The State Revenue Legislation Further Amendment Bill (2019) NSW is bringing in some potentially drastic and detrimental changes to the way NSW taxes discretionary trusts, with such changes set to come about on 31 December 2019.
The proposed changes to the existing legislation apply to a lifetime or Will trust with NSW property as an asset, and are designed to treat the trustee of a discretionary trust as a “foreign person” if one or more of the potential beneficiaries is a foreign person.
As a “foreign person”, any existing residential property held in the trust is to be subject to 2% surcharge land tax, with a whopping 8% duty on residential related land/property if it is subsequently bought by the trust. There is a threshold level of $2 million, which will now be easier to exceed, as it will be based on the actual market value of the land/property, including buildings (and not the unimproved value), and the valuation itself will also take into account all fixtures and fittings!
There is an exemption from the tax if the trust deed is amended to exclude any such “foreign beneficiaries”. Clearly most discretionary trust deeds do not already have this exclusion built-in, as the aim of the discretionary trust is to keep the class of discretionary beneficiaries as wide as possible. In fact, the great majority of trusts will contain a wide range of potential relatives, many of whom may be overseas already, or who may end up being overseas beneficiaries.
It is also important to note that this is still a Bill and does not yet have full legal effect. However, the Bill’s provisions are to take effect retrospectively, and unless the relevant trust deed is amended to exclude foreign beneficiaries by 31 December 2019, all existing non-compliant trusts will run the risk of incurring the duty.
Schedule 3 of the Bill provides some small comfort that in some limited circumstances, where a person dies within 2 years of the Bill becoming law, the trustee of the trust will not be treated as foreign person if the deceased person was not a foreign person.
Clearly, our advice to clients is now to consider amending current discretionary trust deeds and discretionary testamentary trust in Wills. This will ensure that estate planning structures are maintained and updated to ensure tax efficiency and best results for beneficiaries. Even if the Bill does not become law, there is clearly an appetite for it in the NSW Parliament, and the cost of amending the trust deed or Will is likely to far outweigh the risk of doing nothing, and inadvertently lumbering the trustees of the trust with potentially a very hefty tax bill !
We note the changes may never be enacted at all, but we believe it is entirely appropriate to advise you as soon as we become aware.
If you need any further information or advice at all on this subject, please contact Mark Phillips (Mark.Phillips@symonsphillips.com.au) or Rob Lynch (Robert.Lynch@symonsphillips.com.au) or call us on (02) 6295 5555.