SRO ending 'practical approach' to foreign trusts

The Victorian State Revenue Office (SRO) has announced that it will be ending its “practical approach” to whether discretionary trusts trigger the foreign duty surcharge on a purchase. From 1 March 2020, any discretionary trust that does not expressly exclude foreign beneficiaries will automatically be treated as a foreign trust.

The foreign duty surcharge applies where a foreign trust acquires residential property or property which the trust intends to develop into residential property. The current additional duty surcharge in Victoria is 8%.

A discretionary trust will be a foreign trust if more than 50% of the capital in the trust can be distributed to a trustee of a foreign trust (their associates), a foreign person or a foreign company. Given the wide classes of beneficiaries in a typical discretionary trust, including a Harwood Andrews trust deed, it is likely that the majority of discretionary trusts will be considered foreign trusts under this new approach.

Previously, many Victorian land purchasers relied upon the “practical approach” to avoid this 8% surcharge. Since the inception of foreign trust duty surcharge, it was simply a cautionary approach to alter a discretionary trust to exclude foreign beneficiaries as a means of managing the foreign duty surcharge, unless a foreign entity had direct involvement in the control of or benefit from the trust.

However, it is now essential that discretionary trust deeds are carefully reviewed prior to settling the purchase residential property to ensure the deed contains an appropriate foreign beneficiary exclusion clause.

To discuss the foreign trust duty surcharge, please contact:

 Alasdair Woodford
Senior Associate
T: 03 5225 5217
E: awoodford@ha.legal

Rod Payne
Principal
T: 03 5226 8541
E: rpayne@ha.legal

This article was prepared with the assistance of Hugo Le Clerc, Graduate Lawyer