Current as at 12 November 2020
We have discussed the new Foreign Persons Surcharge legislation in previous editions of S & W Insight. This is state based legislation, which is different in each state. The following applies to NSW.
To comply with the legislation and to avoid the surcharge, some recent changes to NSW Revenues guidance may require your trust deed to be amended by 31 December 2020 or at least will require you to submit a new declaration to them, together with a copy of your amended trust deed, by 31 December, 2020.
The foreign persons surcharge is an imposition on family trusts, of additional stamp duty applied on the purchase of property and/or additional land tax applied on the ownership of property.
A family trust is deemed to be a foreign person unless its trust deed specifically prevents a foreign person from being a beneficiary. The fact that no distribution has been made or is intended to be made to a beneficiary that is a foreign person doesn’t preclude you from being affected by this legislation.
To avoid the surcharge, new and amended trust deeds will need to irrevocably exclude, current or future foreign beneficiaries from receiving trust distributions.
NSW Revenue has also advised that all previously completed declarations are no longer valid (ie. declarations advising them that your family trust had no foreign beneficiaries). They now require a new declaration and a copy of the amended trust deed by 31 December, 2020.
In trying to attend to this, care needs to be taken by trustees to ensure that the amendment to the trust deed does not cause a resettlement of the trust. The effect of resettlement is that the trust immediately comes to an end and a new trust commences, with deemed disposal of all trust assets from the old trust to the new trust – with potentially adverse tax consequences.
While we are not lawyers, as initial guidance, be aware of Australian Tax Office Taxation Determination TD 2012/21 at paragraphs 2 to 5 where an example is provided of where there is an exclusion of existing entities from a class of beneficiaries of a trust. The important requirement mentioned in that TD, to avoid a resettlement, is an existing power to change the trust deed, in the original trust deed.
If there is a need to adjust the trust deed this work needs to be done by a properly qualified lawyer.
NSW Revenue released the Commissioner’s Practise Note 004 V2 on 1 July 2020 which makes numerous changes to their original guidance in V1 issued on 5 July 2018.
One significant change (example 5) applies to companies and unit trusts owned by family trusts. These companies and unit trusts will now be liable for the foreign persons surcharge if the family trust deed does not contain a provision to exclude foreign beneficiaries.
If you believe the foreign persons surcharge may apply to your property ownership and we haven’t already contacted you, please contact us urgently.