Pursuant to the Land Tax Act 1956 (NSW) (“the Act”), generally speaking, surcharge land tax is payable in respect of residential land if the land is owned by a foreign person.
On 24 June 2020, the new Section 5D of Act came into force and introduced new legislative requirements on discretionary trusts in respect of the surcharge land tax.
In the context of discretionary trust under the new legislation, ‘where an interest in a property is acquired directly or indirectly by or held through a discretionary trust, the trustee of the trust may be liable for foreign surcharges if any one of the potential beneficiaries is a foreign person’. To put it another way, if the trust does not prevent a foreign person from being a beneficiary (including a potential beneficiary) (the ‘Beneficiary’) of the trust, the trustee of a discretionary trust is taken to be a foreign person in that capacity.
In general practice, potential beneficiaries are not limited to persons specifically named in the trust deed. It also extends to the members of any class of persons, to whom, or for whose benefit, that trust property can be distributed or applied to, by way of the trustee exercising its discretion under the trust. This is the case even if all the Beneficiaries and/or the class of persons are not foreign person at the time the trust deed is executed. The trust may also be subject to surcharge land tax due to the change of circumstances of the Beneficiaries.
As such, to successfully prevent a foreign person from being a Beneficiary of the trust, the following requirements must be satisfied:
No Foreign Beneficiary Requirement: no potential beneficiary of the trust is a foreign person; and
No Amendment Requirement: the terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person.