Last year, the NSW Government introduced land tax and duty surcharges which can significantly impact the tax benefits of many discretionary trusts which own or are in the process of purchasing land in NSW. The legislation increases the duty and land tax surcharge by 4% and 1.25%, respectively.
What this could mean for you
Your discretionary trust will be subject to the surcharges if the Trust Deed allows for the possibility of a distribution to a foreign person (a person who is not ordinarily an Australian resident and who is not an Australian citizen).
The trust will be subject to the surcharges even if the foreign person does not receive and is not expected to receive any income or property from the trust. This is because each discretionary beneficiary is deemed to have a maximum percentage interest in the income and property of the trust.
It is common for a discretionary Trust Deed to set out a wide range of potential beneficiaries, including relatives of primary beneficiaries, some of whom may not be Australian citizens and who may be living overseas. It is important to consider all of the potential beneficiaries of the discretionary trust, even if you have no intention of making a distribution to them, to avoid any unexpected tax consequences.
If your trust already owns property in NSW
If your discretionary trust already owns property in NSW, you should have already disclosed any foreign person beneficiaries to the OSR, otherwise the trust may now be in tax default. Once foreign person beneficiaries are disclosed, the OSR will issue a notice in respect of any surcharges for land tax and duty which may be outstanding.
Are there any exemptions?
The Commissioner of State Revenue can exempt a discretionary trust from surcharge duty or land tax if it is satisfied that the trustee is not involved in a scheme or arrangement to avoid these taxes. If an exemption is granted, you will then need to amend the trust deed. The amendment will need to irrevocably remove foreign persons from all classes of beneficiaries. This amendment should be made before you purchase property in NSW to avoid the duty surcharge, and before the end of the year to avoid the land tax surcharge.
If you have any questions regarding this article or require assistance reviewing your trust deed or drafting an amendment, please contact us on (02) 9525 8688.