Buying residential or vacant property? Watch out for a stamp duty sting


Posted By on 26/02/20 at 12:02 PM

There is a little bit of hype about the Victorian State Revenue Office’s change in its administrative policy in relation to the treatment of ‘foreign persons’ under discretionary trusts for stamp duty purposes, which is due to come into effect from 1 March 2020.

In practice, if you are considering purchasing a residential property (or vacant land to be used to build residential premises) via a discretionary trust, you must amend the trust deed to remove ‘foreign persons’ from receiving capital.

If this does not happen and settlement occurs, an additional duty surcharge of 8% will apply and the total duty cost will be 13.5%. On a $10 million dollar property, the additional duty will be $800,000.

It does not mean you have to seek to amend every trust straight away (although that may be one way to manage things). The critical time is before a property purchase occurs.

This has been the legal position since 1 July 2015 when these laws were first introduced. It is also important from a foreign investment compliance perspective.

Back in 1 July 2015, an additional stamp duty surcharge (now at 8% on top of the usual 5.5% rate = 13.5% total) applied when a foreign person, foreign corporation or a foreign trust acquired residential land (including vacant land that is to be used to develop residential premises) in Victoria. Usually the additional duty has to be considered with every residential/vacant land purchase (including Foreign Investment Review Board approval).

The rules were further complicated by the way the surcharge applied to discretionary (or family) trusts. If a foreign person (including a foreign company or foreign trust) was part of the general beneficiary class of a trust, that person could theoretically benefit from a capital distribution (even if it was very unlikely to happen) and that trust would be deemed to be a foreign trust, meaning that the surcharge would apply.

A “foreign person” is basically someone that is not an Australian resident or an Australian citizen.

However, given the obvious practical hurdles this created (in that most trusts are likely to be set up for someone who has at least one relative that could be a foreign person), the SRO was initially a little lenient with the way it applied the rules as an ‘administrative practice’.

From 1 March 2020 however, that leniency will no longer apply.

What this means is that any time a discretionary trust is used to acquire residential/vacant land, we have to ensure that we carve out foreign persons from benefiting from the capital of the trust.

This can be done by an amending deed only if the trustee has the power to make such a change. Even if a unit trust or hybrid trust is being used to acquire property, a variation may be needed to any discretionary trusts that own the units.  The amendment must be in line with the Duties Act requirements.

It is also important to get the structure right before entering into a contract so that you neutralise the potential application of the sub-sale provisions (in the event of a nomination before settlement).

KHQ Lawyers - Jack Stuk

Jack Stuk Principal Solicitor

Jack is a highly skilled and experienced taxation lawyer, proficient in advising on complex tax issues for high net worth individuals, and across business, commercial and estate matters.

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