Discretionary trusts, surcharge land tax and stamp duty

In brief - Consider reviewing or amending trust deeds 

The New South Wales Government recently introduced a surcharge on foreign persons as defined in the Foreign Acquisitions and Takeovers Act 1975 with respect to both land tax and stamp duty. This can have some unintended consequences for discretionary trusts, as each beneficiary that the trustee has a discretion to make a distribution to is deemed to have a maximum percentage interest in the income and property of the trust.

The surcharge is applied where a beneficiary or associated beneficiaries are foreign persons who together hold at least 20% of the income or property of a trust. Therefore, where a discretionary trust has a potential class of beneficiaries who are foreign persons, that trust will incur the surcharges. This is the case even though there are no foreign persons who actually receive income or property from the trust.

Exemptions for discretionary trusts in certain circumstances

Pursuant to Revenue Ruling G010 issued on 13 September 2017 from the NSW Office of State Revenue (OSR), the Commissioner of State Revenue can exempt a discretionary trust from surcharge duty or land tax if satisfied that the trustee is not involved in a scheme to avoid these taxes.

However, the relevant trust deed must be amended to state that no distribution could be made to foreign persons. Further, the Chief Commissioner can provide an exemption in certain circumstances where this amendment to the trust deed was not made as at the date of the dutiable transaction, provided this happens within six months of the granting of the exemption.

This variation to the statute operates retrospectively from 21 June 2016.

There are also exemptions given in certain circumstances with respect to discretionary trusts involving deceased persons.

Review trust deeds or amend them in accordance with Revenue Ruling G010

If you control a discretionary trust which owns real estate in New South Wales, you should immediately have your trust deeds reviewed to ensure that either it does not give rise to unexpected consequences in relation to stamp duty or land tax surcharges with respect to its property dealings, or that the trust deed is amended in accordance with Revenue Ruling G010 to ensure that this unwanted extra impost is avoided.