1. Background
Foreign purchaser additional duty applies to acquisitions of residential land by foreign persons, and surcharge land tax applies to foreign persons who are owners of residential land in Victoria. Foreign purchaser additional duty and surcharge land tax (together, the foreign surcharges) are payable in addition to any other duty or land tax payable.
Where an interest in a property is acquired directly or indirectly by or held through a discretionary trust, the trustee of the trust may be liable for foreign surcharges if any one of the potential beneficiaries is a foreign person.
Each beneficiary in a discretionary trust is deemed to have the maximum percentage interest in the income or property over which the trustee may exercise a discretion to distribute.
If the trust intends to purchase land now or in the future, 'foreign persons' can be excluded from receiving distributions of income and capital by including a Foreign Beneficiary Clause which prevents distributions being made to that particular person.
2. The relevant surcharge rates of duty and land tax, relevant to 'foreign trusts’
In Victoria, the total stamp duty surcharge rate is 13.5% (5.5%, plus an additional 8%). Regarding land tax, additional land tax of 2% is payable on top of the land tax already payable.
In the Australian Capital Territory, additional land tax of 0.75% is payable on top of the land tax already payable.
3. When might a discretionary trust be considered a 'foreign purchaser' or 'foreign person' or 'foreign trust'?
In some jurisdictions, a 'foreign trust' or 'foreign purchaser' will be any trust in which a foreign person may be entitled to receive a distribution of more than 50% of the capital of the trust estate: this would apply in respect of any discretionary trust where, for example, a foreign natural person falls within the class of eligible beneficiaries.
In other jurisdictions, a trust will only be a foreign trust where, for example, a foreign person is named as a specified beneficiary, or would take distribution from the trust as a taker-in-default (that is, where the trustee fails to validly exercise his discretion).
To avoid being a foreign trustee, the discretionary trust must meet both of the following requirements:
• no potential beneficiary of the trust is a foreign person (the "no foreign beneficiary requirement"); 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 (the "no amendment requirement").
The “no foreign beneficiary requirement” can (and will usually) be satisfied in respect of a person if the terms of the trust prevent any property of the trust from being distributed to or applied for the benefit of the person.
4. Foreign Beneficiary Clause
To be exempted from foreign surcharges, the trust must be amended to exclude any foreign beneficiaries and the amendment must be irrevocable.
If the trust has been established but has not yet entered into any binding arrangements to acquire the relevant asset, then the deed could be amended at that time.
Deed of Variation
A Deed of Variation is a legal document that “varies” or changes one or more clauses of a former contractual agreement which in this case, can be used to vary the trust deed to exclude ‘foreign persons’.
However, a Deed of Variation might be out of context if the trust has already named beneficiaries who are ‘foreign persons’ or where a 'foreign person' is involved in decisions regarding the administration or conduct of the trust, for example, the appointor, trustee or director/shareholder of the trust is a 'foreign person'. In this case, legal advice is recommended.
Chang Accounting Advisory Pty Ltd, we are CPA practice and tax agent. If you or your families or friends need our services, please feel free to contact our team for any assistance.
This article is for informational purposes only and does not form part of our advice. This article is based on Victoria State Revenue Office guidelines.
Please contact our team if you need any assistance.
Claire Chang, 0497 131 419, claire.chang@changadvisory.com.au, wechat: clairechang26
Michelle Cui, 0433 539 870, michelle.cui@changadvisory.com.au, wechat: michellejc
Claire Chang