Caution needed when buying property in trusts
In an alarming move, the Victorian State Revenue Office has confirmed our fear that Foreign Purchaser Additional Duty (FPAD) will be applied to many stock-standard discretionary trusts. This will result in trust acquisitions of Victorian residential property being exposed to an additional 3% of duty.
Trust deeds should be reviewed and possibly amended prior to acquiring a property.
What is FPAD?
Recent amendments to Victoria’s Duties Act have imposed an additional amount of duty of 3% on certain post 1 July 2015 acquisitions of land by foreign purchasers.
The additional duty is payable on acquisitions of existing residential premises by a foreign purchaser.
Also, the additional duty is imposed where a foreign purchaser acquires land (other than existing residential property) and they form an intention to build a residence on that land.
Upon forming that intention, the purchaser must notify the SRO within 14 days. They must then pay an amount of additional duty of 3% of the value of the land (measured at the time of acquisition) within 30 days of forming the intention.
The additional duty also extends to purchases of certain landholder companies and trusts.
Application to discretionary trusts
The definition of a foreign purchaser includes the trustee of a foreign trust. In our view, this will encompass a large percentage of discretionary trusts.
A foreign trust means a trust in which one of the following has a ‘substantial interest in the trust estate’:
-
a foreign corporation;
-
a foreign natural person; and
-
another person that holds the substantial interest as trustee of another foreign trust.
A foreign natural person is broadly a natural person who is not an Australian citizen or certain visa holders.
The amendments go on to provide a definition of what constitutes a ‘substantial interest in a trust estate’. Relevantly for discretionary trusts, the amendments state:
If, under the terms of a foreign trust, a trustee has a power or discretion as to the distribution of the capital of the trust estate to a person or a member of a class of person, any such person is taken to have a beneficial interest in the maximum percentage of the capital of the foreign trust estate that the trustee is empowered to distribute to that person.
What this means is that if, as is so often the case, the trust deed provides:
-
an extensive definition of the class of beneficiaries; and
-
the trustee with broad discretion as to who may receive distributions of capital
it is likely that there will be a foreign natural person with a substantial interest in the trust estate. This will make the trust a foreign trust.
For instance, the standard Hall & Wilcox discretionary trust deed includes a broad definition of the beneficiary class which extends to:
the parents, grandparents, brothers, sisters, Spouses, uncles, aunts and Children of the Primary Beneficiary or the Primary Beneficiaries, the Spouses, Children and grandchildren of those parents, grandparents, brothers and sisters, the Spouses, Children, grandchildren and great grandchildren of the Children of the Primary Beneficiary or the Primary Beneficiaries and the Children and grandchildren of the Spouses of the Primary Beneficiary or Primary Beneficiaries.
In modern, multi-cultural Australia we believe most families will have at least someone within this class who is a foreign natural person. As such, we believe most discretionary trusts will be foreign trusts and subject to the extra 3% duty.
What should be done
Prior to acquring land in a discretionary trust, where the land contains existing residential premises or it is intended to build residential premises, the deed should be reviewed to see if the trust is a foreign trust.
Advice should be sought about whether it is possible to either amend the terms of an existing trust or prepare a bespoke trust deed that ensures it is not a foreign trust. In addition, for existing trusts resettlement issues must be considered before making any amendments.
Please contact us if you require any assistance.
Contact
Jordon Lee
Lawyer
Geoff Benson
Lawyer
Harvey Duckett
Lawyer
Luke Denham
Lawyer
Jemima Whiteman
Lawyer
Bradley White
Lawyer
Sarah Khan
Lawyer
Marie Mitilineos
Lawyer
Gloria Tam
Lawyer
Sheldon Fu
Lawyer
Anna Cao
Lawyer
Claire Bourke
Lawyer
Chloe Taylor
Lawyer
Silvana Brcina
Lawyer
Daphne Schilizzi
Lawyer
Andrew Banks
Lawyer
Isabella Urso
Lawyer
Jessica Liu
Lawyer
Amelia Spratt
Lawyer
Luke Raams
Lawyer
Emma McDonald
Lawyer
Carl Ayers
Lawyer
Gus Hu
Lawyer
Rebecca Dodd
Lawyer
Gretel Burns
Lawyer
Rachel Bonic
Lawyer
Samantha Frost
Lawyer
Emma Bechaz
Lawyer
Matt Dolan
Lawyer
Luke Hefferan
Lawyer
You might be also interested in...
Thinking | 1 Sep 2015
The NSW Court of Appeal find quad bike provider guilty of negligence
Alameddine v Glenworth Valley Horse Riding Pty Ltd [2015] NSWCA 219 Background Alissa Alameddie, the plaintiff, commenced proceedings against the defendant, Glenworth Valley Horse Riding (Glenworth) in relation to an injury she suffered while participating in a quad bike trail ride at the defendant’s premises on 21 May 2011. The plaintiff’s mother organised and paid […]
Thinking | 4 Sep 2015
Talking Tax – Issue 3
Key developments Rio Tinto loses appeal in GST case re ITCs This was a test case regarding whether section 11-15(2) of the GST Act contains a ‘principal purpose’ test. Under section 11-15(2)(a), taxpayers cannot claim an input tax credit for acquisitions of supplies that would be input taxed. The Full Federal Court found that the […]