Potential relief from Foreign Investor Surcharges
As mentioned in an earlier article, foreign persons who own residential land in NSW are subject to a Land Tax Surcharge of 0.75% (stepping up to 2% in 2018) on the taxable value of the residential land so owned, in addition to any land tax otherwise payable.
Similarly, foreign persons are required to pay a Surcharge Purchaser Duty of 8%, in addition to the duty otherwise payable on the purchase of residential property in NSW.
Both of these Surcharges are applied in proportion to the ownership by foreign person(s) of the underlying residential land. In circumstances where a foreign person is a potential beneficiary under a discretionary trust, that person’s percentage ownership will be deemed to be the maximum percentage of the income or property that the trustee could possibly distribute to them.
Consequently, the trustee of a discretionary trust may be exposed to assessment for both of the Surcharges as if the foreign person owned 100% of the residential land when a foreign person is a potential beneficiary, without regard to whether or not such foreign persons received (or were likely to receive) any distribution.
This has caught many trustees by surprise, many of whom have been party to dutiable transactions before their trust deed could be amended to remove foreign persons from the class of beneficiaries.
Relief from the Surcharges, in circumstances where the trustee is able to satisfy the Chief Commissioner of State Revenue that their application is not merely an attempt to evade the Surcharges, may now be available following the issued by Revenue NSW of Revenue Ruling No. G 010 Version 2.
In the case of an discretionary trust not established under a will, the trustee within six months of receiving an exemption from the Chief Commissioner (if not amended prior) must amend the trust deed to irrevocably remove the trustee’s power to distribute to a foreign person or the exemption will be rescinded with retrospective effect.
In the case of a discretionary trust established under a will, the Chief Commissioner may exempt a trustee from the Surcharges for up to two years after the passing of the testator as follows:
- Surcharge Purchaser Duty – trustee is exempt if deceased was not a foreign person at death; and
- Surcharge Land Tax – trustee is exempt in relation to the principal place of residence owned and occupied by the deceased at the time of death, and may also be exempt in relation to any other land that forms part of the deceased person’s estate, for up to the two year period.
Helpfully, this Ruling operates retrospectively upon transactions that occurred on or after 21 June 2016.