November 26, 2020
The foreign beneficiary problem
All trustees of discretionary trusts that own real property already have a heightened awareness of state taxes, especially if any beneficiaries of the trust are currently, or could be, foreign.
It should come as no surprise that there is no uniformity of taxation treatment as between the states and territories with respect to having foreign beneficiaries of discretionary trusts that own certain types of real estate. However, the consequences are becoming so significant, that more care than ever should be applied.
The land tax and additional foreign surcharges have had multiple amendments in some jurisdictions, and there are issues to be addressed on an urgent basis as considered in our article.
We provide a useful brief summary on Victoria’s position, should you own property in Victoria on trust and have named or potential foreign beneficiaries. In addition to this, we consider what options may be available and how we can help.
Previously, Victoria’s State Revenue Office used the “practical approach” when assessing whether a trustee of a discretionary trust was a trustee of a foreign trust for the purpose of foreign duty surcharges. The practical approach assessed a trustee of a discretionary trust to not be a trustee of a foreign trust if that trustee could prove that no foreign beneficiaries had received, or were unlikely to receive, any distributions.
On 1 March 2020, Victoria’s State Revenue Office moved away from its practical approach such that if a discretionary trust does have foreign beneficiaries to whom the trustee can distribute capital of the trust, the trustee would then be considered a trustee of a foreign trust for foreign duty purposes. This new approach applies even if a foreign beneficiary is unlikely to receive any distributions.
If a trustee wishes to be exempt from such foreign duty surcharges, they must have the trust deed amended to include provisions that excludes any foreign persons who are beneficiaries for property acquired after 1 March 2020. Unlike the NSW Amendment, these amendments to the trust deed are not required to be irrevocable.
For land tax purposes, a discretionary trust will be an absentee owner and liable for the absentee owner surcharge if the trust has at least one specified beneficiary that is a foreign person. A specified beneficiary is a beneficiary who may receive income or property from the trust and is specifically named in the trust deed that establishes the discretionary trust. Although the move away from the practical approach for duty purposes has no impact on the land tax surcharge, it is timely to consider the land tax position for discretionary trusts with foreign beneficiaries.
How can we help you?
If your trust has foreign beneficiaries (which in itself requires a careful examination) and you would like to be exempt from the foreign land tax and duty surcharges, we can assist you by:
- understanding what type of property the trustee of the discretionary trust owns and what land tax and duty surcharge consequences there may be;
- providing advice on whether you have the ability to satisfy any exception or exemption requirements;
- undertaking amendments to your trust deed;
- advising on situations where beneficiaries or potential beneficiaries become foreign, and what the reassessment risks are.