In NSW, from 1 January 2017, a land tax surcharge of 0.75% is imposed on owners of residential land who are ‘foreign persons’.
The surcharge also extends to trusts that own residential land which have beneficiaries that are ‘foreign persons’.
The land tax surcharge provisions are very broad and will catch discretionary trusts if the trust deed has a broad definition of beneficiaries, which is typical of most discretionary trust deeds.
When does it apply?
It applies from 1 January 2017. If a foreign person ‘owned’ NSW residential property, whether solely or jointly, as at midnight on 31 December, then they will be liable to pay the land tax surcharge.
What type of property is caught?
The key things to understand about the imposition of the land tax surcharge are:
- It applies to residential land in NSW (which includes a strata unit and vacant land)
- The main residence exemption does not apply
- Tax free thresholds do not apply and
- It applies to residential land even if the land is not ordinarily subject to land tax.
Who is a foreign person?
A foreign person can be:
- An individual – not ordinarily resident in Australia (except for Australian citizens or New Zealand citizens who hold a special category visa)
- A corporation – in which an individual not ordinarily resident in Australia, a foreign corporation, or a foreign government holds a substantial interest (being at least 20%) or
- A trustee of a trust – in which an individual not ordinarily resident in Australia, a foreign corporation, or a foreign government holds a substantial interest (being at least 20%), or is a beneficiary of a discretionary trust.
How is a trust caught?
As mentioned above, if an owner is a foreign person, then the owner is liable to the land tax surcharge. For the purposes of land tax, the trustee of the trust or a beneficiary of the trust is considered to be an ‘owner’ of the land.
It follows that if a beneficiary of a trust is a foreign person, then the trustee would be liable for the land tax surcharge.
There is a deeming rule in the legislation that has far reaching consequences for a discretionary trust. The deeming rule has the effect that each and every potential beneficiary of a discretionary is deemed to hold the maximum percentage on offer to the beneficiary (potentially a 100% interest) irrespective of the fact that the trustee has yet to exercise its discretion in favour of that beneficiary.
Most typical discretionary trust deeds, as used for family trusts or investment purposes, have very broad beneficiary classes. For example, the trustee could distribute to the nominated primary beneficiary and each of their spouse, children, children’s spouse, aunts, uncles, grandparents, nephews, nieces, etc. In addition, any company or trust that a beneficiary has an interest in, is also a potential beneficiary of the trust.
In this global age, given the wide class of beneficiaries, there is a high chance that a family member includes someone of international origins who is not an Australian or New Zealand citizen. If any of these potential family members themselves meet the definition of foreign person or invest in a company that meets the definition of a foreign person, and the trust owns residential land in NSW, then the trustee is liable for the land tax surcharge.
Even if you only have Australian and New Zealand citizens in your immediate family, if your discretionary trust deed does not prohibit distributions to a foreign person and it contains a broad description of possible beneficiaries, then it is very likely that your trust will be caught by the land tax surcharge provisions.
What should you do?
If this applies to you, please contact us immediately.
We can review your situation and your trust deed and advise you of your position and options. It is most likely you will need to amend your discretionary trust deed to expressly prohibit the trustee from making a distribution to a foreign person if there is no intention to ever distribute to a foreign person.
The Chief Commissioner of State Revenue has released a ruling noting that it has the discretion to exempt a trustee of a discretionary trust from the land tax surcharge if satisfied that the trustee is not involved in a scheme or arrangement for the evasion or avoidance of these taxes and will allow you time to amend your deed so that the trustee is no longer liable for the land tax surcharge. We can assist you to apply to the Chief Commissioner to exercise his discretion in your favour.
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