Change of Heart by State Revenue Office

Duty surcharges for foreign purchasers capi_00648d84a1cb17434c68a43ef7792241_09f3a95b42ad05ab0d440235ff5276b5

What are the rules?

The Duties Act 1958 (Vic) was changed on 1st July, 2015 in response to the overheated property market and political requirements to dampen the growth of housing prices.  The effect of that change was to impose surcharges on foreign corporations, foreign trusts and foreign individuals (Foreign Purchasers) who purchased the relevant class of property (the Relevant Property).

The relevant property

The surcharges only apply to residential property, which is defined in Section 3G of the Duties Act 1958 (Vic) and, in summary, includes:-

  • land capable of being used solely or primarily for residential purposes; or
  • land which includes a building, or part of a building, that a person intends to refurbish or extend so the land is capable of being used solely or primarily for residential purposes; or
  • land on which a person intends to construct a building so the land is capable of being used solely or primarily for residential purposes; or
  • land in respect of which a person has undertaken or intends to undertake land development for the purposes of constructing a building so the land is capable of being used solely or primarily for residential purposes.

The surcharges do not apply to land used for primary industry, industrial purposes, commercial purposes and certain types of residential properties such as aged care facilities and retirement villages.  These rules have not changed.

The relevant owner

The Act states that the surcharges are payable when the Relevant Property is held by a Foreign Purchaser.  So who is a Foreign Purchaser?

Individual: if the owner of a property is not an Australian resident, the owner will be a foreign individual and will fall under the definition of a Foreign Purchaser and will be liable for the surcharges.

Company: if the owner of a property is a company which is either registered outside Australia or, being an Australian company, is controlled by one or more foreign individuals, foreign corporations or foreign trusts, that company will be deemed to be a Foreign Purchaser and will be liable for the surcharges.

Unit trust: in the case of a unit trust (other than a hybrid unit trust), it will be deemed to be a Foreign Purchaser and will be liable for the surcharges if it has been formed outside Australia or, being an Australian unit trust, is controlled by one or more foreign individuals, foreign corporations or foreign trusts.

Discretionary trust or hybrid unit trust: for an Australian discretionary trust or a hybrid unit trust (where the trustee has the discretion to distribute income and/or capital to beneficiaries, being those persons who do not hold units in the hybrid unit trust) the Act will deem that the trust can be controlled by any beneficiary.  Accordingly, all discretionary trusts and hybrid unit trusts will be deemed to be Foreign Purchasers and liable for the surcharges.  This all-inclusive deeming of control and its consequences can only be removed if the trust deed which governs the trust specifically prohibits the trustee from making distributions of income and capital to foreign individuals, foreign corporations and foreign trusts.

The change

Since the inception of the surcharge regime, the SRO has simply looked at the pattern of trust distributions made by the trustees of discretionary trusts and hybrid unit trusts and, if no distribution of income or capital has been made to a foreign individual, a foreign corporation or a foreign trust, the SRO has taken a broad, or practical, view of the application of the new rules and has not imposed surcharges.  Since 1st March, 2020, however, the SRO will take a narrow approach and will deem all such trusts to be foreign-controlled unless there is a specific prohibition on the trustee to make distributions to foreign individuals, foreign corporations and foreign trusts.

So, even if the trustee has never made a distribution to any foreign individual, foreign company or foreign trust in the past, and has no intention of ever making a distribution to those classes of persons, to avoid the surcharges, the trust deed must now contain a provision which expressly prohibits the trustee from making any distribution to those classes of persons.

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How to determine if a trust deed needs to be varied

Step 1

Firstly, you will need to determine if the trust holds the Relevant Property.  If it does not, there is no need to vary the trust deed and your journey ends here.  If it does hold the Relevant Property, then you will need to proceed to Step 2.

Step 2

The next matter for determination is whether there is an intention to make a distribution to a foreign individual, foreign company or foreign trust.  If so, there is no need to vary the trust deed, the trustee will become liable for the surcharges and your journey ends here. 

However, if there is no intention to make a distribution to a foreign individual, foreign company or foreign trust, and a desire to avoid liability for the surcharges, you will then need to proceed to Step 3.

Step 3

This requires a determination as to whether or not the trust deed contains the relevant exclusionary provisions.  If so, then nothing further needs to be done.  If not, then the trust deed will need to be varied.  If you are not sure, please send the trust deed to us for determination.

What we can do to assist

Necessary provisions?

If you would like us to determine if a trust deed contains the necessary provisions to exclude foreign individuals, foreign companies and foreign trusts, please send the deed to us.  There will be a very small fee of $22.00 for each trust deed to provide that determination to you in writing.

Variation to trust deed

If the trust deed needs to be varied, we can provide that service.  Our fees are:-

            $330.00                       to vary deeds supplied by Castle

            $550.00                       to vary deeds not supplied by Castle.

Please note the following:-

  • the necessary variation will not result in the trust being resettled.
  • deeds supplied by Castle against an order for an “excluded trust” will not need to be varied.
  • any deed, regardless of the supplier, which pre-dates 1st July, 2015 will not contain the relevant exclusionary provisions as the law which introduced the surcharges had not been introduced prior to then.
  • if we vary your trust deed, the variation will also contain provisions which will apply to all jurisdictions participating in this surcharge regime – not just Victoria.

Transitional arrangements

The SRO will continue to apply its previous practical approach in relation to dutiable transactions where contracts of sale were entered into (or nominations were made in a sub-sale context) before 1st March, 2020.

From 1st March, 2020, if there is an intention to purchase a residential property, and to avoid the surcharges by either:-

  • using a different purchase vehicle (that is not a foreign purchaser); or
  • in the case of a discretionary trust or a hybrid unit trust, by amending the trust deed to prohibit the trustee from making distributions to foreign persons.  Any amendment will have to be done prior to the dutiable transaction completing (ie prior to settlement).

 

Please feel free to give us a call on 03 9898 6666 or simply fill in the following form, if you would like help with the above.

From Castle Legal Pty Ltd                                                                                       Partnering with you to get it right.

 

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