On 5 July 2018 the NSW Commissioner of State Revenue issued Commissioner’s Practice Note No. CPN 004 (‘CPN 004’). CPN 004 relates to surcharge purchaser duty which applies to acquisitions of NSW residential land by foreign persons. CPN 004 provides a number of examples in which the surcharge purchaser duty may or may not arise.

What is a Foreign Person?

The definition of a foreign person has ben previously explained in Revenue Ruling No. G 009. (‘G 009’). For the purpose of the surcharge, a foreign person is considered to be any of the following:

• An individual who is not ordinarily resident in Australia (other than an Australian citizen)
• A corporation in which an individual ‘not ordinarily resident in Australia’, a foreign corporation or a foreign government holds a substantial interest;
• A corporation in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest;
• The trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest;
• The trustee of a trust in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest;
• A foreign government;
• A foreign government investor;
• General partners of limited partnerships.

Surcharge Purchaser Duty

Where the surcharge purchaser duty applies, the surcharge is an additional 8 per cent to the duty payable on the purchase of NSW residential property. An additional land tax surcharge of 2% of the value of the land applies in addition to the normal 1.6% levied on discretionary trusts.

Examples

CPN 004 details six examples where the surcharge purchaser duty may or may not arise. Of particular note are examples 4 and 5, as these are both situations in which a liability for the foreign surcharge may arise.

Example 4

Mr & Mrs Jones (both Australian Citizens) are primary beneficiaries of the Jones Family Trust. Potential beneficiaries include their children, their spouses, grandchildren, aunties & uncles (all Australian citizens), the lineal descendants of the specified beneficiaries and any entities whether formed in Australia or elsewhere such as corporations, charities etc.

The trust has potential existing foreign beneficiaries and in order for the trustee not to be liable for foreign surcharges, the trust deed will need to be amended.

Example 5

Mr & Mrs Jones (both permanent residents but not ordinarily resident for the 2018 tax year) are beneficiaries of the Jones Family Trust. Potential beneficiaries include their children, their spouses, grandchildren, aunties & uncles, the lineal descendants of the specified beneficiaries.

Mr & Mrs Jones were overseas and were not in Australia for more than 200 days in 2017. Mr & Mrs Jones are classified as foreign for the 2018 tax year.

The trust is liable for surcharge land tax for the 2018 tax year. If Mr and Mrs Jones are in Australia for more than 200 days during 2018, they will not be foreign persons for the 2019 tax year and not liable for surcharge land tax for the 2019 tax year.

Named Beneficiaries

Where named beneficiaries fall under the definition of a foreign person, those named beneficiaries will be required to be removed in order to avoid attracting the surcharge purchaser duty. Importantly, CPN 004 expressly states that clauses that prevent named beneficiaries from receiving distributions are not sufficient to prevent a foreign surcharge liability from arising.

Amendments

The six examples provided in CPN 004 are by no means exhaustive. However, CPN 004 does make clear that in circumstances where there are potential or existing foreign beneficiaries, the trust deed should be amended in order to avoid foreign surcharges. Such amendments must be exhaustive and irrevocable. However, where a dutiable transaction occurs on or before 31 December 2018, the Chief Commissioner will accept amendments without an irrevocable clause.

Given the substantial nature of the surcharge purchaser duty, CPN 004 highlights the importance of trustees being aware of foreign surcharge liabilities that may arise from foreign beneficiaries, and the need to exclude such classes of persons and entities.

Over the course of the past year at PGG Legal we have been we have been performing hundreds of amendments to trust deeds to exclude foreign beneficiaries, and are happy to assist with any required amendments. Please contact us for further information.