In recent years, several Australian States have passed legislation imposing tax surcharges on acquisitions of residential property by foreign purchasers.

While the definition of a foreign purchaser may sound straightforward, the practical effect of the way that the legislation has been drafted can mean that many trusts, including “normal” discretionary trusts, are captured by the changes.

Jurisdiction

Duty Surcharge

Land Tax Surcharge

Victoria

7% – On acquisitions of residential property by the trustee of a foreign trust. The definition of a “foreign trust” is a trust where a foreign person holds a “substantial interest” in the trust assets. “A substantial interest” is defined as being more than 50% of the capital of the trust, or otherwise if determined by the Commissioner to be a substantial interest.

1.5% – On “absentee trusts”. An “absentee trust” is defined as a trust where one or more of the beneficiaries are “absentee beneficiaries”.

NSW

4% – On acquisitions of residential-related property by the trustee of a foreign trust (including options to purchase land). The definition of a “foreign trust” includes a trust where an individual, who does not ordinarily reside in Australia, a foreign corporation, or a foreign government, holds a “substantial interest” in the trust. A “substantial interest” is defined as being an interest of an individual, corporation, or government (including any associates) of at least 20% in the income or capital of the trust, or, where two or more individuals, corporations, or government (including any associates) an aggregate interest of at least 40% in the income or capital of the trust.

0.75% – On the taxable value of the residential land owned by a foreign person.

Queensland

3% – On acquisitions by a “foreign person” of “additional foreign acquirer duty” residential property. The definition of a “foreign person” includes the trustee of a “foreign trust”. A “foreign trust” is one where at least 50% of the “trust interests” are foreign interests.

Nil

Victoria

Duties Act 2000

Between 1 July 2015 and 30 June 2016, Victoria imposed a 3% duty surcharge of foreign purchasers of residential property. From 1 July 2016, this surcharge increased to 7%.

The surcharge is applied to transactions involving the transfer of a land-interest residential property, where the purchaser is a “foreign purchaser”. The surcharge is also applied where, subsequent to the transfer, the “foreign purchaser” forms an intention to refurbish or extent land which includes a building, so that the sole or primary purpose of the land becomes a residential purpose, or to construct a residential building.

Additionally, a “foreign purchaser” is liable to pay the surcharge where it acquires an interest in a landholder holding a land-related interest in residential property.

The structuring of the legislation means that the duty surcharge is imposed on both direct and indirect acquisitions by a “foreign purchaser”. The Victorian definition of a “foreign purchaser” includes a foreign natural person, a foreign corporation, or the trustee of a foreign trust. This article will focus on the application to foreign trusts.

The Act defines a “foreign trust” to include a trust where any of the following have a “substantial interest” in the trust property:

  • A foreign corporation.
  • A foreign natural person.
  • A person that holds the substantial interest as trustee of another foreign trust.

All of these people are deemed to have a “substantial interest” in the trust’s property if the foreign person, either alone or together with an associated person, has a beneficial interest of more than 50% of the capital of the trust property, or if the Commissioner makes a determination that a person has a substantial interest in the trust.

In relation to discretionary trusts, the test to determine a “significant interest” is where the trustee, under the provisions of the trust instrument, has the power or discretion to distribute capital of the trust to a person, or a class of persons, where any person is taken to have a beneficial interest in the maximum percentage of the capital of the trust that the trustee has the power to distribute to that person.

Practically, this means the a “normal trust”, with its broad definition of beneficiaries, will be captured as a foreign trust, if one or more of the beneficiaries are a foreign person. This is because that foreign person will be deemed to have a 100% interest in the trust property, as the trustee has the power to distribute the trust property to that person.

Land Tax Act 2005

If a land-holding trust in Victoria has at least one “absentee beneficiary”, a land tax surcharge of 1.5% will be applied to the land owned by the trust.

An “absentee beneficiary” includes:

  • A natural person absentee, acting other than in their capacity as trustee of a trust, that has a beneficial interest in land subject to a fixed trust, is a unitholder in a unit trust, or is a specified beneficiary of a discretionary trust.
  • An absentee corporation, acting other than in its capacity as trustee of a trust, that has a beneficial interest in land subject to a fixed trust, is a unitholder in a unit trust, or is a specified beneficiary of a discretionary trust.
  • A person that has a beneficial interest in land subject to a fixed trust, is a unitholder in a unit trust, or is a specified beneficiary of a discretionary trust.

A “natural person absentee” includes a person who:

  • Is not an Australian citizen or resident.
  • Does not ordinary reside in Australia.
  • Was absent from Australia for a defined period.

An “absentee corporation” includes a corporation that:

  • Is incorporated outside Australia.
  • Has an absentee person controlling interest (where an absentee person includes a natural person absentee, an absentee corporation, or a trustee of an absentee trust).

New South Wales

Duties Act 1997

From 21 June 2016, New South Wales has imposed a 4% duty surcharge on purchases of residential-related property by “foreign persons”. This surcharge also applies to option to purchase residential-related land, and an interest in a landholder that has an interest in residential land.

The Act defines “residential land” widely, resulting in the application of the duty surcharge to both direct and indirect purchases, where the acquirer meets the definition of a “foreign person”.

In New South Wales, a “foreign person” includes the trustee of a trust in which:

  • An individual not ordinarily a resident of Australia, a foreign corporation, or a foreign government, holds a substantial interest.
  • Two or more persons, each of whom are individuals who do not ordinarily reside in Australia, are a foreign corporation, or are a foreign government, hold an aggregated substantial interest.

The definition of a “substantial interest” in a trust where an individual not ordinarily resident in Australian, a foreign corporation, or a foreign government, includes where:

  • Those persons either individually, or together with associates, hold a beneficial interest in at least 20% of the income or capital of the trust.
  • Two or more of those persons, either individually or together with associates, hold an aggregated beneficial interest in at least 40% of the income or capital of the trust.

Note that for the purpose of a significant interest, the New South Wales Act includes a beneficial interest in the income, as well as the capital, of the trust.

Land Tax Act 1956

Commencing 31 December 2016, all foreign persons must pay a land tax surcharge of 0.75% on the taxable value of the residential land that they own. This Act utilises the same definitions for “foreign person” and “residential land” as the Duties Act 1997 (NSW).

In addition to the land tax surcharge, a foreign person is unable to obtain the principal place of residence land tax exemption, if the land is acquired by a foreign person.

Queensland

Duties Act 2001

From 1 October 2016, the Queensland Act imposes a 3% duty surcharge on acquisition of “additional foreign acquirer duty” residential land (AFAD land) by a foreign purchaser.

AFAD land has a wide definition, and a “foreign person” includes the “trustee of a foreign trust”. The definition of a “foreign trust” includes a trust where at least 50% of the trust interests are “foreign interest”. A “foreign interest” means the interest of:

  • A foreign individual.
  • A foreign corporation.
  • A foreign trustee.
  • A related person of any of the above.

Practically, in respect of a discretionary trust, a “trust interest” applies “only to a taker in default of an appointment by the trustee”. This means that a “trust interest” is calculated as the highest percentage of income or capital that a beneficiary would receive in the event that a trustee fails to make an appointment of that income or capital.

This means that the Queensland Act does not capture trusts where a foreign person is a mere object of that trust. However, it is important to understand the application of the related person provisions. If a foreign person is related to a person who was a taker in default, and that taker in default has an interest in the trust property of at least 50%, then the trust would be a foreign trust.

Land Tax Act 2010

Queensland, unlike Victoria and New South Wales, has not amended this Act to impose a land tax surcharge on foreign persons. Accordingly, there is no land tax surcharge for foreign purchasers if they acquire property in Queensland.

Foreign Investment Review Board (FIRB)

When purchasing residential property in Australia, foreign persons are required to apply for, and receive, foreign investment approval prior to the purchase.

Under the Foreign Acquisitions and Takeovers Act 1975 (Cth), a trust is considered to be a “foreign person” where the trustee of a trust in which:

  • An individual not ordinarily a resident of Australia, a foreign corporation, or a foreign government, holds a substantial interest.
  • Two or more persons, each of whom is an individual not ordinarily a resident of Australia, a foreign corporation, or a foreign government, hold an aggregated substantial interest.

The definition of a “substantial interest” under the Act in respect of a trust is where a person, together with associates of that person, hold a beneficial interest in at least 20% of the income or property of the trust. The definition of an “aggregated substantial interest” in respect of a trust, is where two or more persons, together with their associates, hold an aggregated interest in at least 40% of the income or capital of the trust.

A beneficiary of a trust will hold a “beneficial interest” in the maximum percentage of income or capital of the trust that the trustee has the power to distribute to that beneficiary.

Practically, for a “normal” discretionary trust, this means that where one beneficiary of a trust is a foreign person, and the trustee may distribute all of the income or capital to that person, the trust will be deemed to be a “foreign person”.

Non-Foreign Trusts

Given the wide drafting of the various definitions of “foreign trust” or “absentee trust”, many trusts will be subject to FIRB approval, or the relevant State duty or land tax surcharges, on acquiring residential property.

If the trustee of a trust wants to ensure that these provisions do not apply to them, consideration should be given to varying the terms of the trust instrument to ensure that foreign persons, and their associates, are not entitled to capital and/or income distributions in excess of the percentages set out above.

However, it is important that limitations to the trustee’s power to distribute income and capital to excluded foreign natural persons are not drafted so broadly that they have the effect of imposing restrictions that exceed the limitations intended by the legislation.

If the variations are drafted in too broad a manner, it may make the intended operation of the trust impractical. Rather than exclude all possible distributions of income and capital, it may be useful, and less restrictive, to exclude the distributions up to the thresholds allowed in the legislation.

Disclaimer

This article is only intended to provide an overview of the various duty and land tax positions in Victoria, New South Wales, and Queensland, and specific legal advice should be obtained in relation each particular situation.