Potential penalty stamp duty when buying residential property

As we have previously advised our clients, the stamp duty legislation was recently changed to impose a penalty rate of stamp duty on purchases of residential property by “foreign persons”.

Within our client base, we have identified that a lot of discretionary trusts can technically be classified as a foreign person because of the wide class of potential beneficiaries under the trust.  In particular, the legislative changes make it clear that if there is at least one potential beneficiary of a discretionary trust that is not an Australian citizen or Australian tax resident, the discretionary trust can be classified as a foreign person.

The legislative changes leave many discretionary trusts exposed to potentially being assessed at penalty stamp duty rates where they purchase residential properties after the commencement date of the new legislation from 1 July 2015.

For instance, if the discretionary trust was to purchase a residential property for say $1M, the difference between the ordinary stamp duty rate and the penalty stamp duty rate is a staggering $70,000!

Going forward, hopefully the State Revenue Office will adopt a pragmatic approach when determining whether a discretionary trust is classified as a foreign person. However, to avoid any risks and given the black and white terminology used in the legislation, we strongly recommend that if any of our clients are considering purchasing residential properties in a discretionary trust, the discretionary trust firstly amends its trust deed to exclude foreign persons from potentially benefitting under the trust.  This simple amendment will ensure there are absolutely no risks of the trust being assessed at the penalty stamp duty rates for foreign persons.

If you have any further questions, please do not hesitate to contact Tim Olynyk on (03) 9810 0700 or at t.olynyk@banksgroup.com.au.

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