Victoria succumbs to the Call of Duty for Discretionary Trusts

We all know how hard it is to break into the housing market, particularly for our young people. In an effort to improve housing affordability for Australians and discourage foreign purchasers from acquiring Australian property, foreign purchaser additional duty (FPAD) rates are applied to residential property purchases in various States throughout the country (currently 8% in Victoria and NSW, and 7% in WA, Queensland, SA and TAS).

A discretionary trust will be a foreign purchaser if more than 50% of the capital of the trust can be distributed to a foreign person, foreign company or trustee of a foreign trust (or their associates).

Previously, the State Revenue Office (SRO) in Victoria has applied a ‘practical approach’, and if foreign beneficiaries of discretionary trusts have not received distributions, and based on available information are unlikely to receive distributions in the future, the trust would not be a foreign trust.

However, from 1 March 2020, the SRO will no longer apply the practical approach. Given the wide classes of beneficiaries in a typical discretionary trust, the SRO will consider all discretionary trusts with a potential foreign beneficiary to be a foreign trust.

For any contracts signed, or nominations made, from 1 March 2020 by trustees of discretionary trusts, unless the deed contains an appropriate foreign beneficiary exclusion clause, then the trust will be deemed to be a foreign trust and the FPAD surcharge will be triggered.

Importantly, the FPAD will apply to not just residential purchases but also purchases of land capable of being used solely or primarily for residential purposes, meaning property developers will also be caught by these provisions.

So what can you do? It is vital that trustees of discretionary trusts review their deed prior to acquiring residential property to ensure it contains a clause explicitly excluding foreign entities from being a beneficiary. If it doesn’t, the deed must be amended prior to settlement. Don’t panic, with some careful planning, the application of FPAD to discretionary trusts can be avoided.

If this has raised questions for you, the legal team at Partners Wealth Group can help. Call today on 1800 333 143.