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Sometimes leaving open the possibility of foreign resident beneficiaries in discretionary trusts - intended as a vehicle for holding or purchasing land in Australia - can result in unnecessary additional duty and taxes for otherwise compliant trusts.
This video and accompanying article will give you a snapshot of the issue, some practical examples and possible solutions.
Written for Thomson Reuters Cleardocs by Susannah Stanford, Maddocks Lawyers
Exclusive for readers of The Tax Institute blog, you can access the latest Trusts Tax Bulletin for a more in-depth view, including legislative announcements and developments. Click here.
What is the issue?
The most common reason for a discretionary trust deed to explicitly exclude foreign beneficiaries is the State-based foreign purchaser duty and land tax regimes.
Foreign duty surcharge rates and rules differ depending on the State in which particular land is situated but surcharge rates of duty of up to 7% (on top of ad valorem duty) may be incurred in cases of acquisition of residential land by "foreign persons".
Recently introduced land tax rules in various States also impose surcharges on land owners that are "foreign persons".
When is it relevant?
The definition of a "foreign person" is different in each State and can vary depending on the tax or surcharge concerned.
Of particular interest are the special rules in each State applying to discretionary trusts.
For example, in Victoria and New South Wales if a discretionary trust has even a single potential beneficiary (whether named in the deed or falling into the general class of beneficiaries) who is a foreign individual, foreign corporation or foreign trust, then the trust will be considered a "foreign person" for the purposes of the foreign purchaser stamp duty surcharge.
Why vary your existing deed?
Given the wide class of potential beneficiaries provided for by most discretionary trusts, an explicit clause excluding foreign beneficiaries is required to evidence that the trust does not inadvertently have any potential foreign beneficiaries.
The Cleardocs Discretionary Trust - Deed of Variation (excluding foreign purchaser) product will assist where foreign persons could arguably fall into the general class of beneficiaries in a discretionary trust deed. The variation works to exclude ‘foreign persons’ as they are defined in a wide range of legislation, including the relevant duty and land tax rules in each State. Find out more about how the variation product works here.
Where a discretionary trust deed specifically names a foreign person as a beneficiary - then this product cannot be used and legal advice needs to be obtained.