Foreign Surcharge and Discretionary Trusts

Australian trusts which can benefit foreign persons can be costly

Discretionary trusts which are able to benefit foreign persons can be exposed to significant extra costs for land tax and stamp duty in certain Australian states. New South Wales is a prime example of that. Various Australian states and territories now impose foreign surcharges, in addition to duties and/or land taxes, when the trust is deemed to be a foreign trust under their state definition of a foreign person.

As you will be aware, discretionary trusts are a popular property owning vehicle for private clients. However, if any of the beneficiaries, or potential beneficiaries of the trust are foreign residents, the trust may be subject to foreign surcharges. These foreign surcharges are additional taxes that are paid on non-Australian citizens. The impact of these surcharges consequently limits some of the benefits of operating under a discretionary trust structure, at least when the beneficiaries don’t qualify as Australian residents.

You should undertake a review of your client base to see whether you act for any trusts which own land and have the ability to benefit foreign persons.

Foreign Surcharges make administrative compliance more difficult.

The first issue with foreign surcharges is, of course, the cost. Not only does the trust have to pay the regular Australian land tax and/or duties, when there is a foreign beneficiary in the mix, they are also slogged with the foreign surcharge. This has the potential to double the equivalent duties or land taxes that may otherwise be payable.

Secondly, there is the complexity involved in understanding and administering compliance around these state duties and taxes. A large reason for the complexity is that the rules differ state to state (or territory). Each jurisdiction has its own duties and taxes. To complicate things further, each jurisdiction uses its own measure for determining who is a foreign resident.