The New South Wales Office of State Revenue (OSR) has delivered a ruling which significantly undermines the tax benefits of many discretionary trusts, the Revenue Ruling No. G010.
Following G010, any discretionary trust in which a potential beneficiary is a foreign person, will be subject to land tax and stamp duty surcharges.
Broadly, a “foreign person” is an individual who is not ordinarily an Australian resident and who is not an Australian citizen. Certain companies and trustees are also deemed “foreign persons.” There are special provisions for New Zealand citizens.
What does this mean for you?
As many readers will be aware, the group of individuals who are potential beneficiaries of a discretionary trust (whether that discretionary trust is created by will or by deed) tends to be deliberately very broad. Such is the essence of the discretionary trust. The tax and asset protection benefits of a discretionary trust are borne out of the fact that the trustee has the freedom to decide to whom, out of a large group of potential beneficiaries, to distribute funds each financial year. Such a structure can facilitate considerable financial benefits.
After Ruling G010, if your discretionary trust allows for the possibility of a distribution to a “foreign person,” your trust will be subject to land tax and stamp duty surcharges for any real estate that it owns or acquires. This means that if you have inherited property by way of a testamentary discretionary trust, and you or your spouse have a child, grandchild, sibling, cousin or other family member (or any other potential beneficiary) who lives overseas and is not an Australian citizen, your trust may be affected. The same applies if a family member holds an interest in a company that is based overseas.
If G010 affects your trust, then from 31 December 2016 the trust will pay additional land tax for any real estate that it owns. It will also pay a higher rate of stamp duty for any real estate that it acquires. This is the case, even if you have not made and have no intention of making any distributions from the trust to the beneficiary who is the “foreign person.”
If you are a party to a discretionary trust that owns real estate in New South Wales, or if there is any possibility whatsoever that your trust will acquire real estate in New South Wales in the future, it is crucial that you take action now to avoid being unduly disadvantaged by Ruling G010.
How can you avoid paying tax surcharges under Ruling G010?
In order to prevent your discretionary trust from being affected by Ruling G010, you will need to amend the terms of the trust. This amendment needs to be carefully drafted to ensure that foreign person(s) are irrevocably removed from the class of potential beneficiaries, but that the remaining class of potential beneficiaries is still adequately broad to reap the benefits of the discretionary trust structure.
In order to avoid the stamp duty surcharge under Ruling G010, you will need to make the amendments prior to your trust acquiring any real estate in New South Wales. If your trust already owns real estate in New South Wales (or will do so by the end of the 2017), it is imperative that you make the amendments prior to 31 December 2017 to avoid paying the land tax surcharge.
My trust already owns real estate in New South Wales – is it too late to avoid a land tax or stamp duty surcharge?
If your trust owned real estate on 31 December 2016, you will need to take immediate action. Although Ruling G010 was not issued until 1 March 2017, the OSR has indicated that trustees of trusts which owned real estate on 31 December 2016 were required to disclose any “foreign person” beneficiaries to the OSR by 31 March 2017. If this disclosure has not been made, the trustee is now in tax default and must act quickly to disclose the “foreign person” to the OSR.
Once the OSR is aware that the trust has a “foreign person” beneficiary, a surcharge notice will be issued for any land tax assessed at 31 December 2016. A surcharge may also be issued for any stamp duty paid for real estate acquired since 21 June 2016.
Fortunately, the Chief Commissioner has allowed trustees of trusts already affected by Ruling G010 to apply for an exemption from the surcharge if the trustee can show that the trustee is not involved in a tax avoidance scheme. The trustee must urgently disclose the “foreign person” to the OSR, notwithstanding the trustee’s intention to apply for the exemption. If the exemption is granted, the trustee will then be required to amend the trust deed within 6 months, or the exemption will be rescinded.
If you are a trustee or beneficiary of a discretionary trust we would be happy to review your trust deed to determine whether you will be affected by G010. If so, we can assist you by drafting an appropriate amendment to the trust, and to apply for an exemption from land tax or stamp duty if necessary. If your trust already owns real estate in New South Wales, it is particularly important that you take action quickly. Please contact us on 9233 7788 or via email at email@example.com.