Are you intending to purchase Victorian residential property in a trust from 1 March 2020?
The Victorian Commissioner of State Revenue (SRO) will adopt a new approach in applying the foreign purchaser additional duty (FPAD) provisions to discretionary trusts with effect from 1 March 2020.
FPAD applies to any arrangement or transaction involving the transfer of an interest in Victorian residential property to a foreign purchaser. Foreign natural persons, foreign corporations and trustees of foreign trusts are each deemed to be foreign purchasers. The present rate of FPAD, effective from 1 July 2019, is 8%, which is in addition to the usual 5.5% rate of duty.
Discretionary Trusts – Victoria
For the purposes of FPAD, a trust will be deemed a foreign trust if a foreign natural person, foreign corporation or a trustee of a foreign trust has a substantial interest in the trust estate. Under s 3B of the Duties Act 2000 (Vic) (the Act), a substantial interest is defined as having a beneficial interest of more than 50% of the capital of the estate of the trust.
In the case of discretionary trusts, where no interest is specified for a beneficiary, each beneficiary is taken to have, under s 3B(2) of the Act, the maximum percentage of the capital of the trust estate that the trustee is empowered to distribute to that beneficiary (up to 100%).
The “Practical Approach”
A strict interpretation of s 3B(2) would mean that many discretionary trusts, which typically contain very wide unrestricted beneficiary clauses, would be deemed foreign trusts for the purposes of FPAD if any one potential beneficiary of that discretionary trust is foreign.
Despite this strict interpretation, the SRO has adopted a “practical approach” in respect of discretionary trusts that have foreign beneficiaries who have not and who are unlikely in the future to receive any distributions, and has not treated such trusts as foreign trusts for FPAD purposes.
However, from 1 March 2020, the SRO have confirmed that they will no longer apply the “practical approach” to discretionary trusts stating that:
- the FPAD provisions have now been in place for over 4 years; and
- the special rules (namely, s 3B(2) of the Act) relating to discretionary trusts are now widely understood.
Instead, the SRO will strictly apply s 3B(2) so that if a discretionary trust has any potential foreign beneficiary, that trust will generally be deemed a foreign trust for FPAD purposes.
The SRO have confirmed that they will continue to apply the “practical approach” in relation to dutiable transactions where contracts of sale were entered into before 1 March 2020.
What should you do?
- If you are establishing a new trust, which you will use to acquire Victorian residential property, you should ensure that the trustee of the trust is incapable of distributing more than 50% of the trust capital to a foreign beneficiary.
- If you have an existing trust, which you will use to acquire Victorian residential property, you should consider amending the trust deed to ensure that the trustee of the trust is incapable of distributing more than 50% of the trust capital to a foreign beneficiary. However, you should be careful to ensure that any amendment does not constitute a resettlement of the trust and consider the potential impact of any amendment on any future capital distributions to other family trusts or entities.
- If you are considering at a later stage to distribute ‘in specie’ the property to a foreign beneficiary, who may later not be a foreign beneficiary, you should ensure that the amendments or terms of the new trust deed are drafted in such a way that they still provide access to the stamp duty exemption.
Disclaimer. This article is general in nature and should not be relied on as legal or taxation advice. Before taking any action in relation to the above it is recommended that you obtain legal and taxation advice that is specific to your structure and circumstances. This article is current as at 17 February 2020, but is subject to change.