Business & Corporate: Your family trust is probably affected by the 'foreign persons' surcharge’.  Your Trust deed should be reviewed

Family trusts are often created for the purpose of protecting assets and minimising tax liabilities. However, the Office of State Revenue (OSR) has recently made a ruling which will have the opposite effect, namely increasing potential tax liabilities for the beneficiaries of a Family Trust.  Family Trust Deeds which include ‘foreign persons’ in the list of beneficiaries are now liable for a Land Tax and Stamp Duty surcharge on sales or purchases of NSW residential land. 

Who is a foreign person?

For the purposes of this surcharge, a foreign person is someone who is not 'ordinarily resident in Australia and who is not an Australian citizen, according to the Foreign Acquisitions and Takeovers  Act 1975 (Cth). This may apply to New Zealand citizens who ordinarily reside in Australia unless they have a special category visa.

When might this surcharge apply?

Most family trust deeds have a wide definition of who may be included as a beneficiary. As such, this surcharge can apply in a range of situations. For example, your child's spouse may be nominated as a potential beneficiary. If your child moves overseas and marries a person 'not ordinarily resident' in Australia (that is, not an Australian citizen), the Trustee is deemed to be a Foreign Person and therefore will be potentially liable for surcharge purchaser duty and surcharge land tax.

The OSR ruling says” “The result is that any beneficiary who is a foreign person will almost always be deemed to hold a substantial interest in the trust, and the trustee will be deemed to be a foreign person who will be potentially liable for surcharge purchaser duty and surcharge land tax”. 

To ensure that your family trust is not liable to pay the surcharge, 'foreign persons' need to be specifically excluded in the deed. The Trust Deed should be amended to remove the trustee’s power to make distributions to any person who is a foreign person.

Please contact our Andrew Frank or email Frank Law to discuss how your family trust may be amended.  

More from the Blog:

Whats in it for you? A family trust and your business Part I

Whats in it for you? A family trust and your business Part II

Keywords: business & corporate, family trust, discretionary trust, tax minimisation, asset protection, investment property

This article is provided to the reader for general information. It is not legal advice. It was written by Zdenka Marinov & Emily Graham and edited by Andrew Frank.