Following on from the alert last week, it has become increasingly clear how complicated the differing surcharge rules are making the establishment and administration of discretionary and testamentary trusts.

This is in the face of one of the key advantages of a discretionary trust - flexibility.  On the other hand, the primary focus of foreign surcharges is to impose an additional tax on non-Australian citizens which effectively limits the extent that discretionary trusts can have link to foreign persons (or otherwise face a surcharge). 

This is becoming more and more relevant for proper establishment and administration given that surcharges (if they apply), generally more than double the duty or land tax otherwise payable.

The complexity of it all

The concept of a “foreign person” or “absentee” differs in each Australian state and territory.  It also doesn’t help that some have different concepts depending on whether the surcharge is in relation to duty or land tax.  Those differences then flow through to different treatment of certain entities such as discretionary and some testamentary trusts. 

In the last few months we have seen New South Wales, and now Victoria, and soon to be Tasmania, insist that discretionary trust deeds include exclusionary language such that a trustee is not permitted to make certain distributions to a foreign person.  As a consequence, we have seen many instances where trust deeds are being amended or established with surcharges in mind. 

However, there is a concern that such changes are being made without appreciating the full impact of what they mean for the administration of the trust, and the interpretive burden it places on trustees.  

We have also seen trust deeds attempting to “cover the field” to include exclusionary language with the intention to cover off any potential surcharge implications in each relevant jurisdiction.  While that seems logical at first blush, it can create undue complexity for a trustee.

Before looking at what might be the most appropriate approach from an establishment or administrative perspective, the following table highlights some of the major (but not all) differences in determining whether a discretionary or testamentary trust could be subject to surcharge. Note that the table only deals with individual beneficiaries. 

It is even more complex when determining the outcome for beneficiaries who are companies or trustees, as tracing through ownership layers is then required.

How surcharges can apply to discretionary trusts (current as at 13 Feb 2020)

Criteria QLD | Absentee (land tax)[1] QLD | Foreign person (land tax and duty) NSW | (land tax and duty) VIC | Foreign purchaser (duty) VIC | Absentee (land tax) ACT | (land tax) SA | (duty) WA | Duty TAS | (duty) TAS | (land tax)[2]
Type of land All All for land tax, residential for duty Residential Residential All Residential Residential Residential Residential & primary production Residential & primary production
Clawback of duty if intend to change to residential N/A No No Yes N/A N/A No No Yes N/A
Clawback of duty if trust becomes foreign N/A Yes No No N/A N/A Yes No Yes N/A
Person who can make the trust foreign/absentee Individual Taker(s) in default with 50% or more interest Any named or potential beneficiary Trustee[3] or any named or potential capital benficiary Any named beneficiary[4] Any named capital beneficiary Trustee, appointor, named beneficiary or taker in default Trustee[5] or taker(s) in default with 50% or more interest Named or potential capital TBD
Excluded beneficiary clause required to be irrevocable N/A N/A Not until Bill commences [7] in current form Not currently required on website N/A N/A N/A N/A N/A TBD
Residency requirement not to be foreign[8] Ordinarily resides in Australia /or No 200 days No Ordinarily resides in Australia /or No No No No TBD
Need to be in Australia on taxing date[9] Yes /and Yes No N/A Yes /and N/A N/A N/A N/A TBD
Residency requirement More than 6 months N/A N/A N/A More than 6 months N/A N/A N/A N/A TBD

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