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NSW Duty and Land Tax Surcharges and Discretionary Trusts

Surcharge duty and surcharge land tax have been payable since 21 June 2016 in respect of the purchase of residential property in NSW by foreign persons and, in the case of land tax, by virtue of the ownership of residential property by foreign persons.

The current rates for surcharge duty and surcharge land tax are 8% and 2% respectively and those rates apply, without any threshold, in addition to the usual duty or land tax which would be payable.

There is a particular problem with discretionary trusts because of the wide definition of “foreign person” in the Duties Act which is also applicable to the Land Tax Act. Even if there are presently no foreign persons who are beneficiaries of a discretionary trust, virtually all discretionary Trust Deeds include as beneficiaries companies, trusts and other entities which are not limited to those within Australia and accordingly potentially such entities might be foreign persons. This results in the trust being classed as a foreign trust, even if no distributions had been made to foreign entities.

The State Revenue Further Amendment Bill 2019 (the Bill), which has still to be passed by the NSW Parliament, provides that surcharge duty and land tax will not be payable where a discretionary Trust Deed provides that no foreign person may be a beneficiary of the trust and that the terms of the Trust Deed are not capable of amendment in a manner that would result in there being a potential beneficiary of the Trust who is a foreign person. This provision must be irrevocable.

With regard to land tax, the Bill provides that 2017, 2018 and 2019 land tax are not payable or a refund may be obtained where the necessary amendments are made to a discretionary Trust Deed by 31 December 2019.

Revenue NSW has previously indicated that a Trust Deed may be amended by 31 January 2020. The Government now intends to extend the deadline for amendment of discretionary Trust Deeds from 31 December 2019 to a later date in 2020. However, the proposed date is not yet known.

Where a discretionary trust owns residential property, the Trust Deed should be amended urgently as if the ultimate deadline date is missed then surcharge land tax would be payable in respect of any residential property held by the discretionary trust from and including the 2017 year.

Even if a discretionary trust does not own real estate or only owns commercial property, consideration should be given to amending the Trust Deed if there is the possibility of the Trust purchasing residential property in the future. Sometimes the situation arises that a decision is made very quickly to purchase a property and contracts are exchanged and it is at the time of exchange of contracts that the liability for any surcharge duty, presently at the rate of 8% on the price, would arise.

If at that time the Trust Deed had not been amended, liability would arise for payment of a very large amount of surcharge duty and there would be a liability for surcharge land tax in the future.      

All discretionary Trust Deeds are different and it is vital that a lawyer experienced in this area prepare the necessary Deed of Variation.

If you need assistance in this area please contact our Special Counsel, Richard Farmer.