22 Nov Legislative changes to discretionary trusts and foreign persons
The State Revenue Legislation Further Amendment Act 2020 No.14 has introduced a new section 104JA to the Duties Act 1997 No.123 (“new Act”) designed to strengthen New South Wales’ revenue base.
The new Act clarifies when a trustee of a discretionary trust is liable for surcharge purchaser duty and surcharge land tax (“Surcharge Taxes”). Surcharge Taxes are ordinarily payable when a foreign person acquires NSW residential land. When a trust holds an interest in NSW residential land and one of the potential beneficiaries is a foreign person, Surcharge Taxes will be payable.
The current position is that a trustee is deemed to be a foreign trustee (and therefore liable to the Surcharge Taxes) if the terms of the trust deed do not prevent a foreign person from being a beneficiary. The new Act provides for an exemption to the payment of the Surcharge Taxes if the trust deed states that:
1. a foreign person is prohibited from being a potential beneficiary; and
2. the terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary who is a foreign person.
There is a transitional period up until 31 December 2020 to allow for all existing trust deeds to be amended to exclude foreign persons as beneficiaries (and for that exclusion to be fixed) and therefore be able to benefit from the exemption in the new Act. Importantly, the new Act also allows for trustees to be refunded any Surcharge Taxes they have paid provided the terms of the trust deed are amended in accordance with the new requirements before 31 December 2020.
In relation to discretionary trusts created under a Will or codicil which may benefit foreign persons, these will not need to be amended provided they were executed on or before 31 December 2020. A similar exemption applies to trusts arising from intestacies if the deceased died before, or within 2 years after, the commencement of the new Act.
Any trustees who hold, or may hold, NSW residential land, should look to:
- review and amend the trust deed to ensure the trust is not a foreign person trust before 31 December 2020; and
- consider whether any beneficiary of the land holding trust is a discretionary trust which also requires its trust deed to be amended; and
- where applicable, seek a refund from Revenue NSW if they have paid any Surcharge Taxes in previous years.
Do you have questions regarding discretionary trusts or wills? Contact Solari and Stock Miranda on 8525 2700 or click here to request an appointment with one of our Commercial Law Team.