Legal Tip 258: New Land Tax Sting for Trusts and Companies owning Land in NSW

Legal Tip 258: New Land Tax Sting for Trusts and Companies owning Land in NSW


Under NSW law a ‘foreign person’ will pay more land tax and stamp duty for property located in NSW. The definition of ‘foreign person’ is very complex but basically includes a non-citizen not living in Australia.

This would not affect the majority of individuals buying property in NSW.

But it could affect the majority of trusts that already own, or a buying property in NSW.

This is because the definition of ‘foreign person’ includes a trust in which a ‘foreign person’ can potentially benefit.

Example

Marge sets up a discretionary trust. The beneficiaries are herself as the primary beneficiary and secondary include relatives on the primary and spouses of those relatives.

Marge’s whole family is in Australia. Not one cousin or relative is overseas.

But one distant cousin marries an Eskimo who is a ‘foreign person’ so now the whole trust becomes a ‘foreign person’ as the trustee could distribute income and/or capital to the Eskimo.

If the trustee of this trust owned property in NSW there would be an extra 2% in land tax each year.


Example 2

Marge then sets up a company to buy the next property. The company shares are held by the trustee of the trust described in example 1.

This company is now a ‘foreign person’ because the shareholder is a ‘foreign person’.


Bugger!


But to avoid this it is a simple matter of excluding ‘foreign persons’ as beneficiaries of the trust.


However, now it is reported that the laws are in the process of being changed. There is a bill before the NSW parliament which will mean that trust deeds will need to be amened so that a clause excluding ‘foreign persons’ can not later be amended to bring them back in as beneficiaries of the trust. So now foreign persons should be permanently excluded from being beneficiaries of a trust that owns land in NSW and this clause should be unamendable.

But note that this is not yet law. If it is passed next year it will be effective from 31 December 2019.

You have a choice of waiting and seeing or amending the deeds of trusts before 31 December 2019. If you wait and see and the law is passed you could be charged an extra 2% land tax this New Year’s Eve.

I will be doing free trust deed amendments for clients of my company who I set up trusts for – Until 31 Dec 2019.

Note that this is only necessary if the trust owns property in NSW.

It should not be done where the trust only holds shares – as there is no need and you will be restricting beneficiaries unnecessarily.

 

This deed issue was an issue at 21 June 2016. The retrospective nature is contained in a OSR Ruling. A variation to a deed now allows a retrospective application for exclusion under a concession granted to the Commissioner of State Revenue. I have had two trusts requested to evidence this issue.

Surcharge land tax and duty - discretionary trusts

 

The new issue is the removal of foreign persons needing to be irrevocable. State Revenue Revenue Ruling no G 010 version 2

 

Does this apply to testamentary trusts?

 

Yes

But there are concessions for the first 2 years after death.

 

So it has some interesting implications if the intention is to leave real estate into a testamentary trust.

 

Not really. The deed can just be amended after the death - ideally before the executor passes the land to the trustee

 

Does this exempt the Crown? So many properties are listed as "HRH the Queen Betty Windsor" ?

 

That was same with fixed unit trusts. And SMSFs that do a inspecie real property (commercial) transfer have a disguised issue with this too. I have been wondering if QLD OSR will follow this lead after the recent absentee concessions.

 

Could it be as simple as the deed stating "all beneficiaries must be Australian Citizens"? Thus someone who later becomes a citizen could then become a beneficiary.

Also could it be taken a step further by stating "all beneficiaries must be tax residents of Australia" to avoid the new CGT issues if a tax non-resident inherits property?

 

Another thought bubble: For a testamentary trust could you limit capital distribution to only tax residents of Australia? That would avoid triggering inheritance tax in some countries if the beneficiary was living abroad.

 

Yes it is possible. There are a number of issues for foreign beneficiaries of deceased estates and testamentary discretionary trusts are a good way to get around these issues.

 

this was from Chris Batten

"Dear Practitioners

Thank you for your feedback. For those who have inquired I provide the following:

At present section 5A of the Land Tax Act 1956 provides for land tax surcharge where a foreign person owns a residential property. Foreign person takes its definition from Chapter 2A of the Duties Act 1997.

What the State Revenue Legislation Further Amendment Bill 2019 (NSW) seeks to do is introduce section 5D into the Land Tax Act 1956:

5D Surcharge land tax—discretionary trusts
(1) The trustee of a discretionary trust is taken to be a foreign person in that capacity for the purposes of section 5A if the trust does not prevent a foreign person from being a beneficiary of the trust.
(2) If a discretionary trust prevents a foreign person from being a beneficiary of the trust, the trustee is not in that capacity a foreign person for the purposes of section 5A.

The Bill also seeks to amend the Land Tax Management Act 1956 by inserting the following:

Amendments relating to discretionary trusts
(1) Section 5D of the Land Tax Act 1956 applies to the assessment of land tax liability in respect of the 2017 land tax year and subsequent land tax years.
(2) If the trustee of a discretionary trust is liable in that capacity as a foreign person for surcharge land tax in respect of the 2017, 2018 or 2019 land tax year—
(a) the trustee is exempt from that land tax if the terms of the trust have been amended, before payment of the land tax is due and before midnight on 31 December 2019, so that the trust prevents a foreign person from being a beneficiary, or
(b) if that land tax has been paid, the trustee is entitled to a refund of that land tax if the terms of the trust have been amended, before midnight on 31 December 2019, so that the trust prevents a foreign person from being a beneficiary.

As the Bill wasn’t passed section 5D wasn’t inserted into the Land Tax Act 1956 and the above amendments weren’t inserted into the Land Tax Management Act 1956.

There is NO legislation that imposes the land tax surcharge on the trustees of discretionary trusts that own residential property. Wasn’t passed. At the same time the legislation that got you out of the surcharge if you amended by 31 December 2019 didn’t pass."

 

Some countries (eg USA) dont recognise some trusts and have tax laws framed around that position almost on a look through basis eg superannuation. Always wise to seek expert legal / tax advice if a testamentary will OR direct property inheritance is involved and any family beneficiaries are not tax residents. It helps if the foreign tax issue is understood prior to that advice.

 

Its still a tabled Bill and under a legislative instrument issued by the Minister it is to be retrospective.

The NSW state Govt has met a handful of times since the election and prior to new year this isnt going to change. It makes you wonder what we voted for when they arent working.

State Revenue Legislation Further Amendment Bill 2019

 

Just reading a scary courier Mail news article that says QLD are about to do the same. Issue is they were about to roll it out and realised it wasn't simple to determine what a absentee entity is. It's on ice but not buried. Watch this space. Company and trust notices are delayed because of it.

Link

 

What about discretionary trusts that own commercial property?

 

I don't know of any legislation, it is often a contractual matter tho