Should I include or exclude a foreign person from being a beneficiary in my discretionary or family trust?

Due to stamp duty and land tax surcharges applicable where foreign persons are potential beneficiaries of a discretionary trust the question arises as to whether the trust should exclude a person considered to be a foreign person from being a potential beneficiary.

Under the Revenue rulings in the event a trust does not specifically exclude foreign persons from being a beneficiary then Revenue New South Wales will assume a foreign person is a beneficiary and is going to receive the benefit of the assets of trust. This then triggers surcharge stamp duty on the purchase of residential property and also surcharge land tax on residential property.

However, it is not just a question of in all circumstances excluding foreign persons as beneficiaries.

The requirement of Revenue New South Wales is that the exclusion, if it is to avoid the imposition of the surcharge duty and land tax, is to be irrevocable so that it will be a permanent restriction on the trust.

Therefore, in drafting a trust deed for a discretionary trust, or considering amending it to exclude foreign persons, you need to consider whether the trust will hold either now, or in the future, residential property. In the event that you have an existing trust that does hold non-residential property and you have members of the family who would be considered to be foreign persons you may not wish to exclude them from being entitled to distributions through the trust.

Therefore, serious thought needs to be given before excluding foreign persons from a trust and alternatively, in the event that it is then intended to purchase residential property through a discretionary trust, rather than amending an existing trust that has non-residential property in it you may wish to consider establishing another discretionary trust purely for the purpose of holding residential property.

Considered advice therefore needs to be taken into account in determining what you should do in relation to discretionary trusts and the question of whether foreign persons should be excluded from being potential beneficiaries.

Has this prompted questions relating to an existing Trust? To discuss this further please contact our Commercial Law Team on 8525 2700 or click here to request an appointment.

Written by Michael Solari
Photo by Kelly Sikkema on Unsplash