Change in SRO practice for family discretionary trusts

Written by Catherine Micallef

For the last four years, the State Revenue Office has adopted a practical approach in respect of family discretionary trusts. This means that family trusts that have foreign beneficiaries who have not and who are unlikely in the future to receive any distributions, will not be considered a foreign trust.

From 1 March 2020, the State Revenue Office will no longer apply this practical approach.

The State Revenue Office will rule that a discretionary trust can be a foreign purchaser even if the trustee and primary beneficiaries are Australian citizens residing in Australia. In the event that the discretionary trust has any potential foreign beneficiary, the trust will be a foreign trust for the purposes of the Foreign Purchaser Additional Duty provisions (FPAD).

This means that when purchasing property through these trusts, the 8% foreign purchaser surcharge will automatically apply, resulting in a duty rate of 13.5%.

A discretionary trust deed defines who its beneficiaries are and the trustee generally has the discretion to determine which beneficiaries received capital distributions and income. The definition of beneficiary is commonly wide reaching and has the potential for allowing the trustee to make distributions to at least one foreign natural person or entity. This thereby deems the trust itself a foreign trust.

What are the next steps?

Those wishing to purchase Victorian residential land on or after 1 March 2020, using a discretionary trust as the purchaser, should ensure that their discretionary trust deeds are irrevocably amended before settlement to exclude foreign beneficiaries.

It is also important to ensure that new trust deeds include a clause denying the trustee the discretion to distribute to foreign natural persons or entities.

From 1 March 2020, this will be the only mechanism to ensure that the 8% FPAD will not apply to a property transaction involving a discretionary trust.

If you think this may apply to you, you may wish to consider amending their discretionary trust deeds now to ensure that this is not overlooked down the track.