Warning: will your foreign person trust amendment prevent you from distributing to other trusts?
When preparing end of year trust distributions it is important to consider the impact of any foreign person exclusions in the trust deed. Failure to consider this and to get it right can result in the trust distribution being ineffective and the trust income being taxed to the trustee at 47%. But, the fix to the problem may be as simple as a deed amendment.
Over the past few years, many trustees of discretionary trusts have amended their trust deeds to exclude foreign persons from being beneficiaries so that foreign person duty and land tax surcharges are not imposed on the trustee. As trustees prepare their end of year income distributions, it is important to consider how the exclusion of foreign persons may impact on who can receive distributions from the trust.
The problem?
An issue that many may not have turned their mind to is that where a trust deed for a trust that holds residential land in New South Wales (the Amended Trust) has been amended, the trustee of the Amended Trust may no longer be able to distribute income and capital of the Amended Trust to any discretionary trust for which such an amendment has not been made (the Non-amended Trust). This is because the Non-amended Trust may still be a foreign person, being a trust under which foreign persons can potentially benefit, and under the terms of the trust deed for the Amended Trust it cannot distribute to foreign persons.
That is, even if the Non-amended Trust appears to fall within the class of beneficiaries of the Amended Trust, the exclusion of foreign persons benefiting under the Amended Trust, may mean that the Non-amended Trust is no longer a beneficiary of the Amended Trust.
The income tax implications of this are significant. It means that any distribution of income from the Amended Trust to the Non-amended Trust will be invalid and such income may be assessed either:
if there is a default beneficiary under the trust deed for the Non-amended Trust, to the default beneficiary being the person presently entitled to the income; or
otherwise, to the trustee of the Amended Trust at the top marginal rate as there is no beneficiary of the Amended Trust presently entitled to that income.
There are often important reasons, particularly within family groups, why a trustee may wish to distribute income to another trust, such as to take advantages of tax losses in the recipient trust, where permitted under the trust loss rules.
The solution?
The solution to this problem is to amend the trust deeds to exclude foreign persons as beneficiaries for any trusts that, while they do not own residential land in New South Wales, may receive distributions of income or capital from a trust that is to acquire or does own residential land. If such an amendment is made to the trust deed for a trust, the trustee of that trust will cease being a foreign person so that they may be able to receive distributions of income or capital from trusts, the terms for which do not permit distributions to foreign persons, assuming they otherwise fall within the class of beneficiaries of the trust.
Other Australian states have similar, but not identical, statutory regimes that impose land tax or duty surcharges on foreign persons and, as such, similar considerations may arise from trusts that own or are to acquire land in other Australian states.
If you would like us to assist you with amending the trust deed of trust or have further questions concerning the issues raised in this article, please do not hesitate to contact us.
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.