Foreign beneficiaries and discretionary trusts

Does your family trust expressly exclude ‘foreign persons’ as potential beneficiaries?

Chances are, it does not, and Revenue Ruling G010 (v2) from the NSW Commissioner of State Revenue suggests that unless you specifically exclude foreign persons as potential beneficiaries, you may be liable to surcharge purchaser duty.

Discretionary trusts are often used as a tool to acquire residential property in NSW. They offer benefits that range from asset protection to capital distribution and income splitting. As the name suggests, they afford the trustee discretion to determine which of the beneficiaries are to receive the income or property, with no fixed entitlement or interest in the trust funds.

Foreign surcharge duty applies to foreign persons acquiring residential land in NSW.

The Office of State Revenue considers that any beneficiary may have 100% benefit in a discretionary trust. This is relevant if one of the beneficiaries is a foreign person because they can be deemed to hold a 100% interest in any property owned by the trust.

As discretionary trusts typically include an extensive list of ‘General Beneficiaries’, the risks are clear. These range from the lineal descendants of the ‘Primary Beneficiaries’, to spouses and de facto partners. Although you may never intend to make a capital distribution to your daughter’s French husband, your purchase of residential property in NSW may be liable to an addition 4% purchaser duty.  

The NSW Commissioner of State Revenue has considered the effects of the application of surcharge purchaser duty to family discretionary trusts. The Commissioner states that to be exempt from surcharge duty, “amendments made [to the trust deed] must prevent potential beneficiaries that are foreign persons from receiving distributions as to income and/or capital under the trust. Any amendments made must also be irrevocable.”

In consideration of the above, it is important to review the definition of ‘General Beneficiaries’ in a discretionary trust before using it to acquire residential land in NSW. As the Practice Note (CPN 004) explains, amendments can be made to your trust deed to become exempt from the foreign surcharges, by specifically excluding foreign beneficiaries. However, it is important to seek legal advice before doing so, as amendments could trigger a ‘resettlement’ of trust and expose yourself to further liability.