Avoid Additional Stamp Duty in Victoria – Exclude Foreign Beneficiaries from Your Discretionary Trust

The Victorian State Revenue Office (SRO) has announced that from 1 March 2020 it has adopted a new approach in applying the ‘foreign purchaser additional duty’ (FPAD) provisions of the Duties Act 2000 (Vic) to discretionary trusts.

What is FPAD?

FPAD is an additional 8% duty on top of the usual 5.5% rate of duty and applies to transfers of an interest in Victorian residential property to a ‘foreign purchaser’.

Foreign natural persons, foreign corporations and trustees of foreign trusts are all deemed to be foreign purchasers.

I want to buy Victorian residential property in a discretionary trust – how does this affect me?

For the purposes of FPAD, a trust will be deemed to be a foreign trust if a foreign natural person, foreign corporation or a trustee of a foreign trust has a substantial interest in the trust estate. A ‘substantial interest’ is defined as having a beneficial interest of more than 50% of the capital of the estate of the trust.

However, in the case of discretionary trusts (where no interest is specified for a beneficiary), each beneficiary is taken to have the maximum percentage of the capital of the trust estate that the trustee is empowered to distribute to that beneficiary. In most cases, this will be 100%.

This covers all beneficiaries of the trust – not just those beneficiaries who are specifically named. Therefore, if any potential beneficiary is a foreign person, the trust will be considered foreign.

Depending on the definition of ‘beneficiary’ in your trust deed, this might include a British cousin, a company incorporated in Singapore that your uncle owns shares in or a foreign charity.

Hasn’t FPAD been around for a while? Why the change?

The SRO has until now adopted a ‘practical approach’ in respect of discretionary trusts that have foreign beneficiaries who have not and who are unlikely in the future to receive any distributions.

However, the SRO has confirmed that it will no longer apply the ‘practical approach’ from 1 March 2020 because “the provisions have been in place for more than four years and the special rules for discretionary trusts are better understood by all”.

What can I do to avoid FPAD?

We can help you to avoid FPAD by:

  • Establishing a new trust for you to use to purchase Victorian residential property. We will carefully draft the trust deed to ensure that the trustee is incapable of distributing more than 50% of the trust capital to a foreign beneficiary; or
  • Amending your existing trust deed to ensure that the trustee is incapable of distributing more than 50% of the trust capital to a foreign beneficiary. We know that you might be worried about amending your trust deed. Rest assured that we are trust and tax experts. Our tailored documents minimise the risk of you experiencing any unexpected consequences as a result of the changes to your deed.

To avoid FPAD, call us on 1300 654 590 to discuss how we can help you.

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