Amendments to Trust Deed may be required to avoid penalty stamp duty arising

Where a discretionary trust purchases residential property, the discretionary trust will be liable to pay a higher rate of stamp duty (an additional 8%) if it is classified as a “foreign trust”.

Example:

Whereas a discretionary trust that is not classified as a foreign trust would pay stamp duty of $82,500 on the purchase of a $1,500,000 residential property, a discretionary trust that is a foreign trust would pay stamp duty of $202,500.

While these measures have already been in existence for several years, the State Revenue Office (SRO) has recently announced it will be taking a more “hard-line” approach from 1 March 2020. Effective from 1 March 2020, the SRO will consider a discretionary trust to be a foreign trust where the Trust Deed does not specifically exclude the trustee of the trust from making distributions of income or distributions of capital to foreign persons (being persons who are neither an Australian citizen or permanent resident of Australia). Thus, from 1 March 2020, a discretionary trust can be considered to be a foreign trust even if it has never made any distribution to a foreign person.

Based on this revised interpretation, it is critical for those discretionary trusts that are considering purchasing residential properties after 1 March 2020 to ensure their Trust Deed is reviewed and potentially updated (if needed) to exclude foreign persons from being beneficiaries of the trust. In some situations, the Trust Deed may already exclude foreign persons as beneficiaries – this should be the case for those Trust Deeds that were established in the last several years. In these circumstances, no further update would be required.

If you would like further information relating to the above or would like your Trust Deeds reviewed to determine whether they need to be amended, please do not hesitate to contact your client service partner or Tim Olynyk of our office.

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