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A guide to excluding foreign beneficiaries

In Short: Foreign persons purchasing residential land in New South Wales, Victoria and Queensland will now have to pay an additional surcharge.

In NSW, updates to the Land Tax Act 1956 (NSW) were introduced in June 2016. Currently a 4% duty surcharge applies to purchases of residential land by foreign purchasers. This may change with the 20 June 2017 NSW State Budget indicating an increase from 4% to 8%, coupled with an increase from 0.75% to 2% on the land tax surcharge in the 2018 land tax year.

Further updates were introduced in Victoria and Queensland applying from July and October respectively. In Victoria an additional 7% foreign investor surcharge has been imposed on residential stamp duty. This was an increase from 3% previously. The existing land tax surcharge of 0.5% was increased to 1.5% in January of this year. Queensland also followed suit with the introduction of a 3% duty surcharge of the foreign acquisition of residential property in October of 2016.

Property Affected

The type of property which is affected by these changes is residential land in NSW and an option to purchase residential land in NSW. Residential land includes, but is not limited to:

  1. parcels of land on which one or more dwellings are situated;
  2. strata lots;
  3. utility lots; and
  4. parcels of vacant land that are zoned for residential purposes.

Land which is used for primary production is excluded from this additional surcharge.

For residential land in Victoria and Queensland, I direct you to follow the links below.

Who is caught by these updates?

Any trust that owns residential land or could purchase property in NSW, Queensland and Victoria. Both direct and indirect acquisitions by foreign persons are caught in this surcharge and stamp duty. You should restrict all foreign purchasers from a trust which potentially could purchase residential land in the future.

Foreign Persons are?
  1. An individual not ordinarily residing in Australia and who are not Australian citizens;
  2. A corporation or trustee of a trust where an individual does not ordinarily reside in Australia;
  3. A foreign corporation or government which holds a substantial interest (more than 20%) in the trust; and
  4. Any other person that meets the conditions under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (“the Act”). Under this Act, Australian Citizens, not necessarily a resident in Australia, are taken to be ordinarily residing.
How to avoid this additional surcharge?

Most discretionary and hybrid trusts will be considered ‘foreign trusts’ because under the Act a discretionary beneficiary is generally treated as having a complete (100%) interest in the trust. Further, discretionary and hybrid trusts generally have broad classes of beneficiaries. This usually includes foreign beneficiaries. A single foreign beneficiary is enough to cause the entire discretionary or hybrid trust to be considered foreign.

For many Australian trusts, they may not be aware that they may be subject to outstanding surcharge liabilities, not because of a lack of intention, but as a result of a broad class of beneficiaries and not specifically excluding foreign persons from the trust.

Also, the wide definition of ‘foreign persons’ means that the surcharge could apply to a significant number of Australian based developers and land owners. The duty surcharges aren’t insignificant costs, with some jurisdictions exceeding the transfer duty payable on the transaction.

Accordingly, when dealing with property transactions, it is necessary to:

  1. check the status of your stakeholders – this means for trusts, check whether its beneficiaries aren’t foreign persons;
  2. consider whether the land purchased is in fact residential land and or that there is an intention to develop on residential land; and
  3. consider whether any exemptions may apply – this is helpful in order to manage any cash flow or funding requirements which may arise because of the surcharge payable.
Amending the trust instrument

Check Amending Provision:

Most trust deeds provide a mechanism for the provisions of the deed to be amended. This is usually referred to as a ‘amending power’ or a ‘power of variation’. Where no amending authority exists within a deed, an application to the New South Wales Supreme Court seeking an amendment to the terms of the trust deed pursuant to section 81 of the Trustee Act 1925 (NSW) can be sought.

Specifically exclude foreign persons:

Once this has been confirmed, then vary the terms of the trust to exclude foreign beneficiaries by amending the definition of an ‘Excluded Person’ to mean any person, corporation, trust, partnership, or other entity that is a ‘foreign person’ or ‘foreign trustee’ as defined under the Duties Act 1997 (NSW) or the Land Tax Act 1956 (NSW). Relevant legislation for Queensland and Victoria should also be included in this new definition.

Exclusion of foreign persons from receiving income and capital of the trust:

It is necessary to exclude the above foreign beneficiaries from receiving allocations of income and advancements of capital from the trust. This amendment would normally slot into the income and capital provisions of your trust deed.

Restrict the ability to transfer, transmit or redeem units to foreign persons:

In relation to fixed unit trusts, a restriction on the ability of the trustee to transmit, transfer or redeem units to foreign beneficiaries of the trust is required. It is also prudent to insert an overriding provision which specifically removes any ability for an excluded person to benefit from the trust or to receive allocations of income and advancements of capital.

Overall, these amendments create a new definition of an excluded person, foreign persons, trustees and entities along with absentee persons and entities, and restrict these persons from otherwise benefiting from the trust.

Into the future…

The introduction of a foreign purchaser duty surcharge in South Australia and Western Australia effective from 1 January 2018 and 2019 respectively has been announced. This means that additional surcharges will apply to foreign persons or corporations owning residential land in New South Wales, Victoria, Queensland, South Australia and Western Australia. While there isn’t much guidance as to the absentee owner land tax surcharge rates, or the definition of foreign persons and residential land for Western Australia, it is unlikely to be significantly different from NSW. The foreign purchaser duty surcharge rate for both South Australia and Western Australia will be 4%, lower than New South Wales 8%.

The reality is that most jurisdictions in Australia will have some form of a surcharge and land tax on acquisitions by foreign residents. To avoid paying further taxes and surcharges it’s important to exclude the possibility that a foreign resident has an interest in residential property through your trust instruments.

Further Information

Revenue Ruling No. G 010: http://www.revenue.nsw.gov.au/info/legislation/rulings/general/g010

Victorian State Revenue Office: http://www.sro.vic.gov.au/foreignpurchaser

Queensland Government Website: https://www.business.qld.gov.au/industries/service-industries-professionals/professional-financial-services/transfer-duty/investors/afad


GET IN TOUCH:

Adrian Wyper

Tax Paralegal

adrian@petergell.com.au

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