Testamentary discretionary trusts holding residential property – Surcharge duty and land tax
Where a foreign person acquires or holds residential property, duty and land tax surcharge can apply. Foreign person surcharge duty and land tax can also apply to testamentary discretionary trusts where foreign persons are beneficiaries or potential beneficiaries.
The NSW Commissioner of State Revenue issued a ruling in March 2017 allowing exemption of discretionary trusts from surcharge duty and land tax if the trust deed was amended to exclude foreign beneficiaries within six months of the exemption being granted.
The State Revenue Legislation Further Amendment Bill 2019 is currently before the NSW Parliament. If this Bill is passed, the ability to amend a trust deed to avoid the surcharge will be restricted. Once the Bill passes, the exemption is likely to be removed. The second reading speech for the Bill states: ‘the Government considers that the end of 2019 allows sufficient time for any remaining trustees and their advisers to make necessary changes to trust deeds’.
There is two-year period of grace, from the commencement of the proposed new s 104JA of the Duties Act 1997. During that period, the trustee of a testamentary discretionary trust will not be deemed a foreign person if the deceased was not a foreign person, even if the trust does not prevent a foreign person from being a beneficiary of the trust.
In order to avoid the application of surcharge duty and land tax, the By Lawyers wills creating testamentary discretionary trusts and library of testamentary discretionary trust provisions include a clause titled ‘Foreign beneficiaries’ that prohibits the trustee from making trust distributions to, or otherwise benefiting, a foreign person. The clause must also prohibit an amendment that has the effect of including a beneficiary or potential beneficiary who is a foreign person. Where it is intended for a foreign person to benefit under a testamentary discretionary trust, this clause should be appropriately amended or removed when drafting the will.
It is important to review existing testamentary trust provisions arising under a will and consider whether it is necessary to amend to avoid the application of surcharge duty and land tax.
See the commentary in the Wills (NSW) Guide for further details.