A tax accountant’s expertise is essential when dealing with the foreign person rule and potential land tax expenses for residential properties owned by discretionary trusts, commonly known as family trusts. Effective 31 December 2016, these trusts may face an additional 0.75% surcharge on the unimproved land value of the property on top of the existing 1.6%. Count on a tax accountant to navigate these complexities and ensure compliance while minimising costs.
Family Trust A has a potential beneficiary that meets the definition of a “foreign person”, and the trust also owns residential land with a total land value of $700,000.
The average land tax payable is $11,200 per year (at 1.6% of total land value with no land tax threshold applicable – special trust).
The new land tax surcharge from 31 December 2016 will be $5,250 (0.75% of $700,000).
Total land tax cost of $16,450 per year going forward.
This land tax surcharge applies to most states, including NSW, VIC and QLD. Each state has recently changed the definition of “foreign persons” to assess duty and land tax liabilities. If you have a discretionary trust, you will likely be caught out by this new definition. This is since the typical trust set up in Australia usually contains an extensive class of beneficiaries which covers non-resident beneficiaries (such as grandparents, siblings and cousins living or residing overseas). Therefore, if you have existing discretionary trusts with a residential property, we recommend the trust deed be reviewed and amended to remove the foreign person (if applicable). Australian citizens are not considered foreign unless their citizenship rights have been removed for other reasons.
This surcharge is applicable if the trust can distribute to a non-resident. It is not reliant on a distribution being made to them.
In summary, if you are looking to set up a discretionary trust to purchase a residential property or your current trust holds a residential property in your family trust, please get in touch with us immediately so we can try to help you avoid paying the additional surcharge.
For further information about NSW, please refer to the Land tax surcharge section on the NSW OSR website http://www.osr.nsw.gov.au/taxes/land-tax-surcharge.
Should you have any questions, please do not hesitate to contact us to discuss.
Kreston Stanley Williamson Team
*Correct as of January 2017
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.