Buying property in a Disc Trust - Illegal acquisitions with foreign beneficiaries

Discussion in 'Accounting & Tax' started by Paul@PAS, 20th Sep, 2017.

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  1. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    NSW OSR consider a discretionary trusts with ANY potential beneficicary who is a non-resident (ie family / relatives who are overseas) may have a NSW land tax surcharge liability. OSR recommend amending to deed to exclude such beneficiaries.

    Well sorry folks its worse than this. Much worse.
    The problem is not a state issue. Its a national issue for all states all disc trusts.

    The Foreign Investment Review Board consider the trust may actually illegally acquire property if the trust acquires existing residential property and ANY potential beneficiary within the broad scope of the family tree and the terms of the trust deed is a non-resident and not a citizen of Australia. The trust doesnt need to actually distribute to them. No this is a bloodline concern.

    For those families who own or propose to buy property in a disc trust and who have ANY foreign family relations or background this should be a warning. The FIRB view is that if the disc trust has power to distribute to a foreign person then all the trust will be determined as a foreign person.

    The trust may incur penalties and be FORCED to sell the property within 90 days.

    Residential real estate – foreign non-residents [GN3] – Foreign Investment Review Board
    Residential real estate – Australian corporations, trusts, and use of other persons [GN5] – Foreign Investment Review Board

    Anyone thinking of establishing a trust to hold property should consider if specific terms are required in their deed to address this serious risk that can arise now or at a future date. Merely marriage to a person who was born overseas who is resident but not a citizen or if your child marries such a person can trigger the problem. A lawyer will need to address this.
     
    Paul@PAS, 20th Sep, 2017
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  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    Here are the relevant passages from the link's posted:

    Discretionary trusts

    Under Australia’s foreign investment framework, the trustee of a discretionary trust where one or more foreign persons hold any beneficial interest in the trust is generally considered to be a foreign person in their capacity as trustee of the trust. This is because the trustee of a discretionary trust has the power to distribute the income or the property of the trust to one or more beneficiaries, such that one person, who may be a foreign person, can have all the income of the trust distributed to them or receive all the assets of the trust.

    Example 3

    A discretionary trust is established in Australia and the trustee is an Australian citizen. Four individuals hold a beneficial interest in the trust, as potential beneficiaries of any of the income or property of the trust. One of those individuals is not ordinarily resident in Australia and is not an Australian citizen, and the others are Australian citizens. The individual who is not ordinarily resident in Australia is a foreign person and taken to have a 100 per cent interest in the trust (irrespective of how the trustee may exercise his or her discretion in practice). The trustee of the trust is a foreign person for the purposes of Australia’s foreign investment framework. The trustee therefore needs to apply for and receive approval for any proposed purchase by the trust of residential land.​
     
    Simon Hampel, 20th Sep, 2017
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  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I was attempting to avoid a Looooog post. Good idea
     
    Paul@PAS, 20th Sep, 2017
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  4. Simon Hampel

    Simon Hampel Founder Staff Member

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    I went looking because I thought you had misunderstood or misinterpreted something ("surely this can't be right?") :p ... but it turns out you were completely correct! :eek: (I shouldn't have doubted!) :D
     
    Simon Hampel, 20th Sep, 2017
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  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I wish I was wrong. I have had three media print publications call me this afternoon and confirm I wasnt on the drink. They are also stunned.

    I can see some poor shmuck in the High Court defending themselves. Wouldnt it be funny if a MP / Senator has acquired an "existing" investment property in a disc trust....They may fail that test too if they have any relatives who arent citizens.

    This one sits on the Treasurers neck.
     
    Paul@PAS, 20th Sep, 2017
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  6. Simon Hampel

    Simon Hampel Founder Staff Member

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    While I get the point of the legislation and agree this is a natural and somewhat desired consequence (you don't want people bypassing the foreign ownership laws simply by using a trust), it's everyone else who innocently gets caught up in this which is the real problem.

    Very much sledgehammer legislation this.
     
    Simon Hampel, 20th Sep, 2017
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  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The example used appears to be a closed class discretionary trust in which the beneficiaries have something approaching a vested or contingent interest.

    Legal advice should be sought on this before jumping to generalised conclusions.
     
    Terry_w, 20th Sep, 2017
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  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    And if that is the case there is a very simple fix.
     
    Terry_w, 20th Sep, 2017
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  9. Scott No Mates

    Scott No Mates Well-Known Member

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    In Victoria they're voting on voluntary euthanasia legislation, that's one way to remove a beneficiary ;)
     
    Scott No Mates, 20th Sep, 2017
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  10. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Thats the issue - It is a simple fix but many trusts are affected.
     
    Paul@PAS, 21st Sep, 2017
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