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Important changes to tax treatment of Discretionary Trusts

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On 31 December 2020 new laws will come into effect changing the way surcharge stamp duty and surcharge land tax are applied to real property acquired or held in NSW by ‘discretionary trusts’.  A ‘discretionary trust’ (sometimes referred to as a family trust) is essentially any form of trust where there is a broad discretion as to whom the trustee may allocate income too. 

Surcharge stamp duty and land tax is an elevated charge of stamp duty that the Office of State Revenue imposes on foreign persons who acquire and hold property in NSW: an additional 8% stamp duty and an additional 2% land tax. 

Specifically, the new rules say that the trustee of a discretionary trust may be liable for the foreign person surcharges if any one of the potential beneficiaries of the trust is a foreign person. This applies to all potential beneficiaries under the various categories of beneficiaries provided under the relevant Trust Deed – not just the named beneficiaries or those that have received distributions.

A foreign person is defined to include an individual not ordinarily a resident in Australia, a foreign corporation or a foreign government holding a substantial interest. Australian Citizens living overseas are not considered foreign persons. However, their spouses and children born overseas, and not Australian citizens, could mean the trustee is regarded as a foreign trustee.

The effect of the changes are that will be taken to be a foreign trustee if the terms of the trust deed do not prevent a foreign person from being a beneficiary under the trust. If so, a foreign trustee is liable for surcharge purchaser duty as the buyer of residential land and ongoing land tax surcharge as the owner of residential land.

If however, the terms of the trust deed specifically prevent a foreign person from being a beneficiary then the trustee will not be considered a foreign person for surcharge purchaser duty or surcharge land tax purposes.

It may be that urgent amendments are required to your trust deed in order to achieve the following:

  1. Prevent potential beneficiaries that are foreign persons from receiving distributions as to income and/or capital under the Trust; AND
  2. Remove from the Trust Deed any existing named beneficiary who is a foreign

If you think this applies to you (i.e. you have bought or intend to buy property through a discretionary / family trust) please get in contact with the office as soon as possible so we can assist you with any necessary amendments before 31 December 2020. 

If you have any questions about this article, please contact the office on 1800 870 407 and one of our solicitors/conveyancers will be able to assist.

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