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Amend your discretionary/family trust before 31 December 2020 or it may become liable for extra duty or tax

Property Law

If a foreign person buys residential land in New South Wales, a surcharge of 8 per cent is payable in addition to the transfer duty.  If a foreign person owns residential land in New South Wales, a surcharge of 2 per cent is payable in addition to land tax – perhaps even if no land tax is payable.

A ‘foreign person’ includes a trust, if any person who can receive a benefit from the trust is not one of the following:

  • An Australian citizen; or
  • A New Zealand citizen with a subclass 444 visa; or
  • A permanent resident who has lived in Australia more than 200 days in the 12 months before the liability date.

‘Residential land’ includes not only land with dwellings on it, but also vacant land zoned residential, land use entitlements (e.g., leases), strata units and utility lots.

The risk due to potential future beneficiaries

If you are a trustee of a discretionary trust (which includes most family trusts) which has acquired (or intends to acquire) residential land in New South Wales, the trust may be liable to surcharge duty and surcharge land tax if the classes of persons eligible to benefit from the trust include, for example:

  • A future spouse of an existing beneficiary; or
  • A charity; or
  • A company or trust;

because any of those could turn out to be foreign persons in future.

The same applies if you are a director of a company that is the trustee of a discretionary trust.

The effect on entities owned by discretionary trusts

Surcharge duty and surcharge land tax may also be payable by other entities that acquire or own residential land in New South Wales, for example a company that is owned by a discretionary trust.

How to avoid surcharge duty or land tax

You can avoid the risk of having to pay surcharge duty or land tax if the trust deed of the discretionary trust is amended before midnight on 31 December 2020 in order to:

  • Prevent any foreign person from being a beneficiary under the trust; and
  • Prevent the trust deed being amended so as to allow a foreign person to be a beneficiary.

If a trust names or specifies beneficiaries that are foreign persons, then those persons’ names must be removed from the trust as beneficiaries.

Refund for surcharge duty or surcharge land tax paid already

If a discretionary trust has paid surcharge duty or surcharge land tax in respect of residential land in New South Wales, a refund of the duty or tax will be available, provided that the trust deed of the trust is amended as indicated above before midnight on 31 December 2020.

Take action before it’s too late

If the trust of which you are a trustee has acquired (or may in future acquire) residential land in New South Wales, then we strongly recommend that you review that trust deed and, if necessary, have it amended well before 31 December 2020.  Atkinson Vinden is available to review the trust deed, advise you on any necessary amendments and draft an amending deed for you.  Please contact Michael Tyler, Special Counsel, on (02) 9411 4466.