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In New South Wales, from 21 June 2016, residential property transactions involving ‘foreign persons’ have been subject to both duty surcharge and land tax surcharge. As a result, you may pay very high tax surcharges when selling or transferring residential-related property to a foreign person. In some cases, as much as 19% of the value of the property will be added as an extra tax surcharge. This article looks at when these surcharges apply.

Residential-Related Property

In NSW, duty and land tax surcharges can apply to the transfer of, or to certain other transactions involving residential property. This includes:

  • residential land in NSW;
  • an option to purchase residential land in NSW;
  • certain interests in the above; and
  • a partnership interest (where the partnership property includes residential-related property outlined above).

Residential land excludes land used for primary production and includes:

  • parcels of land on which there are one or more existing dwellings or dwellings under construction;
  • strata lots if lawfully occupied as a separate dwelling; and
  • parcels of vacant land that is zoned or otherwise designated for use under an environmental planning instrument for residential purposes.

Foreign Persons

To trigger the surcharges, the transfer or sale of the residential-related land must then be made to a foreign individual, company or trust.

Foreign Individuals

For duty surcharge purposes, an individual is a foreign person unless they are:

  • an Australian citizen (even if they live overseas); or
  • a permanent resident that ordinarily resides in Australia.

To ‘ordinarily reside in Australia’ the person needs to have been in Australia for 200 days or more in the preceding 12-month period.

Foreign Companies

A company is a foreign person if:

  • an individual foreign person, a foreign corporation or a foreign government holds at least a 20% interest in the company; or
  • two or more persons, each of whom is an individual foreign person, hold an aggregate 20% interest.

Foreign Trusts

A trust is a foreign person if:

  • an individual foreign person, a foreign company or foreign government hold a substantial interest in the trust; or
  • two or more persons, each of whom is an individual foreign person, hold an aggregate substantial interest.

For a trust, a ‘substantial interest’ is a beneficial interest in at least 20% of the income or property of the trust.

Discretionary Trusts with Foreign Family Beneficiaries

One of the most common situations is for an Australian citizen to find out that their discretionary trust is actually counted as a ‘foreign person’.

Australia is a multicultural society and it is not uncommon for the broad class of discretionary objects in modern trust deeds to include a beneficiary’s foreign relatives. In line with the substantial beneficial interest definition discussed above, this would render the trust itself to be a foreign person for duty and land tax surcharge purposes.

In this case, your discretionary trust may have to pay duty and land tax surcharges if it:

  • acquired residential related property in NSW on or after 21 June 2016; or
  • held residential land in NSW as at midnight on 31 December 2016 or 31 December 2017.

One way to fix this is to amend the trust deed so that it will no longer be treated as a foreign person, by removing the foreign beneficiaries. However, you should seek legal advice before doing so, as this may cause a ‘resettlement’ of the trust (making a new trust out of the old assets). This would potentially trigger both capital gains tax and duty surcharges.

Key Takeaways

The duty and land tax surcharges represent a significant cost in property transactions. In particular, the surcharge rules have far-reaching implications for Australian individuals with what they (often mistakenly) understand to be ordinary Australian trusts. Therefore, before transferring property into a trust, it is essential to seek legal advice on whether your trust counts as a ‘foreign person’ and if so, whether it is possible to amend the trust deed to avoid this.

If you need further advice on amending a trust deed for tax planning purposes, call LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page.

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