Do you have residential property held in a company or a unit trust and you don't want to pay the foreign person land tax or duty surcharges? - read on…

While there has been a lot of focus from law firms on the need to amend trust deeds for discretionary trusts that own residential land in NSW, little attention has been paid to the impact of the measures on a company or unit trust where a discretionary trust owns shares or units in the company or unit trust.

In New South Wales, "foreign persons" pay:

1. duty surcharge of 8% on the dutiable value of land when they buy land; and

2. land tax surcharge of 2% of the land tax value of all residential land owned as at 31 December each year.

Some key points about the foreign person surcharges include that:

• a natural person will generally be a foreign person if they are not:

  • a citizen of Australian, or

  • a permanent resident or New Zealand citizen who has actually been in Australia during 200 or more days of the preceding 12-month period.

• a company or the trustee of trust in which a foreign person holds a "substantial interest", being a 20% interest, is also a foreign person;

• a beneficiary of a discretionary trust is treated as having a "substantial interest" in the trust, such that the trust deeds for discretionary trusts that own land need to exclude foreign persons from benefiting to prevent the foreign person surcharges being imposed;

• where a discretionary trust has an interest of 20% or more in a company or unit trust (and foreign persons have not been excluded from benefiting from the discretionary trust), the company or unit trust will also be a foreign person.

Recently, where land is held by a company or unit trust, Revenue NSW have been making inquiries to determine whether the shareholders or unit holders of the company or unit trust may cause it to be a foreign person, including where the company or unit trust is owned by a discretionary trust without a foreign person exclusion in the trust deed.

Some examples of how the foreign person surcharges can be imposed where discretionary trusts have an indirect interest in land are as follows:

Example 1

Facts

• A unit trust that is not a land tax fixed trust owns land in New South Wales.

• The unitholders of the unit trust are an individual (as to 50%) and a discretionary trust (as to 50%).

• The trust deed for the discretionary trust does not have a clause excluding foreign persons from benefiting.

Outcome

• The unit trust is a foreign person as the discretionary trust is a foreign person and has a substantial interest in the unit trust.

• The trustee of the unit trust will be subject to duty and land tax surcharges.

Example 2

Facts

• A unit trust that is land tax fixed trust owns land in New South Wales.

• The unitholders of the unit trust are an individual (as to 50%) and a discretionary trust (as to 50%).

• The trust deed for the discretionary trust does not have a clause excluding foreign persons from benefiting.

Outcome

• The unit trust is not a foreign person for land tax, as there is a special land tax rule preventing fixed trusts from being foreign persons for land tax. However, the unit trust will be a foreign person for duties purposes

• Land tax assessments will be issued to the trustee and unitholders.  For the assessment issued to the discretionary trust, land tax foreign person surcharge will be imposed.

• In summary, the trustee of the unit trust will only be subject to duty surcharge, but land tax will be imposed on trustee of the discretionary trust as a secondary landholder at surcharge rates.

The above outcomes can be overcome by amending the trust deeds for the discretionary trusts to exclude foreign persons.  Any amendments should be made before 31 December 2020 to prevent land tax surcharge being imposed for the 2021 land tax year.  Further, if the company or unit trust intends to make a dutiable transaction, the amendments to the trust deed for the discretionary trust should be made before the dutiable transaction.

Please contact us if you would like our assistance in preparing an amendment to the trust deed of a discretionary trust.

The material in this article was correct at the time of publication and has been prepared for information purposes only. It should not be taken to be specific advice or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained in this article.

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