Look to your Trust – Is “Mr Hyde” lurking amongst its layers of beneficiaries?

by | Oct 12, 2015

Foreign purchaser (stamp) duty surcharge commenced in Victoria on 1 July 2015. It impacts not only on conventional residential property purchases but also filters into duty payable under the land holding provisions.

Is your seemingly “dinky di” Aussie discretionary trust really a “foreign trust”? For instance, is there a foreign natural person “buried” in Trust’s layers of definition of “beneficiary”, which may cause the spectre of surcharge to apply? (If so, don’t despair – it may be possible to keep “Hyde” in check and for your trust to have an existence as calm as Dr Jekyll.)

You may also be aware that for the forthcoming 2016 land tax year, a Victorian land tax surcharge will apply to absentee owned land. However, there appears to be subtle and not-so-subtle differences between the concept of a “foreign trust” for stamp duty and the concept of an “absentee trust” for land tax purposes.

For Victorian duty purposes, basically, a “foreign trust” is a trust in which a substantial interest is held by a foreign natural person, a foreign company or the trustee of another foreign trust. Life becomes interesting, when one turns to the definition of “a substantial interest in a trust estate.”

As the SRO observes:

“A foreign natural person, foreign corporation or foreign trust has a substantial interest in a trust (either alone, or with an associated person) when that person or entity:

Has a beneficial interest of more than 50 percent of the capital of the estate of the foreign trust, or

Has (in the Commissioner’s opinion) the capacity to determine or influence the outcome of the decisions about the administration and conduct of the trust, taking into account certain factors (such as the practical influence the person can exert in addition to any rights the person can enforce, and any practice or behavior affecting the trustee”s administration and conduct of the test, even if that practice or pattern of behaviour involves the breach of an agreement or breach of trust).”

Focussing on the first (more than 50%) limb – the SRO notes that:

“For discretionary trusts, a person or member of a class of persons, is taken to have a beneficial interest in the maximum percentage of the capital of the foreign trust estate that the trustee of the discretionary trust is empowered to distribute to that person.” (underlining and italics added)

Applying this approach, it becomes necessary to consider whether some distant relative (who falls within the modern identification of beneficiaries by reference to extended family and who was, probably, never really intended to receive a benefit) happens to be a “foreign natural person.”

The “problematic” relative is often likely to be a family member who did not migrate with siblings to Australia but remained in the “old country.” In more recent times, the “problematic” relative might be a parent who has funded their child’s migration to Australia and entrusted the child with family assets to invest. He (or she) will be a person who is not an Australian citizen under the Australian Citizenship Act 2007 (Cwlth), does not hold a permanent visa as per s 30(1) of the Migration Act 1958 (Cwlth) or, being a New Zealand citizen, does not hold a special category visa as per s 32(1) of the Migration Act.

Under the changes to the Victorian land tax legislation operative from 30 June 2015, absentee owners of Victorian land are subject to surcharge. For present purposes, the focus is on a discretionary trust that is an absentee trust.

A discretionary trust will be an “absentee trust” for land tax purposes … “where at least one absentee beneficiary is a specified beneficiary.” The Land Tax Act defines a “specified” beneficiary (italics added) as a beneficiary who is either specifically named in the trust deed or is “specifically” declared in writing pursuant to the trust deed’ to be a beneficiary to whom the whole or part of trust income or property may be distributed/vested through the exercise or non-exercise of discretion.

It will be immediately noted that the operation of the Land Tax Act is only concerned with a specifically identified beneficiary, rather than any discretionary beneficiary including one buried in general description of an extended family. The difference in wording is especially significant, given the concepts of ‘absentee trust’ (Land Tax Act 1958) and “foreign trust” (Duties Act 2000) were respectively inserted by the same amending Act in the relevant principal Act.

The notion of an absentee beneficiary is more generous than the counterpart notion of a foreign trust. For example, a “natural person absentee” (the land tax counterpart of ‘foreign natural person’) is a person who not only fails an Australian citizen test (see the definition of “Australian citizen or resident” – similar to the test for a foreign natural person) but also has to fail an ordinary Australian residency test. This will be a relief to parents whose children head overseas for an extended working holiday. However, given the form of most trust deeds, it will more likely be a relief to children who see their parents retiring overseas (while retaining their Australian citizenship) and leaving family land wealth tied up in a family trust.

It is important to recognise that the foregoing does not purport to be an exhaustive discussion of either the exposure of discretionary trusts to duty surcharge or, as the case may be, to land tax surcharge. For example, underlying the seeming simplicity of inclusion of corporate beneficiaries and discretionary trustees as beneficiaries there is scope for a foreign beneficiary or, with less likelihood, an absentee beneficiary, to arise in a guise other than that of a natural person. Furthermore, a trust holding shares in a company (or an interest in another trust) may conceivably transmit its foreign/absentee character to the company (or the other trust).

Given the wide variety of structures that may exist – one can only suggest: “Look to your Trust” in both a literal and a figurative sense. If you find “Mr Hyde” lurking, consideration can be given to the propriety of exorcising him – whether through seeking access to the concessionary regimes of the relevant legislation or other means.

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