Trusts and Tax Minimisation: Changes to Stamp Duty and Land Tax Surcharges and its effect on Trusts

As detailed in our Property Law Team’s previous article, the NSW Revenue Office announced that citizens of New Zealand, Finland, Germany and South Africa (“Exempt Countries”) are now exempt from Surcharge Stamp Duty and Land Tax payments imposed on foreign nationals.

So, what does this development mean for trusts controlled by citizens of these Exempt Countries?

Surcharge Stamp Duty and Surcharge Land Tax

Surcharge Stamp Duty is imposed on foreign persons who buy property in NSW. The surcharge was as much as an additional 8% of the price of the property.

Surcharge Land Tax is a yearly tax that is imposed on foreign persons who continue to own property in NSW. The current tax rate is 4% of the rateable value of the property.

Until NSW Revenue Office’s announcement, the surcharges were imposed on all ‘foreign persons’ as defined under the Foreign Acquisitions and Takeovers Act 1975 (Cth). This definition excludes Australian citizens, but includes:

• An individual not ordinarily resident in Australia, including foreign citizens on permanent residency visas;
• A corporation or trustee of a trust in which an individual is not ordinarily a resident in Australia, a foreign corporation or a foreign government holds a substantial interest (defined as a 20% interest); and
• A trustee of a discretionary trust in which any beneficiary or potential beneficiary is an individual not ordinarily resident in Australia, a foreign corporation or foreign government.

Why these exemptions?

Australia is party to a number of international tax treaties, of which a primary object is the avoidance of ‘double taxation’ – that is, tax being imposed upon the same person or entity with respect to the same subject matter by both countries party to the agreement.

A treaty mechanism which allows for double taxation to be avoided is what is known as a “binding non-discrimination” clause. In effect, these clauses mean that foreign nationals must not be treated any less favourably than Australian citizens for tax purposes, and so affords them a level of tax minimisation. In Addy v Commissioner of Taxation [2021] HCA 34, the High Court held that these treaty provisions override the discriminatory parts of domestic tax law.

Many of Australia’s international tax treaties include this kind of clause. However, most only apply to taxes imposed by the Commonwealth Government, not those imposed by the States and Territories. The only treaties which limit taxes at the State level are those with New Zealand, Finland, Germany, South Africa, Japan and Norway.

In reviewing Land Tax and Stamp Duty taxation policy, Revenue NSW has determined that the surcharges are inconsistent with Australia’s international tax agreements with the Exempt Countries. This has not yet been extended to Japan and Norway.

What this means for you – tax minimisation and potential refunds

Following the NSW Revenue Office’s announcement, individuals with citizenship of the Exempt Countries will no longer be required to pay Surcharge Stamp Duty or Land Tax. Accordingly, if you are a citizen of one of these countries and paid Surcharge Stamp Duty or Surcharge Land Tax on property within NSW after 1 July 2021, you may be eligible for a refund.

What this means for your trust

A Trust will no longer be considered foreign for the purposes of Land Tax and Stamp Duty Surcharges if it would be deemed foreign solely because a substantial interest (at least 20%) is held by an individual who is a citizen of one of the Exempt Countries. However, if a foreign person who is not a citizen of one of the Exempt Countries holds a substantial interest in the trust, surcharges will still apply.

If you are a trustee of a trust that has paid Surcharge Stamp Duty or Surcharge Land Tax on property within NSW as a result of your citizenship or citizenship of foreign beneficiaries, and you or they are citizens of one of the Exempt Countries, you may be eligible for a refund. Refunds are currently being offered for surcharges paid after 1 July 2021.

These tax benefits for foreign beneficiaries also extend to trusts created in Wills, namely discretionary testamentary trusts. The tax effectiveness of these types of trusts in Wills is a specialty area of our Wills and Estates lawyers.

If you wish to discuss the tax implications of your trust, or you are from one of these countries and wish to set up a trust during your life time or in your Will, please do not hesitate to get in contact with our Private Wealth Law Team for assistance.