From 1 July 2015, provisions in the Duties Act 2000 (Vic) have imposed additional duty on foreign purchasers of Australian residential property. Since 1 July 2019, the rate of additional duty has been 8%.
Foreign trusts are within the category of foreign purchasers targeted by the Act, and include a trust where:
- a foreign natural person, which includes a person who is not an Australian citizen; or
- a foreign corporation, which includes a company that is incorporated outside Australia or in which a foreign natural person has a controlling interest,
has a beneficial interest in more than 50% of the capital of the trust.
Typically, a discretionary trust (or family trust) is set up with a couple of key people as the “specified beneficiaries” and a broad range of other beneficiaries – from the immediate family to unnamed long-lost descendants of the grandparents of the specified beneficiaries.
Yes, that even includes the specified beneficiary’s long lost cousin who lives overseas and is not an Australian citizen.
Stave Revenue Office
Until now, the State Revenue Office (“SRO”) has taken a practical approach to the application of the foreign duty provisions in relation to discretionary trusts.
The SRO’s approach has been to treat a trust with foreign beneficiaries who have not and who are, based on the information available, unlikely to receive any distributions from the trust in the future, as not falling within the definition of foreign trust.
However, from 1 March 2020 the SRO will no longer be applying this practical approach. Instead, any discretionary trust that has within its beneficiary class a foreign natural person or a foreign corporation which is eligible to receive 50% of the capital of the trust will be considered to be a foreign trust purchaser for the purposes of transfer duty – attracting an additional 8% of duty.
By way of example, if a Victorian residential property is purchased for $2,000,000 on 1 March 2020 by a discretionary trust which has the overseas cousin who is not an Australian citizen as one of its beneficiaries, then the duty on the purchase will be $270,000, rather than $110,000 if the cousin was not a beneficiary of the trust.
If you are considering purchasing residential property in your family trust, it is extremely important to consider how you may be able to avoid foreign purchaser additional duty on the purchase.
This may be possible by amending the trust deed prior to settlement of the purchase. Obviously, there are many issues to consider before determining whether this is an appropriate strategy for you, including whether the amendment is permitted and advisable in your circumstances, and consideration of the risk of resettlement.
It is not clear whether the SRO will accept that excluding beneficiaries pursuant to an existing power in the trust deed will be sufficient. Setting up a new trust with no foreign beneficiaries may be a preferable way to go.
For more information on how we can assist you in considering the best way to proceed in your own circumstances, please do not hesitate to contact us.