Unexpected sting for family trusts

A recent NSW Revenue Ruling has significant implications for those who own or purchase residential property using a family trust. Residential property can include: your home, a holiday house, an investment property, vacant land, a portion of farming land, commercial or industrial property, and a business which includes land.

Transfer Duty (previously referred to as Stamp Duty) is payable when you buy property.

The recent ruling determined that if a discretionary trust (e.g. a family trust) is worded such that a beneficiary could possibly be a foreign person, then the trust will be liable to pay:

1. in addition to the standard Transfer Duty, 8% of the value of the land purchased/transferred, by way of a Transfer Duty surcharge e.g. an extra $40,000 on a $500,000 parcel of land; and
2. a 2% surcharge on the trust’s land tax bill.

The Ruling states:

…a discretionary trust may be liable for the foreign person surcharges even though none of the beneficiaries who actually receive or are likely to receive distributions of income or capital are foreign persons.

Given that most family trusts provide for a wide variety of beneficiary including but not limited to children, spouses of children, step-children, spouses of step-children, nieces, nephews etc, that possibility will almost always exist, unless it is expressly excluded.  To do this requires the trust deed to be varied to incorporate the express exclusion into it.

The Ruling states:

The trust deed must be amended so that the trustee is no longer liable for the taxes.

Amending a trust deed usually can be achieved without a complete redraft of the trust deed. Our approach to this is to not redraft the trust deed, rather to draft a deed of variation which has the effect of adding the new words to the trust deed.