The NSW government recently introduced a Bill affecting the application of transfer duty (previously known as stamp duty) and land tax surcharges to discretionary trusts that own or will own residential land in NSW.
Surcharge purchaser duty and Surcharge land tax
The surcharge on transfer duty (known as “surcharge purchaser duty”) and the surcharge land tax were introduced in June 2016 to ease pressure on housing affordability by discouraging foreign persons from purchasing and holding residential property in NSW.
Surcharge purchaser duty is an 8% surcharge on the value of any residential land purchased by a foreign person (in addition to any other duty payable).
Surcharge land tax is a 2% surcharge on the taxable value of any residential land held by a foreign person as at the taxing date (in addition to the land tax otherwise payable).
Broadly, the surcharges apply to foreign persons purchasing or holding residential land in NSW.
Who is a ‘foreign person’?
The definition of ‘foreign person’ is defined in Revenue NSW’s Ruling G009.
As an individual, you’re generally considered a foreign person, unless:
- you’re an Australian citizen; or
- you’re:
- a New Zealand Citizen, who holds a subclass 444 visa or
- a permanent resident of Australia
and you’ve lived in Australia for more than 200 days in the 12 months before the purchase date.
Companies and trusts can also be foreign persons. A trust is a foreign person for surcharge purposes if:
- an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or
- two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest.
The current law also means that a discretionary trust that has a foreign person as a potential beneficiary is subject to the surcharges. As the class of beneficiaries of a discretionary trust is usually very wide, many trusts will have foreign persons that are potential beneficiaries, even if no distributions are made to them and there is no intention to do so.
What is ‘residential land’?
The definition of residential land for surcharge purposes extends beyond what most people would expect.
Residential land includes any of the following:
| Land Type | Definition |
| Parcel of land | Where there are one or more dwellings on the land or a parcel of land on which there is a building under construction that, when completed, will constitute one or more dwellings. |
| Strata Lot | If it is lawfully occupied as a separate dwelling, or suitable for lawful occupation as a separate dwelling. |
| Utility Lot | If its use is restricted to the owner or occupier of a strata lot. |
| Land use entitlement | If it entitles the holder of the land use entitlement to occupy a building, or part of a building, as a separate dwelling e.g. company title and residential flats. |
| Parcel of vacant land | Zoned or otherwise designated for use for residential or principally for residential purposes. |
Residential land does not include land used for primary production that is exempt from land tax.
The surcharge applies if a building has both residential and commercial purposes. In this case, an apportionment factor is used to apportion the land value.
What’s changing?
Under the proposed changes, trusts will be taken to be a foreign person (and so potentially subject to the surcharges) unless the trust prevents a foreign person from being a beneficiary.
The trust must be able to satisfy two requirements:
- That under the terms of the trust, no property is able to be distributed to or applied for the benefit of a foreign person; and
- That the terms of the trust are not capable of being amended in a manner that would result in there being a potential beneficiary of the trust who is a foreign person.
These are not clauses commonly included in trust deeds, meaning that existing trusts affected by the changes will need to amend their trust deed in order to meet the requirements.
While there is no change in the end result for trusts that have no intention to distribute to a foreign person, there are important documentation changes that must occur to prevent the surcharges being applied.
When does the change take effect?
The changes are not law until the Bill receives assent (which has not yet happened), however it is expected to do so. Once legislated, the proposed changes will be retrospective and apply to:
- For Surcharge purchaser duty: Purchases of residential land where the contract was entered into on or after 21 June 2016.
- For Surcharge land tax: Residential land held on taxing dates falling on or after 21 June 2016, including the 2017, 2018 and 2019 land tax years (for land held at 31 December 2016, 2017 and 2018).
However, a trustee will be exempt from the surcharge if the terms of the trust deed are amended in line with the above requirements prior to midnight on 31 December 2019. There are additional requirements around the timing of the amendment for duties where the due date is before 31 December 2019.
Take action!
We will update you on the progress of the Bill as it moves through Parliament. In the meantime, we have summarised below the suggested actions based on the trust’s circumstances.
| Trust circumstances | Actions to take |
| Existing trusts that own or are intending to own residential land in NSW |
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| New trusts being established that intend to own residential land in NSW |
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| Trusts with no intention to own residential land in NSW | No action required |
If you are unsure of whether the above changes will affect you, or would like guidance on the process for amending your trust’s deed, please contact our office.
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