Recent changes to State laws may trigger a surprise tax bill for some family (discretionary) trusts.
Additional foreign acquirer duty
Additional foreign acquirer duty (AFAD) is an extra amount of duty that applies to land purchases that are liable for transfer duty, landholder duty or corporate trustee duty. AFAD applies when you are a Foreign Acquirer of residential land, and the acquisition occurs after 1 October 2016.
You are a Foreign Acquirer if you are:
- A foreign individual (not an Australian citizen or permanent resident); OR
- A Foreign Corporation (incorporated outside Australia, or where foreign persons and their associates have 50% or more control); OR
- A Foreign Trusts (at least 50% of the trust interests are held by foreign individuals, corporations, trustees or their associates).
A transaction involves residential land if:
The transaction is for land that is or will be used solely or primarily for residential purposes. Where particular conditions are met. AFAD residential land includes:
- homes and apartments
- vacant land on which a home or apartment will be built
- land for residential development, such as
- smaller unit blocks
- housing subdivisions
- major developments with a residential component
- buildings refurbished, renovated or extended for residential use.
AFAD residential land does not include land used for hotels and motels, and other types of residential property such as retirement villages and student accommodation are considered on a case-by-case basis.
The problem for some family trusts stems from recent legislative changes in New South Wales (NSW), Victoria (VIC) and Queensland (QLD) that impose a surcharge on foreigners purchasing residential land. An issue may arise because of the way the trust deed is drafted. These trust deeds are typically drafted so that the trustee has the power to distribute income or capital to a very wide class of potential beneficiaries.
In the case of Victorian and New South Wales Land, the new surcharge can apply even where you have only a single foreign discretionary beneficiary. However, in Queensland, the test clearly states that a trust is a “foreign trust” only where at least 50% of the trust “interests” are held by foreigners. A ‘Trust interest’ is a person’s interest as a beneficiary of a trust, other than a life interest. For a trust that is a discretionary trust, only a taker in default of an appointment by the trustee can have a trust interest (s57 Duties Act).
This means that amendments to trust deeds should only be considered in advance of Queensland residential property purchases where there is a foreign default beneficiary, or if the trust is a hybrid trust, and foreign beneficiaries have more than 50% of the rights to income or capital.
In the case of Victorian and New South Wales residential land purchases, the trust deed may need to be amended to exclude all “foreign persons” from being beneficiaries. On this point we note that for asset protection purposes, most family trusts have a very wide class of potential beneficiaries and unfettered powers for the trust to distribute income or capital. This means that no one beneficiary can claim that they have a right to the assets or income of the trust, which is helpful when a creditor is looking to target assets – you don’t have a right to the assets or income of the trust until the trust agrees to distribute to you, however it also means that there are because of the wide definition potential foreign beneficiaries and hence the possibility of duty surcharge for Victorian or New South Wales land purchases.