Property News Alert: Local Trusts, Foreign Beneficiaries - be careful when buying property
We reported in July that the Victorian Government had introduced a 3% stamp duty surcharge on acquisitions by foreign buyers. A foreign purchaser can be a company, a natural person or a trust.
Acquisitions after 1 July 2015 by a foreign purchaser will attract 3% more in stamp duty. As an example, a $600,000.00 purchase will ordinarily attract duty of $31,070.00. The additional 3% will mean the foreign purchaser pays $18,000.00 more, for a total of $49,070.00.
It has now become apparent that a standard, local family trust may fall within the scope of a foreign purchaser and attract the additional duty. The standard family trust deed will describe beneficiaries as being spouses, children, nieces, nephews, aunts, uncles, etc. The trust is discretionary, meaning that the trustee may distribute income to any beneficiary.
Given our multicultural society, many standard family trusts will have potential beneficiaries that live in foreign countries.
The definition of a foreign trust is one where a foreign beneficiary has a substantial interest in the trust. The troubling aspect of this is that the State Revenue Office will consider any potential beneficiary of a discretionary trust to have a substantial interest. By its very nature, under a discretionary trust any one beneficiary has as much entitlement to a distribution from the trust as any other.
The State Revenue Office have now indicated that they may treat standard family trusts as a “foreign trust” and require the extra 3% duty if property is purchased in such a trust.
Subsequently, if you are wishing to utilise a trust to purchase property you need to be very careful to examine the scope and location of beneficiaries, or to take a step to limit the pool to which capital of the trust may be distributed. Otherwise you may unwittingly incur significant extra tax in the form of the foreign acquisition stamp duty surcharge. In that regard, we also caution that changes to a Trust Deed can have serious tax and duty consequences.
Dan Flynn, Partner