This is a cautionary tale for ensuring that discretionary trust deeds are amended correctly so that “foreign” land transfer (stamp) duty and land tax surcharges are not triggered. Unfortunately, in the decision of Khalil & Associates Pty Ltd ATF The George Khalil Family Trust v Chief Commissioner of State Revenue [2024] NSWCATAD 23 (Khalil), the NSW Civil and Administrative Tribunal (Tribunal) found the particular amendment did not prevent the triggering of such a surcharge.
What’s the issue?
Most states and territories have introduced foreign surcharges for land transfer (stamp) duty and/or land tax on purchases, and holding of land, by foreign persons. While these measures are relatively targeted for foreign natural persons and companies and fixed trusts that they control or have interests in, that is not the case with discretionary trusts.
Due to the flexible nature of discretionary trusts and the perceived ability to use them to make distributions to foreign persons, the deeming rules for discretionary trusts to become foreign trusts are very wide. These vary from state to state but will typically require the trust deed of the discretionary trust to remove foreign beneficiaries or restrict their entitlements. In this regard, New South Wales has the most strict requirements (as discuss below).
This is the case regardless of whether there is any intention to make distributions to foreign persons. That is, these surcharges can capture ordinary Australian discretionary trusts, unless the appropriate amendments to the trust deed are made.
Background to Khalil
The taxpayer in Khalil was the New South Wales-based trustee of a discretionary trust.
On 24 June 2020, New South Wales introduced a requirement that most taxpayers with standard-type family trusts needed to amend their trust deeds by 31 December 2020 to not be liable to foreign owner land tax by specifically excluding potential foreign objects.
A (new) section 5D was introduced into the Land Tax Act 1956 (NSW) that provides that a trustee of a discretionary trust is taken to be a foreign trustee if the terms of the trust do not prevent a foreign person from ever being or becoming a beneficiary (regardless of whether or not there actually are any foreign beneficiaries).
On 3 June 2021, the taxpayer took steps to ensure that an amending deed by inserting a clause into the trusts’ deed to exclude foreign beneficiaries:
Any foreign beneficiary that may exist in this trust is irrevocably excluded from receiving any current, or future trust distributions. For the avoidance of doubt this clause will supersede any other clause under this deed.
The clause did not define the term ‘foreign beneficiary’.
A further deed of variation was executed to excluded foreign persons.
Although initially the taxpayer was not subject to foreign owner land tax with respect to the 2022 land tax year, on 19 July 2022, the Chief Commissioner of State Revenue (Commissioner) issued assessments.
On 22 June 2023, the taxpayer objected to a surcharge land tax assessments for the 2017-2023 tax years (inclusive). On 24 July 2023, the Commissioner disallowed the objection. On 29 August 2023, the taxpayer sought review of the objection decision by the tribunal.
Issue and opposing arguments
The issue was whether the amending deed satisfied the requirements of section 5D of the Land Tax Act for the 2022 land tax year, in that it irrevocably prevented foreign persons (as defined) from being beneficiaries of the trust.
The taxpayer submitted that the Commissioner's guidance on foreign surcharges and discretionary trusts (Practice Note CPN 004 V2 issued on 1 July 2020) did not require a definition of a ‘foreign beneficiary’ to be inserted into a deed. Furthermore, there is no difference in the meaning between the term ‘foreign beneficiary’ as was used in the Amending Deed and the term ‘foreign person’ as defined in section 5D of the Land Tax Act.
The Commissioner submitted that the Amending Deed did not satisfy the requirements of paragraph 5D(3)(a) or paragraph 5D(3)(b) of the Land Tax Act 1956. The term ‘foreign beneficiary’ does not have the same meaning as ‘foreign person’ because the words are different. Furthermore, the clause excluding foreign beneficiaries did not prevent the addition of future foreign beneficiaries.
Decision
The Tribunal was not satisfied that the amendment did not preclude the applicant from amending the trust’s deed in the future to make a foreign person a potential beneficiary of the trust.
Furthermore, the taxpayer did not provide any evidence on their intention nor errors that they made.
Accordingly, the trust was treated as a foreign trust and thus the trustee was liable to pay foreign owner land tax.
Key observations
As referred to above, the concept of a “foreign person” differs in each Australian State and Territory. In New South Wales, Victoria and Tasmania, discretionary trusts deeds must include exclusionary language to ensure that a trustee is not permitted to make certain distributions to a foreign person (as defined).
Other jurisdictions only look to named beneficiaries, takers in default and/or the trustee – which is easier to monitor.
The rules in New South Wales are also particularly onerous as exclusionary clauses must also be irrevocable. A trust will therefore forever be restricted from making distributions, regardless of whether it holds land in New South Wales or not.
Action required
A trust should be drafted and amended based on the intent for which it is to be used.
Taxpayers that intend to use a trust to acquire land in different States and Territories should carefully review the terms of any trust deeds to prevent being liable for foreign owner land tax.
If a trust deed contains an exclusionary clause trustees should ensure they are operating within the confines of their discretion and that a distribution is not made to a beneficiary who is, or has become, an excluded beneficiary.
Navigating the complexities of setting up or managing a trust can be difficult. We are well placed to guide taxpayers through the best ways to achieve their goals using trusts.
Please contact us with any questions or any other State Tax issues.
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au
Nicholas Clifton
Principal Lawyer
T +61 3 9611 0154 | M +61 401 150 955
E nclifton@sladen.com.au
Meera Pillai
Associate
T +61 3 9611 0179
E mpillai@sladen.com.au
