Professional guidance on foreign purchasing, surcharge duty and discretionary trusts.
In most Australian states now, foreign persons who acquire residential property are liable to pay a surcharge duty.
This operates to impose additional duty on a purchase. The rate in NSW is 4%. In Victoria it is 7% and in Queensland it is 3%. Varying land tax surcharges from 0.75% to 1.5% will also apply.
The term “foreign persons” is broadly defined in most States. In NSW, for example, this includes an individual not ordinarily resident in Australia or a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest (40% income or capital entitlements or more).
Trusts, including discretionary trusts, can attract this additional surcharge duty and land tax. If persons together with anyone or more associates of them hold an aggregate beneficial interest in at least 40% of the income or property of the trust, then property acquired by the trust will be subject to the surcharge duty.
The problem, it seems. even extends to discretionary trust where it purchases residential property and any possible beneficiary of that trust is a foreign person.
This is despite the fact that under most commercially available deeds no one beneficiary under a discretionary trust has any proprietary interests in the trust assets.
The stamp duty involved in this surcharge is very significant.
For example, the duty payable on a purchase price of $2,000,000 is $95,490. The surcharge of 4% on $2,000,000 is $80,000 resulting in total duty of $175,490 – a very large sum.
If you have any trust which it is intended will be purchasing real property, it would be advisable to have the terms of the trust reviewed to determine if an amendment restricting the classes of persons who can benefit under the trust is needed.
It may be necessary for the definitions of “Beneficiaries” and “Excluded Persons” to be reviewed and modified before any contract for sale of land is entered into.
Existing trusts owning real estate may need to be reviewed as well if there is a possibility that a foreign person can benefit from the trust. The terms of the trust may have to be varied to restrict or exclude foreign persons from being able to benefit under the deed.
Of course, proper and detailed legal advice should be sought before any deed is amended to determine if there are any stamp duty or capital gains tax consequences which may occur if a deed is amended.
Views are those of the author. Reckon Limited does not give financial or legal advice. Consult your own professional advisers about your specific circumstances.
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