For many families and investors, discretionary trusts are a preferred vehicle for holding assets, including property. But in New South Wales, there is a significant trap when it comes to surcharge land tax, and there is a critical deadline approaching.
Surcharge land tax is levied on ‘foreign persons’ who hold interests in residential land in NSW and is calculated on 5% of the unimproved value of the relevant property. On land with a value of $1,000,000 surcharge land tax is $50,000 per year.
So what’s the trap?
Under NSW law, a discretionary trust will be deemed a “foreign person” (and is therefore liable for surcharge land tax) even if no distributions are ever made to a foreign beneficiary unless both of the following are satisfied:
- The rules of the trust provide that no foreign person is or may be a beneficiary or potential beneficiary of the trust; and
- The rules of the trust deed must prevent the deed from being amended to allow a foreign person to be a beneficiary.
Requirement #2 is the trickier of the two, and is the one that is most often overlooked.
Most discretionary trust deeds prepared after approximately 2017 will cover this issue, but the only way to be sure is to review your deed and confirm that it contains the required clauses.
Surcharge land tax is assessed at midnight on 31 December each year, so at the time of writing you have approximately 3 weeks to make sure you’ve avoided the surcharge land tax trap.
