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Now is the time to review your discretionary trusts

Mark McKinley, Andrew Parlour and Eleanor Athanasiou
Practical approach no more! Changes are afoot in relation to the Victorian State Revenue Office’s (“SRO”) treatment of discretionary trusts.

In January this year the SRO introduced a raft of changes related to transfers of foreign purchases duty and discretionary trusts. Taking effect from 1 March 2020, these changes will impact many discretionary trusts. 

It is vital that purchasers using a discretionary trust to acquire residential property in Victoria understand what these changes could mean for them, and how to avoid the additional duty imposed on trusts that are deemed to be foreign.

Discretionary trusts are quite commonly used for family trust arrangements, and these changes will have a notable impact on discretionary trusts used to purchase residential property in Victoria.

Foreign purchaser additional duty

In 2015, the SRO introduced the “foreign purchaser additional duty” on foreign purchasers (transferee) of property in Victoria.

Where a transferee was deemed a foreign natural person, a foreign corporation or a trustee of a foreign trust, that foreign person would be required to pay an additional 8% (of stamp duty on the acquisition of the property in question) on top of the standard rate (which operates on a sliding scale, but generally has a limit of 5.5%).

The practical approach

Since 2015, to determine whether a discretionary or family trust was a foreign trust, the SRO employed what it called the ‘practical approach’. 

This approach involved assessing each trust with foreign beneficiaries and if the SRO deemed that those beneficiaries were not currently receiving, and, based on information made available to the SRO at the time, were unlikely in the future to receive any distributions, the trust would not be considered a foreign trust.

Practical approach no more – Discretionary Trust special rules shall apply from 1 March 2020

From 1 March 2020, the SRO will replace its ‘practical approach’ for determining whether a discretionary trust is a foreign trust with a strict test of whether foreign beneficiaries are specifically excluded from the class of beneficiaries.  If not, the trust will be deemed to be a foreign trust and additional foreign purchaser duty will be imposed.

The implications

If discretionary trusts have not had their trust deeds amended to specifically exclude foreign persons from the class of beneficiaries, those trusts will be deemed to be foreign trusts.

If it is deemed to be a foreign trust, any dutiable transactions undertaken by the trustee of the discretionary trust in respect of Victorian residential land will be subject to foreign purchaser additional duty of 8% (on top of the general rates of duty of 5.5%). 

The practical approach will not be put to the wayside entirely; the SRO will continue to apply this practical approach to those dutiable transactions where the contract of sale was entered into, or where the nomination was made, before 1 March 2020. 

Our recommendations

For contracts entered into on or after 1 March 2020, purchasers and nominees who are trustees of a discretionary trust ought to ensure their discretionary trust deeds are properly drafted or amended before settlement of the purchase to specifically exclude foreign beneficiaries where it is appropriate to do so.

How we can help

At Russell Kennedy we have the skills and expertise to assist you with reviewing and amending your discretionary trust deed, or establishing a new discretionary trust that properly excludes foreign beneficiaries in readiness for the 1 March 2020 change and beyond. Please contact Mark McKinley, Andrew Parlour or Eleanor Athanasiou if you require assistance.

If you would like to keep in touch with Alerts and Insights from our expert Property team, you can subscribe to our mailing list here.

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