Any trust that qualifies as a foreign trust has to potentially pay foreign trust surcharges.
Foreign Trust Surcharges
Foreign trust surcharges consist of 7% or 8% additional stamp duty and 2% additional land tax. But there is a lot more to it.
In this episode Emily Pritchard of ACIS will walk you through the rules for Queensland, NSW and Victoria.
Here is what we learned but please listen in as Emily explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Whenever you buy land in Australia, you pay land transfer duty aka stamp duty. And after that each year you pay land tax unless the land is exempt, for example as your main residence or a farm. You pay this stamp duty and land tax, no matter whether you are an Australian or not, whether you live in Australia or not.
But if you qualify as a foreign person, then you have to pay extra. You have to pay a surcharge on this stamp duty and land tax. You pay 7% or 8% additional stamp duty if the land is in Queensland, NSW or Victoria. And you pay an addition 2% surcharge of land tax.
So it all depends on whether you are a foreign person or not. And this is quite straight forward for individuals. If you are an Australian citizen or you are a permanent resident present in Australia for at least 200 days per year, then you are not a foreign person. And so you don’t pay any surcharges.
But if you are not – if you are neither an Australian citizen nor a permanent resident actually living in Australia – then you are a foreign person subject to these surcharges.
A company is also still relative straight forward. Whenever a foreign holds a substantial interest in a company, being at least 20% of any rights, then the company is a foreign person and also has to pay these surcharges.
But what about trusts? Trusts are less straight forward, since discretionary and hybrid trusts often provide for a broad class of beneficiaries.
Beneficiaries are usually defined by reference to a principal beneficiary – for example Peter Smith and all his descendants and all their spouses. With time this can become a pretty big group and chances are that at least one of these will live overseas without an Australian passport.
So then it all comes down to which beneficiaries are included in the foreign person test and this varies from state to state.
In Queensland only the default beneficiary is included in the foreign person test. This is very lenient. Let’s use Peter Smith as an example. In Queesnland – as long as Peter Smith is still alive as the default beneficiary – you just have to test Peter Smith. And if Peter Smith is an Australian citizen or lives (200 days) in Australia with a PR visa, then all is well. The trust is not a foreign person.
The concept of potential beneficiary is the toughest of all and applies in NSW to both land tax and stamp duty. Here you have to consider any potential beneficiary that the trustee COULD distribute to.
So if under the terms of the trust, the trustee could potentially distribute all of the income or capital of the trust to a foreign person, whether or not they actually do so, the foreign person is treated as having a 100% interest in the trust and the trustee is treated as a foreign person.
So if – going back to our example – Peter Smith had a grandson who moved to the US and married a US citizen, then the entire trust would be treated as a foreign person – just because of this one potential beneficiary who is not an Australian citizen or permanent resident.
And it doesn’t even have to be a living and breathing individual. Peter might have included an overseas charity as beneficiary in the trust deed – let’s say a charity in Israel – and the trust might never have distributed a cent to this charity. And yet, the trust counts as a foreign person because of this potential beneficiary.
And it can go further than this. Let’s say Peter’s trust holds 21% in a company who owns residential land in NSW, then the company would also be a foreign person and owe surcharges on that land.
Rules per State
Surcharges apply if acquirer or holder of land is a foreign person. But what this means varies from state to state.
Land tax and stamp duty are state-based taxes, not federal taxed, hence the rules are slightly different in each state and territory.
Stamp duty surcharge is 7% on residential land only but no surcharge-free threshold.
Land Tax surcharge is 2% surcharge on any land with a $350,000 surcharge-free threshold.
A trustee is a foreign person if 50% of trust interests are foreign. For a discretionary trust, only the default beneficiary is considered to have a trust interest.
s240 and s244 Duties Act 2001 (Qld) – s32(1)(b) & Schedule 2 Land Tax Act 2010 (Qld)) – s234 Duties Act 2001 (Qld) – s18 C, D and F Land Tax Act 2010 (Qld) – s237 Duties Act 2001 (Qld) – s57 Duties Act 2001 (Qld).
New South Wales
Stamp duty surcharge is 8% on residential-related land only but no surcharge-free threshold.
Land Tax surcharge is 2% surcharge on any residential land only but no surcharge-free threshold.
A trustee is a foreign person if anybody holding a potential trust interest is foreign. So for a discretionary trust, any potential beneficiary is considered to have a trust interest. And hence if any potential beneficiary is foreign, the trustee and hence the trust is foreign.
It is not enough that named beneficiaries are merely prevented from receiving distributions. In other words, a general clause excluding foreign persons from being beneficiaries is not enough. You need to actually remove them as potential beneficiary.
And you must make sure that it is not possible to amend the terms of the trust in a to include a foreign person as potential beneficiary later. So the group of beneficiaries must be irrevocable and not include a foreign person, if you want to avoid surcharges.
s5A(1) Land Tax Act 1956 (NSW) – s104L(1)(a) & s. 104U Duties Act 1997 (NSW) – s18(3) Foreign Acquisitions and Takeovers Act 1975 (Cth) – NSW CPN 004: Foreign Surcharges and discretionary trusts – State Revenue Legislation Further Amendment Bill 2019 (NSW)
Stamp duty surcharge is 8% on residential property only but no surcharge-free threshold.
Land Tax surcharge is 2% surcharge on any land and no surcharge-free threshold.
For a discretionary trust, it is the specified beneficiary that determines surcharges for land tax. And it is any potential beneficiary for stamp duty.
s46IA (1B) Land Tax Act 2005 (Vic) – s3 Land Tax Act 2005 (Vic)
So in Queensland it is all about the default beneficiary both for land tax and stamp duty.
In NSW it is any potential beneficiary both for land tax and stamp duty that will turn a trust into a foreign trust.
And in Victoria it is the specified beneficiary for land tax and potential beneficiary for stamp duty.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 16 March 2021