Author: Brenda Hutchinson, Partner, TAG Financial Services
Welcome to the New Year. With the volatile market in 2020 due to COVID-19, we saw many investors considering a move to property investments, from shares and managed funds.
As a result, it is an opportune time to raise an issue for those of you thinking of purchasing residential property in your family trust, as there are some additional considerations to be aware of.
From 1 March 2020, the State Revenue Office (SRO) has advised they will change the way it will treat a new purchase. If any of the beneficiaries of a family trust are foreign residents or foreign companies (even if they never have or never will receive a distribution), and a new property is purchased, then additional stamp duty will apply. This should be discussed with you by your lawyer that is administering the purchase of the property and it is likely they will need a copy of the trust deed.
How it did work (before 1 March 2020)
Since 1 July 2015, in Victoria, if a residential property was purchased by a foreign purchaser, then additional stamp duty is levied on the acquisition. Under these provisions, a foreign purchaser can be a person, a corporation, or a trust. With regards to a trust, it will be considered a foreign trust, when a foreign person, company or other trust has a “substantial interest” in the trust. A substantial interest exists when a foreign beneficiary has a beneficial interest in more than 50% of the capital of the trust.
Typically, with family trusts, the trust deed outlines who the beneficiaries are. This is often a very broad definition and may include “mum and dad”, their children, parents, grandparents, other relatives (such as aunts, uncles, cousins), spouses of any of the previously mentioned or even corporate beneficiaries. These types of trusts are discretionary, meaning that the profit for the year can be distributed to any of these beneficiaries, and in any proportion.
As a result, if any of these beneficiaries are foreign residents, or the corporate beneficiary is a foreign company, then they may be entitled to more than 50% of the capital in any given year.
Up to now, the SRO has taken a much more practical approach when assessing whether a trust is a foreign trust. It has taken the approach of considering the likelihood of a foreign beneficiary receiving the distribution, not just relying on what the trust deed permitted. This approach meant that even if the trust deed was broad enough to permit distributions to foreign beneficiaries, but there was never any intention to make distributions to these beneficiaries, then the trust would NOT be considered a foreign trust.
How it works now (from 1 March 2020)
This practical approach changed from 1 March 2020. From this date, the practical approach will be removed, and if any of the beneficiaries are foreign residents or foreign companies (even if they never have or never will receive a distribution), and a new property is purchased, then additional stamp duty will apply.
This new approach will not apply to purchases that were contracted before 1 March 2020 – essentially there will be a grandfathering of any properties bought before this date.
Is there anything that can be done?
There is a solution that will be able to be adopted to help alleviate this issue. It will be possible to amend the existing family trust deed to exclude any potential foreign beneficiaries. With any change in trust deed careful consideration needs to be undertaken to avoid a resettlement of the trust.
Do the changes only apply in Victoria?
No. Similar changes will also apply in other States and Territories. In New South Wales, it will not only be additional stamp duty on the purchase of property. There will also be a surcharge land tax rate that is applied on an ongoing basis on the land held. Again, the potential solution is for the trust deed to be amended to restrict foreign beneficiaries from being able to receive no more than 50% of the capital of the trust.
What should you do now?
You should contact TAG to discuss having your family trust deed amended. Even if you are not planning on purchasing property in the new future, it may be worthwhile having this updated now, so that you are prepared for any future purchases.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686).