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21 Feb 2020

Victorian foreign purchaser additional duty trap to spring in autumn

By David Wong

For transactions on or after 1 March 2020, review all discretionary trust deeds before acquiring Victorian residential land.

In Victoria, the transfer of residential land to a foreign purchaser will give rise to foreign purchaser additional duty (FPAD), which is currently imposed at a rate of 8%. This duty is in addition to the transfer duty rate of 5.5%.

A foreign purchaser includes a trustee of a foreign trust. A trust is a foreign trust if a foreign corporation, foreign natural person or a trustee of a foreign trust holds a substantial interest in that trust (including when aggregated with interests held by other foreign corporations, foreign natural persons or trustees of foreign trusts). A person has a substantial interest in the trust if:

  • the person has a beneficial interest of more than 50% of the capital of the estate of the trust; or
  • the Commissioner has determined that a person has a substantial interest in the trust.

However, if under the terms of a trust, the trustee has a power or discretion to distribute the capital of the trust estate to a person or class of persons, that person is taken to have a beneficial interest in the maximum percentage of the capital of the trust estate that the trustee is empowered to distribute to that person. Typically, the trust deeds of discretionary trusts (including most family trust) are drafted in such a way so that the trustee is able to distribute the property to a wide number of persons and potentially some of those persons could be foreign persons. As such, those discretionary trusts would be foreign trusts even if the trustee has never actually distributed any property to any foreign persons and even if the trustee was unlikely to ever do so.

When the provisions regarding the additional duty on foreign purchasers were first introduced, the Victorian Commissioner of State Revenue adopted a practical approach under which he said that he would not treat a discretionary trust as a foreign trust, even if a potential object of the trust was a foreign person. The Commissioner said that this would be the case provided that the foreign beneficiaries had not received, and would be unlikely in the future to receive, any distributions from the trust. However, the Commissioner has said that effective 1 March 2020, he will no longer apply this practical approach. Note, that the practical approach will still apply to transfers where the associated contract for sale was signed prior to 1 March 2020.

Consequently, for transactions entered into on or after 1 March 2020, a discretionary trust will be treated as a foreign trust if the trust deed allows the trustee to distribute more than 50% of the capital of the estate of the trust to one or more foreign persons. Not only will this change in approach directly impact trustees of discretionary trusts, but it will also have an impact on any companies or fixed trusts whose shareholders or beneficiaries (as the case may be), include trustees of discretionary trusts.

Therefore, in order to prevent a liability for FPAD inadvertently being incurred in respect of transactions occurring on or after 1 March 2020:

  • if the transferee is a trustee of a discretionary trust, the discretionary trust deed should be reviewed and amended (if required) to prevent the trustee from able to make any distributions to foreign persons;
  • if the transferee is a company whose shareholders could include a trustee of a discretionary trust, the company will need to make inquiries as to whether or not its shareholder is itself a trustee of a foreign trust, which in turn may require an amendment to be made to the trust deed of that discretionary trust to prevent the company from incurring foreign purchaser surcharge duty; and
  • if the transferee is a trustee of a fixed trust (Trustee A) whose beneficiaries could include a trustee of a discretionary trust (Trustee B), then Trustee A will need to make inquiries as to whether or not Trustee B is a trustee of a foreign trust, which in turn may require an amendment to be made to the trust deed of that discretionary trust (of which Trustee B is a trustee).

Note that the practical outcome in this instance would be quite similar to the position regarding discretionary trusts and surcharge purchaser duty in New South Wales, which you can read about here.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.