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Discretionary trusts update: stamp duty and land tax surcharges for “Foreign Trusts”

Big changes to discretionary trusts could be on the horizon in New South Wales, although finalisation of these changes won’t be made clear until the new year.

The proposal

Recently, the NSW government proposed changes to their definition of whether a discretionary trust should be considered a ‘foreign trust’. This distinction could impact whether the trust will be subject to surcharges on land tax and stamp duty for residential property in NSW. If amendments to the Duties Act 1997, the Land Tax Act 1956 and the Land Tax Management Act 1956 are ratified, this would impact individuals with trusts that hold such property.

Under the proposed changes, unless foreign persons are specifically excluded from a trust’s beneficiary class, the trust will be automatically deemed to be a foreign trust. For any purchases or holdings of NSW residential property, this would result in a stamp duty surcharge of 8% and/or land tax surcharge of 2% – this is in addition to the existing rates of ~5.6% and 1.6%, respectively.

Not finalised yet

The changes have yet to be passed, however it is considered likely following a discussion of the matter on 12 November in the NSW Parliament. Victor Dominello, the Minister for Customer Service who is responsible for the Bill, said it has three key purposes:

“Firstly, to avoid discretionary trusts becoming subject to surcharge purchaser duty or surcharge land tax where there is no intention that income or assets in the trust be distributed to foreign persons; secondly, to enhance the landholder duty provision to address inequities and anomalies in their application, bring them into closer alignment with other jurisdictions and fortify them against avoidance through the use of foreign acquisition vehicles; and, thirdly, to ensure consistency between recent changes to provide for the indexation of stamp duty thresholds and stamp duty concession provided under the First Home Buyers Assistance Scheme.”

Any amendments to each deed must be made by 31 December, so we will keep you updated as the issue progresses later this year.