On 5 July 2018, the NSW Commissioner of State Revenue issued Commissioner’s Practice Note No CPN 004 on Foreign surcharges and discretionary trusts.

It applies from 21 June 2016 and outlines how surcharge purchaser duty and surcharge land tax will be applied in certain situations where land is held by a discretionary trust. CPN 004 further expands on Revenue Ruling G010 Version 2, and should be read in conjunction with the ruling.

Surcharge purchaser duty applies to acquisitions of NSW residential land by foreign persons, and surcharge land tax applies to foreign persons who are owners of residential land in NSW. Surcharge purchaser duty and surcharge land tax (together, the foreign surcharges) are payable in addition to any other duty or land tax payable.

Where an interest in a property is acquired by or held on trust by 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. For a discretionary trust, each beneficiary to whom the trustee has discretion to distribute the income or property is deemed to have the maximum percentage interest in the income or property over which the trustee may exercise a discretion to distribute.

Surcharge purchaser duty applies to acquisitions of NSW residential land by foreign persons, and surcharge land tax applies to foreign persons who are owners of residential land in NSW. Surcharge purchaser duty and surcharge land tax (together, the foreign surcharges) are payable in addition to any other duty or land tax payable.

CPN 004 says potential beneficiaries are generally nominated by class rather than name for a number of reasons including change of circumstances or they do not exist at the time the trust deed is executed. Where there are no existing potential beneficiaries who are foreign persons, the Commissioner says the foreign surcharges will not apply.

Should the trust deed contain named or specified beneficiaries that are foreign persons, the Chief Commissioner will usually require that such beneficiaries are removed from the trust deed as beneficiaries. If the named foreign beneficiaries are not removed, the trustee will generally be liable for foreign surcharges.

To be exempt from the foreign surcharges, amendments made must prevent potential beneficiaries that are foreign persons from receiving distributions as to income and/or capital under the trust. Any amendments made must also be irrevocable.

Revenue Ruling G010 version 2 clarifies that all amendments must be irrevocable. If the amendments were made prior to the 19th September 2017 (when the amended ruling was posted on our website) , the Chief Commissioner will accept amendments without the irrevocable clause for surcharge purchaser duty if the dutiable transactions occurs on or before 31 December 2018 and for surcharge land tax for the 2018 land tax year.

FJM 17.7.18

[LTN 132, 12/7/18; Tax Month – July 2018]

 

Comprehension questions (answers available)

  1. Does a discretionary trust have to pay the ‘surcharge’ if it has any foreign beneficiaries who can receive income or capital?
  2. If the foreign beneficiary is part of a class, but not named, is is sufficient to have a clause prohibiting them being a beneficiary or receiving any distributions?
  3. Does a named foreign beneficiary have to be removed from the deed?
  4. Can the amendment be revocable?

[answers:1.yes(maximumDistributionAssumedForThatClassOfIncomeOrCapital);2.yes;3.yes;4.no(mustBeIrrevocable)]

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