdiction. In addition, the no foreign beneficiary/no amendment requirements are superfluous unless residential land is acquired in NSW. Careful drafting is required in implementing conditional provisions which in some cases are not accepted by the revenue authority of the relevant jurisdiction.

NOTE: This article is for general information only and should not be relied upon without first seeking advice from one of our specialist solicitors.