What's the issue?

Contracts for the purchase of property which are entered into after 1 July 2016 by foreign purchasers now incur an additional 7% surcharge on stamp duty.

A foreign purchaser is defined under Duties Act 2000 (VIC) ("the Act") as a foreign natural person, a foreign corporation or the trustee of a foreign trust.

The problem now faced by purchasers who purchase a property through a trust, is that, under section 3B of the Act, a trust may be considered to be 'foreign' if a foreign beneficiary or trustee has the rights and discretion to a distribution of 50% or more of the capital in the trust.

The issue with this is that it does not matter that there is or has been no distribution to a foreign person or that there is never likely to be such a distribution. The mere fact that there is discretion to possibly distribute to a foreign person or entity is enough to trigger the additional surcharge.

This could be a serious risk to many trusts, particularly family trusts where one or more of the deemed broad beneficiaries (family members) reside overseas.

Where's the time bomb?

Given the fact that a purchase of property within a trust, or whether or not a trust is a foreign trust are matters of disclosure to the State Revenue Office ('SRO'), you may be thinking that the SRO will not become aware of these issues as they apply to your circumstances. Therefore why should you be concerned about it?

Be aware that the SRO has a history of completing reviews and audits which result in the reassessment of the amounts of land tax and stamp duty payable on properties. A failure to disclose a foreign trust now may not be caught immediately by the SRO.

However, there is a strong possibility that the issue will be discovered in the future. For example, over the past few years the SRO have been auditing land tax on properties which were held in trust but the owners had failed to disclose the trust. Accordingly the land tax trust surcharge rate was not applied when land tax was initially assessed. More recently, the SRO has been catching up, non-disclosing land holders have been receiving large land tax bills for the arrears of tax and, depending on circumstance, have been subject to penalties and interest.

Any Tips?

We recommend that trust deeds be carefully reviewed prior to purchasing a property in order to ensure that you are fully aware of your tax obligations. Disclosures to the SRO need to be made up front, where appropriate.

If you think that you may have inadvertently breached your reporting obligations, we recommend that you seek immediate legal advice.

If you wish to use a trust to purchase property in the future, it may be necessary to modify the existing trust deed so the trust will no longer be considered 'foreign'. This could be done by way of a Deed of Variation, subject to the terms of your current Trust Deed.

What to do now?

For further guidance, please feel free to give Andre Ong, an Accredited Specialist in Property Law and Principal at Sharrock Pitman Legal, a call on (03) 8561 3317.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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