Surcharge Duty and Discretionary Trusts
This is a quick update in relation to a recent revenue ruling from the Office of State Revenue (OSR) that will affect discretionary trusts purchasing land or which have purchased land since 21 June 2016.
Revenue Ruling No. G010 provides that where a foreign person is a beneficiary of a discretionary trust then the trust will be liable for surcharge duty in addition to the stamp duty payable. The foreign person must have a substantial beneficial interest in the trust, which equates to an interest of 20% of the income or property.
You should keep in mind that in determining whether the foreign person has a 20% interest in the trust, the OSR will deem their interest to be the maximum interest that they could receive if the trustee exercised its discretion in the foreign beneficiary’s favour.
Given that most family trusts, testamentary trusts and discretionary trusts provide the trustee with very wide discretionary powers, then it is likely that if there are any foreign persons who are beneficiaries then the trust will fall foul of this ruling.
The OSR has the discretion to exempt discretionary trusts from paying surcharge duty if it is satisfied that the trustee was not involved in a scheme of tax evasion or avoidance. The exemption is only available for 6 months, during which time the trust deed must be varied so as to make the trust no longer liable for the surcharge duty.
We recommend that you review all of your existing discretionary trust deeds where the trustee has purchased land since 21 June 2016 (when the surcharge duty was introduced). You should also keep the ruling in mind where you have clients with discretionary trusts that are used as a vehicle to purchase land.
A further matter to keep in mind for discretionary trusts is land tax. We recently assisted a client who had purchased land using a discretionary trust and had received legal advice from another firm that there would be no land tax payable as the value of the unimproved land was below the threshold (currently $549,000). The threshold does not apply to discretionary trusts. Such trusts are deemed to be special trusts and the land tax will be calculated from the first $1, with no such threshold being taken into account.
For more information please contact Richard or Greg, or our trust lawyer Cameron Cowley (Special Counsel). Moin & Associates Pty Ltd can also assist with the preparation of deeds of variation for trust deeds to ensure compliance.