Changes to the law in June 2016 meant that foreign persons acquiring residential property in NSW were liable to pay a surcharge on the usual stamp duty payable on the purchase. If a foreign person owned a residential property from 31 December 2016, they were also liable for a land tax surcharge and are not entitled to the tax-free land tax threshold.
Recent changes to the law now mean that the trustee of a discretionary or family trust is deemed to be a ‘foreign person’ if the terms of the trust don’t prevent a foreign person from being a beneficiary. Most trusts deed would not include such a provision and therefore will be subject to a land tax surcharge of 2% on the unimproved value of the residential property and a surcharge stamp duty of an additional 8% of the value of any residential land the trust purchases/
Land Tax surcharge
Revenue NSW has determined that so long as a trust deed is amended before 31 December 2020, it will not be liable for the surcharge land tax. If the trust is amended by this date, the trust will not be liable for the land tax surcharge for the 2017, 2018, 2019 or 2020 year. If the surcharge has been paid in any of these years, the trust will be entitled to a refund.
If your trust owns residential property or may own residential property in the future, it is essential that you get the trust deed reviewed to ensure that you will not be liable for either surcharge. The trust deed must be amended to ensure that a foreign beneficiary cannot receive any benefit or distribution from the trust. It is not enough that none of the current beneficiaries are foreign persons. For example, if the trust deed includes that any spouse of your child is a potential beneficiary, there is a chance that at some point such spouse may be a foreign person. The trust deed must be explicitly amended to provide that such spouse would not be a beneficiary if they are a foreign person.
If amendments to the trust deed were not made before 24 June 2020, the trust deed is required to be amended so that:
- no potential beneficiary of the trusts is a foreign person (as discussed above); and
- the terms of the trust must not be capable of amendment in a manner that would result in a foreign person being a potential beneficiary in the future.
Purchaser surcharge duty
If the trust does not include the provisions excluding foreign persons and it purchases residential property in NSW, it will be liable for surcharge purchase duty. This duty is in addition to the usual stamp duty paid on the purchase. If you intend to purchase a property through a trust, it is important that your trust deed is amended prior to entering into any contract to purchase the property.
There may be circumstances where a person has set up a trust in their will. If the person owns residential property, the testamentary trust may become liable for surcharge land tax if a foreign person is a beneficiary of the trust. For wills executed on or before 31 December 2020, Revenue NSW’s current policy is to ignore if a foreign person is a potential beneficiary of the testamentary trust. For any wills executed after this date, if the terms of the testamentary trust do not prohibit a foreign person from benefiting, the trust will be liable for the surcharge land tax taking advantage of the elimination of stamp duty of share transfers.
Review you trust deed
The potential additional costs for owning residential property in a discretionary trust are substantial. It is essential that you get your trust deed reviewed or ensure that any new trust deed includes the required provisions to exclude foreign beneficiaries. If it is necessary to include a foreign person or entity in a trust or company structure, there may be ways to reduce or eliminate the potential purchase surcharge and land tax surcharge. Our team can assist in restructuring your trust or corporate structure
If you control a trust or are the beneficiary of a trust, get in contact with our team today to have your trust deed reviewed and ensure you don’t get hit with substantial surcharge duty or land tax surcharge.