Urgent Action Required for NSW Trusts that Own Residential Land

November 19, 2020

Do you have control of a discretionary trust that owns residential land in NSW, or you are planning to use a discretionary trust to purchase residential land in NSW?  You may need to make changes to your trust deed by 31 December 2020 to avoid paying surcharge purchaser duty and surcharge land tax.

What is surcharge purchaser duty and surcharge land tax, and who must pay it?

Since 21 June 2016, “foreign persons” have been required to pay:

1. a surcharge purchaser duty (currently 8% of the market value of the property) on the purchase of residential land in NSW; and
2. a surcharge land tax (currently 2% on the unimproved value of the land) for any residential land owned in NSW for the 2017 to 2020 tax years. It is calculated on the full value of the land, i.e., if the land value is $200,000, then the land tax surcharge for the 2020 year will be $4,000.

These surcharges are payable in addition to any other duty or land tax payable.

A foreign person is an individual who is not ordinarily resident in Australia, or other entities which have foreign control. More importantly, a trustee of a discretionary trust which owns or is purchasing residential land in NSW, is considered to be a foreign person and is liable to pay the surcharge purchaser duty and surcharge land tax unless the terms of the trust deed irrevocably prevent a foreign person from being a potential beneficiary.

What do I need to do to avoid paying the surcharges?

If your discretionary trust owns or intends to purchase residential land in NSW, you need to urgently review the terms of your trust deed.  The trust deed may already contain the necessary terms, but if not, you have until midnight 31 December 2020 to amend the trust deed to irrevocably exclude foreign persons from being a potential beneficiary of the trust.

What if I have already paid the surcharges?

If you have already paid surcharge purchaser duty or surcharge land tax in the 2017, 2018 or 2019 tax years, you will be entitled to receive a refund if your trust deed is amended to irrevocably exclude foreign persons from being a potential beneficiary by midnight 31 December 2020.

Considerations when amending your trust deed

Care needs to be taken in amending trust deeds to irrevocably exclude foreign beneficiaries.

It is becoming increasingly common for family members to be spread around the world and as trusts can exist for up to 80 years in New South Wales, consideration needs to be given as to the long-term implications of amending a trust deed to exclude foreign beneficiaries.

If a person whom you wish to benefit from the trust ceases to be an Australian citizen or ordinarily resident in Australia, do you want them to be forever excluded from being a beneficiary of the trust?

The terms of the trust deed must also be carefully considered before changing the beneficiaries to make sure you do not inadvertently trigger a resettlement of the trust. A resettlement of a trust may result in unfavourable duty and taxation consequences.

If, for example, the default beneficiary of your trust ceased to be an Australian citizen or ordinarily resident in Australia and was excluded as a beneficiary, that would likely be a resettlement of the trust, giving rise to duty and tax on the property held by the trust.

If you have a trust that owns residential land in NSW or you are planning to use a trust to purchase residential land in NSW, please contact our commercial team as soon as possible.

There is also a risk that some mixed use primary production land could be inadvertently caught by surcharge duty and land tax, so stay tuned for our follow up bulletin tomorrow.