There are a number of conflicting issues at play.
Our experience is the issues such as those here must be considered on a case by case basis.
Discretionary Trusts
In respect of existing discretionary trusts, View Legal’s foreign beneficiary deed of variation is intended to ensure the trust being updated will not be a ‘foreign person’, ‘foreign purchaser’, ‘absentee person’ or ‘foreign trust’ for the purposes of foreign acquirer duty (in Queensland, NSW, South Australia, Victoria, Tasmania and Western Australia) and land tax surcharges (in ACT, Queensland, NSW and Victoria).
Each jurisdiction imposes separate requirements and the deed of variation does not address a number of issues including the following, which should be considered on a case by case basis (with specialist advice sought where appropriate):
- exclusion of any specifically named beneficiaries who are foreign residents, where the legislation or regulatory authority requires them to be expressly removed as named beneficiaries. While the deed of variation removes foreign residents as a class, this will likely be insufficient if foreign beneficiaries are expressly named as beneficiaries;
- where a foreign beneficiary is a default beneficiary, an exclusion may result in a dutiable transaction. The deed of variation should not be used in this scenario unless the duty consequences have been first considered;
- some jurisdictions deem a trust to be a foreign trust if the trustee, a person with power to appoint, or other controller (such as the appointor or principal) is a foreign person. This deed of variation only excludes beneficiaries and does not consider these control positions; and
- to satisfy the NSW rules, the deed of variation is expressed to be irrevocable and must not be varied by the trustee in the future (unless you specifically instruct us to the contrary).
NSW
NSW has introduced legislation (the State Revenue Legislation Further Amendment Bill 2020 (NSW)) which states that a trustee of a discretionary trust is deemed to be a foreign trustee (and so is liable for surcharge purchaser duty as the transferee of residential land and for land tax surcharge as the holder of residential land) if the terms of the trust do not prevent a foreign person from being a beneficiary. If the terms of the trust prevent a foreign person from being a beneficiary, the trustee is not a foreign trustee for surcharge purchaser duty and land tax surcharge purposes.
In brief:
a. if foreign persons are excluded from being able to benefit from the trust, and that restriction is irrevocable, by 31 December 2020, then the trust will not be foreign. In addition the trust will be exempt from surcharge duty and land tax (and eligible for a refund of surcharge duty or land tax paid) for any period before 31 December 2020;
b. if an irrevocable foreign beneficiary exclusion clause is added to the trust (or if the trust is established with such a clause), after 31 December 2020, the trust will cease to be foreign from the date of the variation (or will not be foreign from establishment) but will not benefit from the retrospective exemption referred to above; and
c. if, as at the date the 2020 Bill passes, a trust already prevents a foreign beneficiary from benefitting, that will be sufficient for the trust not to be foreign, even if that clause is not irrevocable.
Accordingly, for trusts intending to own NSW real property or already holding NSW real property, it is imperative that the deed be reviewed and amended prior to 31 December 2020.
If the deadline is missed, specialist advice should be obtained.
Where the existing trust does not own real property before 31 December 2020, there is no requirement for the trust deed to be amended prior to 31 December 2020, however the trust deed should be reviewed and amended prior to the acquisition of NSW real property.
A more conservative (and safer) approach is to establish a new trust with the correct structure, prior to acquiring NSW property rather than amending an existing trust that was not amended prior to the 31 December 2020 deadline.
This is particularly so given that any variation of an existing trust may trigger a stamp duty cost or tax resettlement event, or both.
Testamentary Trusts and NSW real property
The State Revenue Legislation Further Amendment Bill 2020 (NSW) also specifically contemplates testamentary trusts (TDTs).
Briefly, a trust will not be foreign (even if there are potential foreign beneficiaries) where:
a. the will or codicil which contains a TDT is executed on or before 31 December 2020; or
b. for a trust arising under an intestate estate - the deceased dies within two years of the commencement date of the new law; or
c. for a trust resulting from a court order varying the provisions of a will or codicil or of the rules governing the distribution of an intestate estate – the order was made on or before 31 December 2020.
General comments
Ultimately the issues for will makers concerned about the potential impact of the NSW foreign beneficiary rules are no different to an array of other similar topics in this space such as:
- CGT event K3;
- The fact that losses of a will maker are forfeited on death;
- The application of ‘’fast death tax’’ for will makers with superannuation savings at death, but no tax dependant;
- Ongoing changes to the excepted trust income rules;
- The developing rules in relation to the tax consequences of trust vesting.
The topic is also another example of the value provided by specialist advisers who regularly review the impact of rule changes, and the changes in the situation of their customers.
To the extent helpful, View’s mastermind platform is designed to help advisers in this space proactively keep across changes in the law is profiled at the following link:
https://comviewnities.com/techniview/
It has been based on feedback that while View’s webinars, seminars and blog posts are generally a very good way to learn, it would be helpful if there was the ability to have an ongoing conversation and raise issues in real time, without the significant investment that is often associated with accessing specialist advice.
Each of the topics in this article have been explored more deeply in the mastermind community recently.
Flowchart
The following flowchart summarises the NSW rules.
