Foreign purchasers of residential real estate in Victoria and NSW will have to pay an increased land tax surcharge effective from 1 January 2017. This is in addition to the stamp duty surcharges on foreign purchasers introduced in mid-2016. While, as an Australian citizen, you may feel that these changes will not have any impact on you, the increased surcharges could result in hidden and unexpected additional costs to property you have purchased through a trust.
Purchasing property though a trust has many tax and general financial benefits and is therefore a popular form of purchasing assets. However, by using a trust vehicle to purchase residential property, you may be unwittingly subjecting yourself to additional stamp duty and land tax surcharges.
In Victoria, the foreign investor surcharge on residential stamp duty increased from 3% to 7% effective from 1 July 2016. From 1 January 2017, the land tax surcharge will triple from 0.5% to 1.5%. Similarly in NSW, the stamp duty surcharge has increased by 4%, while the land tax surcharge is set to increase by 0.75% on the first day of 2017.
As an Australian citizen, you are probably asking yourself how this change could possibly affect you. The answer lies in the definition of a “foreign purchaser”. In Victoria, the definition of a foreign purchaser includes the trustee of a foreign trust. A foreign trust is a trust in which a substantial interest (over 50%) is held by a foreign natural person or foreign corporation. However, it must be noted that any foreign beneficiary of a discretionary trust will be deemed to hold the maximum interest in the trust that the trustee has the power to distribute to it.
Therefore, any truly discretionary trust with at least one foreign beneficiary will meet the definition of a foreign trust. The trustee of such a trust would therefore be classified as a foreign purchaser under Victorian law. The NSW definition of a foreign person would also be met in such a case, with foreign beneficiary interests as low as 20% sufficient to meet the definition of a foreign trust.
The effect of this is that if you hold residential land as trustee for a family trust of which at least one of the beneficiaries lives overseas, that land will be subject to an additional 7% land tax. Any purchases of land through a trust so described will also attract a 1.5% stamp duty surcharge. What may have started off as an attempt to save money on the purchase of property could end up costing you a significant amount of additional duties and taxes.
So how can these surcharges be avoided? If you are planning on purchasing property through a trust, or already own property as part of a trust, it is safest to have a special clause inserted, specifying that no distributions may be made to a foreign beneficiary. Otherwise the trust may be considered a foreign trust and will get hit with the additional duties and taxes. By stipulating that no distributions from the trust that holds the property can be made to foreign persons, you ensure that the property owned by the trust will not be the subject of additional land tax and stamp duty surcharges.
If you think the above changes could affect you or your family, get in touch with Warlows’s dedicated Trusts and Estates team today to have your trust amended accordingly to help ensure you aren’t hit with any surprise taxes or duties.