Last call for amendments to discretionary trusts to avoid surcharge purchaser duty and surcharge land tax

By Keshni Maharaj and Michelle Pham
07 Dec 2020
Discretionary trust deeds must be amended before midnight on 31 December 2020 to avoid the inadvertent imposition of surcharge purchaser duty and surcharge land tax on trusts that do not exclude foreign persons from being beneficiaries of the trust even where none of the existing beneficiaries are actually foreign persons.

Changes to the Duties Act 1997 and the Land Tax Act 1956 in New South Wales mean that trustees of discretionary trusts may be liable to pay surcharge purchaser duty and surcharge land tax as a “foreign trustee”, even though the trust has no foreign beneficiaries, if the terms of the trust are drafted such that a potential beneficiary of the trust can be a foreign person.

A trustee of a discretionary trust will not be liable to surcharge taxes only if the following requirements are satisfied:

  • the terms of the trust deed prevent a foreign person from being a beneficiary or potential beneficiary of the trust (no foreign beneficiary requirement); and
  • the terms preventing a foreign person becoming a beneficiary are irrevocable and cannot be amended to allow a foreign person to be a beneficiary at a later time (no amendment requirement).

As these changes have retrospective application – surcharge purchaser duty on foreign trustees will extend to surcharge duty transactions that occurred before the legislation was enacted on 24 June 2020, and the imposition of surcharge land tax will apply from the 2017 land tax year onwards – the Commissioner has given affected parties until midnight on 31 December 2020 to amend non-compliant trust deeds to satisfy the above requirements. With the deadline for amendment rapidly approaching, trustees of discretionary trusts that hold any interests in NSW residential land should urgently review their trust deeds.

Trust deeds that are amended accordingly will be exempt from surcharge taxes going forward, and trustees that amend their trust deeds but have already paid surcharge purchaser duty or surcharge land tax as a result of these provisions will be entitled to apply for a refund from Revenue NSW for the earlier years. 

Trustees that do not have the power to vary a trust deed can seek to rely upon the recent decision of Re Dion Investments Pty Limited [2020] NSWSC 1661. In this case, the NSW Supreme Court found that while the Trustee did not have the power and therefore could not amend the terms of the trust deed, the existence of a tax advantage can form the basis of "expediency in the management and administration of trust property" for the purposes of section 81 of the Trustee Act 1925. The Court therefore granted the Trustee with the necessary power to release and/or surrender any trusts and powers (referable to the trust estate) which may benefit a “foreign person” to satisfy the above requirements relating to surcharge land tax. 


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