31/03/2020

Discretionary trusts in Victoria may need to amend their deeds.

Beginning 1 March 2020 the State Revenue Office of Victoria (SRO) abandoned the practical approach in respect of discretionary trusts holding property. This comes after the New South Wales government last year filed a bill providing that discretionary trusts holding property in New South Wales will be deemed a foreign trust if its deeds do not include an irrevocable provision excluding foreign persons as beneficiaries.

Under the practical approach, discretionary trusts having foreign beneficiaries who have not and who are, based on available information, unlikely in the future to receive any distributions, were not treated as foreign trusts.

Special Rule for Discretionary Trusts

A foreign trust is a trust in which a foreign corporation, foreign natural person or a trustee of another foreign trust has a substantial interest in the trust estate.

A person has a substantial interest in a trust if such person has a beneficial interest of more than 50% of the capital of the trust. But if the trust is a discretionary trust, a person has substantial interest in it as such person is deemed to have taken a beneficial interest to the entire capital of the trust if the trustee has the power to distribute it to such person.

If the beneficiary happens to be a foreign person to whom the trustee can decide to distribute the entire capital of the trust, the foreign beneficiary has a substantial interest in the discretionary trust. In this case, the SRO will generally treat the discretionary trust as a foreign trust.

Impact of Change of Approach on Discretionary Trusts

Although foreign trusts acquiring residential property in the state of Victoria have been subject to the Additional Duty for Foreign Purchasers of 8% (“Additional Duty”), its imposition on discretionary trusts will depend on the approach taken by the SRO in determining whether such trusts are foreign or not.

Even with the presence of foreign beneficiaries, the practical approach previously adopted by the SRO gave an opportunity for discretionary trusts to provide information that it is not a foreign trust and accordingly not subject to Additional Duty.

All that has changed starting 1 March 2020 where the SRO will begin treating any discretionary trusts which have a potential foreign beneficiary as foreign trusts and accordingly subject to Additional Duty.

Scenario

To better understand the impact, let us take the following scenario.

Campbell Family Discretionary Trust (“the Trust”) was established with Campbell Pty Ltd as trustee (“the Trustee”). The beneficiaries of the Trust are:

a)    Alex Campbell and Belle Campbell
b)    Children of Alex Campbell and Belle Campbell who are Carl Campbell and Dianne Campbell.
c)    Spouses of the children of Alex Campbell and Belle Campbell
d)    Companies in which the persons listed above from a) to c) inclusive are shareholders, members or directors

Alex Campbell owns 10% of all the shares in Emerald Properties Pty Ltd, a company which has 90% of its shares owned by foreign citizens.

Carl Campbell is married to Francine Lowe. He is the trustee of the Lowe Family Discretionary Trust. Francine has a sister, Gina Lowe, who is married to Henry Murdoch, a Canadian citizen. Both Gina Lowe and Henry Murdoch are beneficiaries of the Lowe Family Discretionary Trust.

Dianne Campbell lives in the US with her husband Ian Williams who is a US citizen.

Based on the above, the Trust has the following foreign beneficiaries:

•    Ian Williams, the US spouse of Dianne Campbell;

•    Emerald Pty Ltd, the foreign majority owned company in which Alex Campbell is a shareholder; and

•    Carl Campbell, trustee of the Lowe Family Discretionary Trust where one of the beneficiaries is Henry Murdoch, a Canadian citizen.

Under the Practical Approach

In September 2019, the Trust acquired a residential property in Geelong, Victoria. While the Trust would be considered as a foreign trust because of the foreign beneficiaries, the Trustee could provide information that these beneficiaries have never received and were unlikely to receive any distributions such as evidence or explanation that:

•    Ian Williams is a well-known business owner in the US and has never been financially dependent on the Campbell family. As a non-resident of Australia, he is unlikely to receive any distributions because of negative tax implications the Trustee will bear.

•    the priority of the Trust is to provide for the bloodline relatives, not companies such as Emerald Pty Ltd.

•    Lowe Family Discretionary Trust would not be considered a foreign trust because it similarly prioritises distributing to bloodline relatives thereby making it unlikely for Henry Murdoch to receive any distribution.

Relying on the information, the SRO will not treat the Trust as a foreign trust. Hence the Trust will not be subject to Additional Duty.

Approach starting 1 March 2020

If the Trust acquires the residential property in March 2020, the SRO will consider the Trust as a foreign trust on the mere fact that these foreign persons are potential beneficiaries of the Trust. The Trust no longer has the chance to provide information that these foreign persons have not received in the past and unlikely to receive in future any distributions from the Trust. Hence the Trust will subject to Additional Duty for the acquisition.

Recommendation

To prevent discretionary trusts from being considered as foreign trusts, discretionary trusts are advised to amend or vary its trust deeds by including a provision expressly excluding foreign persons as beneficiaries prior to purchasing residential properties in Victoria.

There can also be consequences relating to capital gains tax if extreme care is not taken in that an amendment or variation of the trust deed can be seen as a resettlement of the trust.

At Townsends Business & Corporate Lawyers, we are able to assist with the careful amendment or variation of the discretionary trust to best suit you.  For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email info@townsendslaw.com.au to see how we can assist.