Legal Tip 330: Bucket Company Trap with Foreign Persons Exclusion

Many have had to amend trust deeds where the trustee holds land so as to exclude foreign persons from ever benefitting from the trust. This is done in such a way that companies which meet the definition of foreign person will also be excluded as beneficiaries of the trust.

If a company has its shares held by a trustee of a discretionary trust which does not exclude foreign persons as beneficiaries then that trust will be a foreign person which will make the company a foreign person.

This means your bucket company may not be a beneficiary of a trust that holds land. It also means a bucket company cannot be a beneficiary in a chain of trusts or companies that holds land, otherwise there will be extra duty and land tax to pay.


Example

Homer sets up Ho Pty Ltd to act as trustee of Hom Discretionary Trust which will hold property. Homer Bucket Pty Ltd is set up with the shares of this company Held by Hom2 Discretionary Trust.

This means if Hom 2 Discretionary Trust does not exclude foreign persons as beneficiaries then Hom Discretionary Trust will be classed as a foreign person and the extra stamp duty and land tax will apply. This is because the Homer Bucket Pty Ltd is classed as a foreign person. Alternatively where Hom Discretionary Trust has excluded foreign persons the bucket company won’t actually be a beneficiary of the Hom Discretionary Trust.


See other related posts:

Legal Tip 327: Trusts Mistakenly Distributing Income to Non-Beneficiaries Legal Tip 327: Trusts Mistakenly Distributing Income to Non-Beneficiaries

Legal Tip 320: Foreign Persons and Companies Owning Land in NSW Legal Tip 320: Foreign Persons and Companies Owning Land in NSW

 

The OSR view considers the test applies to the bucket company considers a substantial interest test at the "relevant date" so that test may need to be considered at various times as land tax and/or duty applies in NSW. The deed definition of a excluded beneficiary should be precise and not just mention "non-resident" and not contradict the permission for a company where there is no "substantial interest". eg the foreign person test may not own 20% or more of the shares (in fact the foreign person may merely be a co-Director). I have seen some discretionary deeds (and amendments) with poor definitions in this respect.

This can be fatal to the trust that holds property as Terry says. But it is not necessarily automatic unless the substantial interest test by one (or more) related associates is met. Where the foreign person (or associates) has no shareholding there may be no concern. Care should be taken too that the shareholder for the bucket company is not the trustee of the trust as that creates a problem! A bucket company with resident shareholders alone will possible be eligible as a beneficiary. However the chain of the trustee, trust and bucket company must all be considered.

Definately a matter for legal advice at the following times:
- Trust formation and then
- When a director or potential beneficiary etc in the closely held unit considers departing Australia other than for a temporary absence and
- Prior to making a bucket company a new beneficiary where a shareholder or an associate of them has residency (tax or otherwise) issues
Care must be taken by tax advisers but typically the act of distribution wont be the land tax surcharge concern alone. A defective trust tax distribution could occur and may see the trustee assessed with tax on a defective distribution for income tax purposes when and if detected.

Para 23+ of the ruling is a guide
G009

 

Thanks for you post @Terry_w - forgive me but I'm a little confused as to what the remedy is here.

Is it simply that the discretionary trust must exclude all "foreign persons" as a class of eligible beneficiaries?

 

The trustee must make sure the bucket company is not a foreign person. One way to do this would be for the shareholder of the bucket company to not be a foreign person

 

Yes its a important step some miss. An Australian Co may be resident for tax purposes by being an Australian company BUT for NSW land tax etc the foreign person definition includes:

a corporation in which an individual "not ordinarily resident in Australia", a foreign corporation or a foreign government holds a substantial interest;. So what does substantial interest mean ?? Hint its not 50%. Its lower. Much lower. 20% AND also may be afffected by associates

• if the person, with any one or more associates, holds a beneficial interest in at least 20 per cent of the income or property of the trust (see the definition of 'substantial interest' in section 4 of the FAT Act).
  A substantial interest may be held through interests in other corporations or trusts (see paragraph 24)

Read the ruling....G009

Having a resident non-foreign person shareholder with a substantial interest of at least 80% BUT with different shareholder rights is one option to explore with legal advice.

 

If a trustee of a discretionary trust owns the shares in the company and if the trust has not excluded foreign persons as defined in the Duties Act and Land Tax Act NSW then the company will be a foreign person under NSW law.

This means if another trust distributes to it, if that trust has excluded foreign persons, it is likely to be a breach of trust as the company won't be a beneficiary.

 

I think if a trust will not hold NSW land it is generally best to not make it exclude foreign persons under NSW law.
But something to take legal advice on.

 

Agree. Its a bit family trusts election .....consider it at the time. I am finding some older trusts need mods to make it compliant and this can often be detected at time of purchase. Wise a solicitor instruct on trust acquiring property to ensure that process isnt missed. Had a client recently who purchased and they sent OSR the deed without seeking legal advice and it created all sorts of drama as it didnt comply. Soliictor had to explain that the taxpayer sent the unamended copy. OSR accepted it.

Some of the best deeds with foreign purchaser rules have catch all provisions which indicate IF a deed is not amended to explicity exclude a foreign purchaser then that deed has clauses which adopt the state law as if it was made law. This is important since its possible that if the deed excluded AND doesnt allow variation that a later correction may not even be permitted. However those only apply to say a trust that already has had to amend and not one which hasnt yet amended. Had someone who had the foreign purchaser exclsuion for NSW and they were also buying in...QLD ? and I was pleased to see it appeared the deed was fine. I did suggest their own solictor advise as my opinion is not (legal) advice and they confirmed it was OK. This can avoid the costly need to amend each and every state.

 

Ok thanks for the answers. So if the trust has no immediate plans to hold NSW property, leave the deed as is. Amend the deed if and when that changes.

 

I think that is the best way to structure things generally, but something to take legal advice on as lots of other implications.