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Upcoming changes to foreign purchaser duty

Upcoming changes to foreign purchaser duty

Kerry Hicks and Alexandra Barras

The foreign purchaser additional duty provisions have been in effect since 1 July 2015.
The additional duty applies to a ‘foreign purchaser’, which includes:
  • Foreign natural persons – Importantly this is someone who is not an Australian citizen or a holder of a permanent visa. This is not determined by the tax residency of the individual.
  • Companies incorporated overseas or controlled by a foreign natural person.
  • Trustee of a ‘foreign trust’ where a substantial interest is held by a foreign natural person or a foreign company. A substantial interest may apply where a foreign natural person or a foreign company is a potential beneficiary of the trust.

To date the Commissioner has been applying a ‘practical approach’ when family discretionary trusts purchase residential property in order to determine if the additional duty applies.
This practical approach meant that trusts who have not recently distributed to a foreign beneficiary, and were not likely to distribute to the foreign beneficiary in the future, would not be considered a foreign trust for the purposes of the additional duty provisions. 
As the foreign purchaser rules have now been in place for more than four years, the SRO has advised that its practical approach will no longer be applied from 1 March 2020. Instead, the special rules for discretionary trusts will be applied to all discretionary trusts including family discretionary trusts.
Special rules for substantial interest in a discretionary trust
Typically, under a discretionary trust the trustee has the discretion to distribute the income or capital of a trust to a broad range of beneficiaries. The special rules deem any potential beneficiary to have a beneficial interest equal to the maximum percentage of the capital of the trust estate that the trustee is empowered to distribute to that person.
Therefore, if the discretionary trust has a potential foreign beneficiary, the trust will generally be deemed a foreign trust for the purposes of the provisions, and subject to the additional duty.
Next steps
If you are at risk of being liable for the additional duty due to purchasing residential property in a discretionary trust you could consider the following options:

  • If possible, enter into the sales contract prior to 1 March 2020;
  • Use a different purchase vehicle that is not at risk of being considered a foreign purchaser; or
  • Amend the trust deed so that foreign persons are excluded as potential beneficiaries. Importantly, any amendment to the trust deed needs to be completed prior to settlement of the property.

How we can help
Moore Australia can assist in reviewing your discretionary trust deed and advising on the duty implications of your residential property transactions. For more information, please contact your Moore Australia advisor.