Foreign Person and Land Tax Surcharge problem in family trusts

From 31 December 2016 discretionary trusts (commonly known as family trusts) holding residential properties could be subjected to the foreign person rule and could be liable for an extra 0.75% land tax cost on the unimproved land value of the residential property (on top of the existing 1.6%).

Example

Family Trust A has a potential beneficiary that meets the definition of “foreign person” and the trust also owns residential land with a total land value of $700,000.

The normal land tax payable is $11,200 per year (at 1.6% of total land value with no land tax threshold applicable – special trust).

New land tax surcharge payable from 31 December 2016 will be $5,250 (being 0.75% of $700,000).

Total land tax cost of $16,450 per year going forward.

This land tax surcharge is applicable to most states including NSW, VIC and QLD. Each state has recently made changes to the definition of “foreign persons” for the purposes of assessing duty and land tax liabilities and if you have a discretionary trust then you are likely to be caught out by this new definition. This is due to the fact that the typical trust setup in Australia usually contains a very wide class of beneficiaries which covers non-resident beneficiaries (such as grandparents, siblings and cousins living or residing overseas). Therefore, if you have existing discretionary trusts with a residential property, we recommend the trust deed be reviewed and amended to remove the foreign person (if applicable). Australian citizens are not considered foreign persons, unless your Australian citizenship rights have been removed due to some other reason.

This surcharge is applicable if the trust has the ability to distribute to a non resident. It is not reliant on a distribution actually being made to them.

In summary, if you are looking to set up a discretionary trust to purchase a residential property or your current trust holds a residential property in your family trust, please contact us immediately so we can try to help you avoid paying the additional surcharge.

For further information specific to NSW please refer to the Land tax surcharge section on the NSW OSR website http://www.osr.nsw.gov.au/taxes/land-tax-surcharge.

Should you have any questions please do not hesitate to contact us to discuss.