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Foreign purchaser additional duty and discretionary trusts

February 03, 2020

The State Revenue Office has announced that it will cease the practical approach it has been taking in respect to liability for foreign purchaser additional duty (FPAD) for family discretionary trusts with foreign beneficiaries.  This change may have an impact on members who use family discretionary trusts and purchase residential property.  Some proposed land purchases may also be affected.

Background

Members will be aware that purchasers of land in Victoria are subject to a foreign purchaser additional duty of 8%.  This duty is charged in addition to the usual stamp duty for purchasing property.  As a general rule an entity other than a natural person will be a foreign purchaser if more than 50% control or benefit is held by a foreign natural person, foreign company or foreign trust.  A foreign natural person is a person who is not an Australian or New Zealand citizen or a permanent resident of Australia.

Some trusts are established as discretionary trusts.  This can be a popular option as it allows the trustee a broad discretion to distribute capital or income from the trust to beneficiaries; subject to any rules in the trust deed.  This means that the capital or income can be distributed in a variety of ways to suit current circumstances.  This flexibility makes the use of discretionary trusts common for family trusts. 

However, the flexibility of discretionary trust also means that a beneficiary, including a foreign beneficiary, may receive more than 50% of a distribution.  For this reason, the Duties Act in Victoria has since the introduction of the FPAD included a provision that if a beneficiary of a discretionary trust is a foreign person, company or trust the trustee of the discretionary trust will be a foreign purchaser for the purchase of FPAD.  This causes difficulties for family trusts where a member of the family is a beneficiary and a foreign natural person, such as the spouse of a family member, and because of the inclusion of this beneficiary their family discretionary trust effectively becomes a foreign purchaser if it buys residential land.  For this reason the State Revenue Office has being taking a practical approach and not treating these family discretionary trusts as foreign purchasers when a foreign beneficiary is unlikely to receive a distribution.

The State Revenue Office has advised that this approach will no longer be applied for purchases of land by family discretionary trusts from 1 March 2020.  Read more

What to do?

If you have a family discretionary trust and may use that trust to purchase residential land in the future then you should consider having your trust deed reviewed.  Ideally the lawyer who prepared the Trust Deed should be consulted.  It may be possible to amend or replace the existing Trust Deed for your family trust to avoid the risk of being liable for FPAD in the future.

This change may also have an impact on proposed land transactions if the purchaser will be captured by the changes.  It is therefore possible that some transactions may be accelerated or restructured to avoid this change.

If you need further information about this matter you should consult your accountant or tax lawyer or contact HIA Workplace Services on 1300 650 620.