Changes to trusts under new legislation

Does your trust own residential land? You have until 31 December to change the terms of your trust to avoid surcharge duty.

If you have a discretionary trust (commonly known as a family trust) which holds an “interest” in residential land, the trust will be hit with surcharge land tax if the terms of the trust don’t expressly and irrevocably exclude foreign persons from benefiting from the trust.

Since June 2016 surcharge duties have been imposed on certain foreign persons (including foreign trusts) who own residential land. Discretionary trusts which don’t expressly and irrevocably exclude foreign persons as beneficiaries are considered to be foreign trusts for this purpose. Revenue NSW have been allowing trustees to amend the terms of their trust to exclude foreign beneficiaries to get out of paying the surcharge. Under new legislation, trustees only have until 31 December to change their trust deeds otherwise the trustee will be deemed a foreign trustee and the surcharge duties will apply.

An “interest” in residential land means not only the trustee itself owning the residential land, but also more remote interests like the trustee owning units in a unit trust which owns residential land or owning shares in a company which then owns an interest in residential land.

The surcharge rate is an additional 0.75% for the 2017 land tax year and an additional 2% from the 2018 land tax year onward. This is on top of the normal rates of land tax and will be payable every year that the trust owns an interest in residential land.

Obviously, if the trust is used/to be used for the benefit of a foreign person, then the terms of the trust shouldn’t be varied. But you need to be aware of the implications of this.

If you don’t expect that there will be any foreign persons who will need to benefit from the trust, you should vary the terms of the trust as soon as possible (if this hasn’t already been done).

We have come across instances where it hasn’t been possible to vary the terms of the trust (this happens where the trust deed doesn’t give the necessary power to vary the deed). In these circumstances, we can work with your accountant to try to come up with recommendations as to the best course of action for you. This can take some time and, as the deadline is looming, it is important to get to work on this as a matter of urgency.

If your trust purchases residential land down the track, without this variation, surcharge stamp duty will also be payable.

When you are considering the land tax position of your family trust, you should be aware that the trust can’t receive the benefit of the land tax threshold – if your trust has incorrectly been receiving the benefit of this threshold, Revenue NSW can look back over the years it incorrectly received this benefit and hit you with a bill for the difference. It goes without saying this could be a hefty amount.

Does your will contain a testamentary trust? You may need to change its terms.

Under the new legislation, provisions are also being introduced which specifically provide that discretionary trusts created under the terms of a will are to be liable for surcharge duties if the terms of the trust don’t expressly and irrevocably exclude foreign persons as beneficiaries.

A two year grace period will apply before the legislation takes effect in this realm.

Even where the terms of the trust allow for variation to be made by your executor, if it isn’t expected that a foreign person will need to benefit from the trust it may be best to include the exclusion now. This is because:

  1. the power to vary may not extend to varying the beneficiary class; and
  2. a variation can constitute a delegation of testamentary power and, if it does, the variation won’t be effective.

Without specific testing of whether the amendment will be effective, it is possible the terms of the trust may not be capable of variation after death.

You should seek advice regarding these changes and consider whether the terms of your will should be amended in light of this new law. If you would like to discuss this matter further or if you need assistance with your trust, please contact our Estate Planning team.