Trusts that own or purchase residential land in NSW – additional duty and land tax imposts
All discretionary trusts that own or purchase land in NSW should consider whether or not the new Surcharge Purchaser Duty or the Land Tax Surcharge applies to the trustee. Changes may be required to trust deeds to ensure that these surcharges do not apply.
Background – what is surcharge purchaser duty and the land tax surcharge?
Surcharge purchaser duty is imposed at the rate of 4% on the purchase of residential real estate in NSW by a “foreign person” on or after 21 June 2016.
Land tax surcharge of 0.75% is imposed on foreign persons who own residential land in NSW starting from the year ending 31 December 2016 (2017 land tax year). No tax-free threshold or principal place of residence exemption applies if the surcharge applies.
Background – who is affected?
A surcharge applies to all foreign persons who acquire (surcharge duty) or own (land tax surcharge) property in NSW.
A foreign person means:
an individual not ordinarily resident in Australia; or
a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or
a corporation in which 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest; or
the trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or the trustee of a trust in which 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest; or
a foreign government; or
a general partner of a limited partnership where:
an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds at least 20% in the limited partnership; or
two or more persons each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate interest of at least 40% in the limited partnership.
How are trusts affected?
Relevantly, for trusts that own residential land, if a foreign person is a potential beneficiary of the trust, this will mean the trust is itself a “foreign person”. This is due to the fact that a discretionary beneficiary is deemed to have the maximum percentage interest (i.e. 100%) in the trust. This is a “substantial interest” which means that the Trustee will itself be a foreign person and liable for the surcharges.
Beneficiary classes in most discretionary trust deeds are broadly cast and do not ordinarily differentiate based on the residency of beneficiaries. A simple example is a discretionary family trust that has principal beneficiaries being mum, dad and children, all of whom reside in Australia and are not foreign persons. However, all other relatives of Mum and Dad reside overseas. These relatives fall within the secondary class of discretionary beneficiaries of the trust. In this case, the trust itself will be a foreign person and subject to both the surcharge purchaser duty on the acquisition of NSW land and the land tax surcharge.
To prevent the surcharges applying to trustees in this circumstance, trust deeds will need to be amended to exclude foreign persons from benefiting from the trust. The Office of State Revenue has issued a Revenue Ruling confirming that the Commissioner will exercise his discretion to exempt a trustee of a trust from the surcharges provided he is satisfied that the trustee is not involved in a scheme or arrangement for the evasion or avoidance of these taxes. The trustee then has 6 months to amend the deed in accordance with the exemption.
As for how to achieve the exclusion of foreign persons, the mechanism by which this is done should be carefully considered and will vary for each trust. There are several ways for this to be achieved and each will have different legal consequences (for example, by the trustee exercising a power of exclusion, variation of the deed or self-exclusion by beneficiary). Each trust deed and circumstances will be different. However, in most cases, to ensure maximum flexibility for the trust, so that the trustee retains the ability to reappoint foreign persons as beneficiaries of the trust in the future, such a change preferably should not be expressed to be irrevocable.
Some of the other concerns with the new surcharges:
Exemptions which may otherwise apply to residential land (such as the primary place of residence exemption) do not apply when calculating the taxpayer’s surcharge liability; and
The meaning of “residential land” is unclear – industry consultation is currently progressing with a view to the OSR issuing a Revenue Ruling in relation to the definition.
If you would like to discuss your specific requirements relating to your or your clients’ trusts, please contact me.
Changes to landholder duty provisions
Landholder duty is ad valorem duty charged on the acquisition of an interest in a landholder. That is, instead of nil duty on the acquisition of a share in a company which holds land, duty is imposed as if the purchaser is buying an interest in the land.
A bill which, among other things, extends the landholder duty provisions, passed the Legislative Assembly (State Revenue Legislation Amendment Bill 2017) on 8 March 2017 and moved to the Legislative Council. Some of these changes include extending certain anti-avoidance measures, the point in time at which an interest is acquired, including landholdings that are “agreed to be transferred” and those subject to put and call options. This extends the application of these already complex and far-reaching provisions. Care should continue to be taken whenever transferring or dealing with interests in a landholding entity.
If you would like to discuss any issues relating to State taxes, please contact me.