Following recent changes to the Land Tax Act 1956 (NSW) and the Duties Act 1997 (NSW) a trustee recently had to approach the Supreme Court of New South Wales to make sure the tax affairs of the trust were adequately dealt with. The decision of Re Dion Investments Pty Limited [2020] NSWSC 1661 may have implications for any trust whose property includes residential land in New South Wales. In 1973 a trust was settled. The trust corpus included residential property in New South Wales. 

Recently, amendments were made to the Land Tax Act and Duties Act with the effect that surcharge tax will not be charged if a trust comprising assets, including residential property has no potential or existing foreign beneficiaries. In short: If the relevant trust has current or potential foreign beneficiaries, it means a hefty tax bill.

The trustee approached the Court for judicial advice (s63 of the Trustee Act 1925 (NSW)) and for orders (s81 of the Trustee Act) with the effect, in essence, of releasing the trustee from any obligation to pay a beneficiary for as long as they are a “foreign person” for tax purposes.

In relation to the first limb of s63 advice, the trustee would not be justified in surrendering the trusts relating to foreign beneficiaries as the trust deed gives no power to do that, noting the relevant power to distribute to foreign beneficiaries is a “power coupled with a duty” which it would be a breach to release.

Regarding the second limb, the trustee could disclaim its powers concerning current beneficiaries. Still, as the class remains open to “issue” there may be future foreign beneficiaries, meaning the tax requirements would not be satisfied even if the current beneficiaries were disclaimed.

And for the third limb, the power to revoke trusts (which was granted in the trust deed to specific people) does not pass on to the executors of the estates of those people. However, despite the problematic outcome of the s63 judicial advice, the Court considered s81 which allows the Court to make orders granting trustees power to undertake transactions which are expedient for the trust. The existence of a tax advantage (to the tune of $100K per year) was found to be expedient.

The Court granted the trustee the power to release or surrender any trusts which might benefit a foreign beneficiary pursuant to s81. The trust advantage was, therefore secured.

https://www.caselaw.nsw.gov.au/decision/175f26f188ceca3d8343f366