Before midnight on 31 December 2019, review all discretionary trust deeds and amend them to satisfy the no foreign beneficiary requirement and the no amendment requirement.

The State Revenue Legislation Further Amendment Bill 2019 introduced to the NSW Legislative Assembly on 22 October 2019 proposes changes to the Duties Act 1997 which will deem discretionary trusts to be foreign trusts, which are liable for surcharge purchaser duty and surcharge land tax payable in respect of residential land, unless trust deeds contain certain prohibitions by 31 December 2019.

A trustee of a discretionary trust is taken to be a foreign trustee (and liable for surcharge purchaser duty as the transferee of residential land), if the terms of trust do not prevent a foreign person from being a beneficiary. If the terms of the trust prevent a foreign person from being a beneficiary, the trustee is not a foreign trustee for surcharge purchaser duty and surcharge land tax purposes.

The Bill makes clear that in order for a trustee not to be deemed to be a foreign trustee, the terms of the trust must explicitly prevent a foreign person from being a beneficiary.
 

What does this mean for you?

To AVOID LIABILITY and prevent a discretionary trust from inadvertently attracting liability for surcharge duty and tax payable by a foreign trustee, the terms of the discretionary trust deed must be amended before midnight on 31 December 2019. Not only must the terms of a NSW trust deed prevent a foreign person from being a beneficiary under the trust, such an exclusion must also be irrevocable.

Under the proposed Bill, an exemption from (and refunds of) surcharge purchaser duty and surcharge land tax payable in respect of residential land held by the trustee of a discretionary trust will be given if the following requirements are met:

1. No foreign beneficiary requirement: the terms of the trust deed prevents a foreign person from being a beneficiary of the trust, so as to prevent a discretionary trust from inadvertently attracting liability for surcharge duty and tax payable by a foreign trustee; and
    
2. No amendment requirement: the clause preventing a foreign person from becoming a beneficiary cannot be amended to allow a foreign person to be a beneficiary at a later time.

Meeting the above requirements will prevent a discretionary trust from being liable for surcharge duty and tax payable by a foreign trustee.

Transitional clauses have been included which provide for exemptions and refunds when discretionary trusts are amended before the end of 2019 (i.e. by 31 December 2019). The transitional provisions also have retrospective effect to the commencement of surcharge purchaser duty on 21 June 2016. As a result, any trustee that has incurred a duty liability prior to the commencement of this Bill will have an opportunity to obtain relief by way of refund.

What do you need to do?

Before midnight on 31 December 2019, review all discretionary trust deeds and amend to satisfy the no foreign beneficiary requirement and the no amendment requirement.

Unless a discretionary trust deed complies with the above requirements, the trustee will not be eligible for the surcharge purchaser duty and surcharge land tax surcharge exemptions and refunds.

For a review of your discretionary trust deeds, please contact Danny Adno, Partner within Holman Webb's Business, Corporate and Commercial team.