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Trusts

The effective management of trusts can protect and enhance the wealth of a business or an individual, but understanding the advantages and implications of different types of trusts can be difficult.

Non-Foreign Trusts

 

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Non-foreign Trusts

[Sladen Legal discretionary trust order form and price list are available on the Sladen Store page]

The primary purpose of the State legislation is to apply tax surcharges on the acquisition of residential land by foreign purchasers. However, the legislation has more far-reaching implications and applies to any trust that holds residential property, where that trust can distribute capital or income to a foreign person.  

It is therefore essential that trustees carefully consider the potential application of the ‘foreign trust’ tests, as the tests have been broadly drafted and may apply to trusts that most people would not expect to be deemed to be a ‘foreign trust’.

The following table briefly summarises the State legislative regimes that are discussed in further detail on this page:

State

Duty Surcharge

Land Tax Surcharge

Victoria

Duty surcharge of 7% on acquisitions of residential land by the trustee of a foreign trust (including acquisitions of an interest in a landholder that has an interest in residential land). A ‘foreign trust’ includes where a foreign person has a ‘substantial interest’ in the trust estate, defined as a beneficial interest of more than 50% of the capital of the trust (or if determined by the Commissioner).

Land tax surcharge of 1.5% on ‘absentee trusts’, where a trust has at least one ‘absentee beneficiary’.  

New South Wales

Duty surcharge of 4% on acquisitions of residential-related property by the trustee of a foreign trust, including an option to purchase such land. The trustee of a trust is considered a ‘foreign person’ where an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a ‘substantial interest’ in the trust – defined where that foreign individual, corporation or government (together with any associates) holds a beneficial interest of at least 20% of the income or capital of the trust, or where two or more foreign individuals, corporations or governments (together with any associates of any of them) hold in aggregate beneficial interests in at least 40% of the income or capital of the trust.

Land tax surcharge of 0.75% surcharge land tax of the taxable value of residential land owned by a foreign person.

Queensland

Duty surcharge of 3% on acquisitions by a ‘foreign person’ of ‘additional foreign acquirer duty’ residential land. A ‘foreign person’ includes the trustee of a ‘foreign trust’, which is a trust whereby at least 50% of the ‘trust interests’ are foreign interests (i.e. a trust interest of a foreign individual, foreign corporation, foreign trustee, or a trust interest held by a related person).

Nil

Victoria

 1.     Duties Act 2000

 From 1 July 2016, Victoria’s foreigner duty surcharge increased from 3% to 7%. This surcharge applies to the transferral of a land-interest in residential property to a ‘foreign purchaser’. The surcharge also applies where after the transfer, it become an interest in residential property where the ‘foreign purchaser’ forms an intention to refurbish or extend land which includes a building, so that the land is capable of being used solely or primarily for residential purposes, or to construct a residential building.

A ‘foreign purchaser’ will also be liable to pay the duty surcharge where it acquires an interest in a landholder that holds a land-related interest in residential property.

The duty surcharge is therefore imposed on direct and indirect acquisitions, where the purchaser meets the test to be considered a ‘foreign purchaser’. In Victoria, a ‘foreign purchaser’ includes a foreign natural person, a foreign corporation, or the trustee of a foreign trust. This webpage focuses on the applicability of the duty surcharge to foreign trusts.

A trust is defined as a ‘foreign trust’ where any of the following persons has a ‘substantial interest’ in the trust estate –

  • a foreign corporation;
  • a foreign natural person;
  • another person that holds the substantial interest as trustee of another foreign trust.

The above persons are deemed to have a ‘substantial interest’ in a trust estate where the foreign person (alone or together with an associated person), has a beneficial interest of more than 50% of the capital of the estate of the trust, or if the Commissioner makes a determination that a person has a substantial interest in a trust.

For discretionary trusts, a significant interest is determined where the trustee under the terms of the trust deed has a power or discretion to distribute capital of the trust estate to a person (or a member of a class of persons), whereby any such person is taken to have a beneficial interest in the maximum percentage of the capital of the trust estate that the trustee has the discretion to distribute to that person.

This means that in the case of many “normal” discretionary trust deeds, which are broadly drafted, where a primary beneficiary, or one of the primary beneficiary’s relatives is a foreign person, that foreign person will be deemed to have a 100% interest in the trust estate (on account of the trustee’s discretion to distribute capital to that person), and therefore the trust will be deemed to be a ‘foreign trust’ for the purposes of these provisions.

2.     Land Tax Act 2005

A trust may be deemed a foreign trust and liable to pay 1.5% ‘absentee trusts’ surcharge on land tax where the trust has at least one ‘absentee beneficiary’, which has a beneficial interest in land subject to a fixed trust, is a unit holder in a unit trust scheme, or is a specified beneficiary of a discretionary trust.

An ‘absentee beneficiary’ is defined as including:

  • a natural person absentee (not in the capacity as trustee of a trust) that has a beneficial interest in land subject to a fixed trust, is a unit holder in a unit trust, or is a specified beneficiary of a discretionary trust;
  • an absentee corporation (not in the capacity as trustee of a trust) that has a beneficial interest in land subject to a fixed trust, is a unit holder in a unit trust, or is a specified beneficiary of a discretionary trust; and
  • any person that has a beneficial interest in land subject to a fixed trust, is a unit holder in a unit trust, or is a specified beneficiary of a discretionary trust in its capacity as trustee of an absentee trust.

The provisions further provide that a ‘natural person absentee’ includes someone who is not an Australian citizen or resident, does not ordinarily reside in Australia, and was absent from Australia for a defined period. An ‘absentee corporation’ is a corporation that is incorporated outside of Australia, or in which an absentee person has an absentee controlling interest, and an ‘absentee person’ includes a natural person absentee, absentee corporation, or trustee of an absentee trust.

New South Wales

 1.     Duties Act 1997

 As of 21 June 2016, New South Wales has imposed a 4% duty surcharge where a ‘foreign person’ acquires residential-related property, including an option to purchase such residential land, and an interest in a landholder that has an interest in residential land. ‘Residential land’ is widely defined under the legislation. The duty surcharge is therefore imposed on direct and indirect acquisitions, where the acquirer meets the test to be considered a ‘foreign person’.

The New South Wales legislation adopts the definition of ‘foreign person’ from the Foreign Acquisitions and Takeovers Act 1975 (Cth), with some modifications. A ‘foreign person’ is defined to include:

  • 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.

In respect of a trust (including a unit trust), an individual not ordinarily resident in Australia, a foreign corporation or a foreign government (persons) are considered to hold a ‘substantial interest’ in the trust where:

  • the persons, together with any one or more associates, hold a beneficial interest in at least 20% of the income or property of the trust; or
  • two or more persons, together with any one or more associates of any of them, hold in the aggregate, beneficial interests in at least 40% of the income or property of the trust.

Note that unlike Victoria, New South Wales includes a beneficial interest in the income and capital of the trust, in determining whether a substantial interest is held by foreign persons.

2.     Land Tax Act 1956

From 31 December 2016, foreign persons are liable to pay surcharge land tax of 0.75% on the taxable value of all residential land owned. This legislation adopts the same meaning of ‘foreign person’ and ‘residential land’ as the Duties Act 1997 (NSW).

In addition, there is no principal place of residence exemption for residential land acquired by a foreigner.  

Queensland

1.     Duties Act 2001

The Queensland government has introduced a 3% surcharge duty, which was operable from 1 October 2016.

The duty surcharge applies to acquisitions by a foreign purchaser of ‘additional foreign acquirer duty’ residential land (AFAD residential land). ‘AFAD residential land’ is widely defined. A ‘foreign person’ includes the ‘trustee of a foreign trust’. A ‘foreign trust’ is defined as being a trust where at least 50% of the trust interests in the trust are ‘foreign interests’, where ‘foreign interests’ means a trust interest of:

  • a foreign individual;
  • a foreign corporation;
  • foreign trustee; or
  • held by a related person of one of the above persons.

A ‘trust interest’, in respect of a discretionary trust, applies “only to a taker in default of an appointment by the trustee”. This means that a ‘trust interest’ is measured as the greatest percentage of capital or income that a beneficiary would receive if a trustee failed to make an appointment of capital or income.

Unlike the Victorian and New South Wales provisions, the Queensland legislation does not capture trusts which have a foreign person as a mere object of that trust. It is important to note the application of the related person provisions. If the foreign person was related to a person who was a taker in default, and that taker in default had a trust interest of at least 50%, then the trust would be a foreign trust.

2.     Land Tax Act 2010

Unlike Victoria and New South Wales, Queensland has not amended its land tax in respect of land owned by foreign persons, and therefore there is no land tax surcharge for land acquired by a foreign person.

Foreign Investment Review Board (FIRB)

Foreign persons generally need to apply for and receive foreign investment approval before purchasing any residential property in Australia.

Under the Foreign Acquisitions and Takeovers Act 1975 (Cth), a trust is considered a ‘foreign person’ where:

  • 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 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 substantial interest.

A ‘substantial interest’ is defined under the legislation in respect of a trust where a person, together with any one or more associates, holds a beneficial interest in at least 20% of the income or property of the trust. An ‘aggregate substantial interest’ is defined, in respect of a trust, where two or more persons, together with any one or more associates, holds in the aggregate beneficial interests in at least 40% of the income or property of the trust.

A beneficiary is taken to hold a ‘beneficial interest’ in the maximum percentage of income or property of the trust that the trustee may distribute to that beneficiary.

For a discretionary trust, if one of the beneficiaries is a foreign person, and the trustee has the power to distribute all of the income or capital of the trust to that person, the trust would therefore qualify as a ‘foreign person’. This would capture most “normal” discretionary trusts, where the primary beneficiaries (or one of their relatives) is a foreign person.

Converting a trust into a non-foreign trust

Given the definitional breadth of what constitutes a foreign trust or absentee trust, many trust entities will be subject to FIRB approval, or the relevant State duty or land tax surcharges, as discussed in the preceding sections of this webpage.

A trustee who wishes to avoid the application of such regimes should consider varying the trust deed to ensure that foreign persons and their associates are not entitled to capital and/or income under the terms of the trust deed.

It is important, however, that limitations to the trustee’s power to distribute income and capital to excluded foreign natural persons are not drafted too broadly with the effect of imposing restrictions that exceed the limitations intended by the legislation. Such broad exclusions may make the intended operation of the trust impractical. Rather than exclude all possible distributions of income and capital, it may be useful and less restrictive to exclude the distributions up to the thresholds allowed in the legislation.

 

Disclaimer: Please note that this webpage contains a high-level overview of the State regimes. The individual regimes are complex, and we strongly advise that specific legal advice be obtained to confirm the application of the regime in a particular situation.

Trust Lawyers