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State Tax Warning for Family Trusts

April 2017


Recent changes to State laws may trigger a surprise tax bill for family trusts with residential land and foreign beneficiaries.

Recent changes to State laws may trigger a surprise tax bill for family trusts (discretionary trusts). 

Recent legislative changes in New South Wales, Victoria and Queensland mean that they will now impose a surcharge on foreigners who purchase residential land. While that may not sound like a problem for most family trusts, the issue may arise because of the way that family trust deeds are often drafted, which is so that the trustee has the power to distribute income or capital to a very wide class of potential beneficiaries.

As a result, if a foreigner could receive distributions from the trust then your trust may be liable to pay the new surcharge if it holds or purchases residential land in New South Wales, Victoria or Queensland. 

The way the State laws are written, if you cannot exclude foreigners as beneficiaries (your cousin living in England, for example) you are potentially exposed to the new tax. 

It does not matter if a distribution to a foreigner is unlikely to happen, the trust deed just has to allow it as a possibility.

How can you avoid being caught by the surcharge?

Assuming you don't have foreigners that you want the trust to distribute to, the solution might involve amending your trust deed. The amendment would exclude a "foreign person" from being a beneficiary and being able to benefit from the trust.

However, it would be necessary to work through this process carefully to ensure that even worse tax implications don't follow (e.g. need to ensure the amendment does not cause the trust to be resettled).

What's the problem with Trust Deeds?

For asset protection purposes, most family trusts have a very wide class of potential beneficiaries and unfettered powers for the trust to distribute income or capital. 

This means that no one beneficiary can claim that they have a right to the assets or income of the trust, which is helpful when a creditor is looking to target assets – you don't have a right to the assets or income of the trust until the trust agrees to distribute to you.

The State law changes and the exposure for family trusts

Legislative changes introduced at the end of 2016 in NSW, VIC and QLD impose a surcharge on "foreign persons" (or "foreign purchasers") who purchase and own (for land tax purposes) certain types of residential land in those States (this includes units in a landholder).  The surcharge is in addition to existing land taxes and stamp duty: The Foreign Surcharge Duty is based on the purchase price and the Land Tax Surcharge is based on unimproved land value. 

If your trust deed does not exclude a foreign person, then it may be liable to pay the new surcharge if it holds or purchases residential land in the affected States.

Check your trust deeds and seek professional advice

If you are concerned about the impact of these legislative changes on your family trust, please call or email us on 02 9957 4033 and we can help you work through this issue.* 

* In some circumstances legal advice will also be required.

 

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Disclaimer

This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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