Watch out if your discretionary trust allows distributions to foreign residents

Background

In Victoria, foreign purchasers of property are required to pay additional stamp duty on top of what is payable by Australian purchasers. The current iteration of this duty was introduced with effect from 1 July 2015, however recent announcements by the State Revenue Office (SRO) will alter how these rules are implemented. This change effects transactions where the purchaser is the trustee of a discretionary trust (including family discretionary trusts) for contracts entered into after 1 March 2020

Trusts and the SRO

If property is acquired by the trustee of a trust, the State Revenue Office will consider whether a foreign entity has a ‘substantial interest’ of more than 50% in the trust. Where a ‘substantial interest’ of a foreign entity is found, additional duty is to be paid. For some trusts this is clear cut –a foreign person with the beneficial interest of 75% of a trust’s assets clearly has a ‘substantial interest.’

Things become less clear when considering discretionary trusts – those trusts where the trustee has the discretion as to how the proceeds of the trust will be allocated.

Discretionary trusts often give the trustee extremely broad powers to distribute funds. Generally, this will include classes of beneficiaries such as charities and corporations, as well as relatives of named beneficiaries. Such powers are well-founded and enable the trust to continue to function even though circumstances may have changed since it was established.

However, the trustee is not obliged to consider only Australian charities or Australian relatives of other beneficiaries. One often-unintended result of the trustee’s powers is that the trustee may name a foreign entity as a beneficiary. For this reason, the 2015 introduction of the foreign purchaser additional duty provisions technically applied to trusts where the trustee has mostly unfettered discretionary power (typical of most discretionary and family trusts).

The SRO’s ‘Practical’ Approach

Until now, the SRO has taken what it termed to be a ‘practical approach’ to these newly-foreign trusts. Leeway has been granted ‘so that trusts that have foreign beneficiaries who have not and who are, based on available information, unlikely in the future to receive any distributions, will not be considered a foreign trust.’ Effectively, this has safeguarded trusts which were never likely to distribute assets to a foreign entity.

It is this position that is set to change from March this year as the SRO abandons the ‘practical approach’ above and will deem any discretionary trust in which the trustee can distribute at least 50% of the trust assets to a foreign entity to be ‘foreign.’ The foreign purchaser additional duty will apply accordingly. This will apply to all transactions where the contract of sale was entered into after 1 March 2020.

Approaches for Foreign Trusts

The easiest solution for purchasers seeking to purchase property in Victoria with a discretionary trust is to have the trust deed amended to exclude any beneficiary that the State Revenue Office may consider ‘foreign’. By specifically excluding such entities the SRO can no longer claim that any potential foreign beneficiary continues to have a substantial interest in the trust. Some trusts created since the 2015 introduction of the foreign purchaser additional duty already include provisions to this effect.

The complexities of foreign duty assessment highlight the importance of engaging experienced legal representation in any purchase of property. Eastern Bridge has considerable experience dealing with acquisitions of property by trustees of discretionary trusts. If you would like advice in relation to purchasing property for a discretionary trust or how these changes may affect you or your trust, please do not hesitate to contact Eastern Bridge.