No. 58 Changes to Victorian Foreign Purchaser Additional Duty and discretionary trusts

When you buy or acquire property in Victoria, you will ordinarily have to pay land transfer duty (also known as stamp duty).

Foreign Purchaser Additional Duty (FPAD) provisions were introduced with effect from 1 July 2015. Generally, if you are a foreign purchaser and you acquire residential property, FPAD will be payable as well as land transfer duty. Please note FPAD only applies to residential property.

However, since that time, the Victorian State Revenue Office has been applying what has been termed a “practical approach” when certain discretionary trusts purchase residential property.

Effective from 1 March 2020, this practical approach will no longer apply and FPAD of 8%, in addition to the general rates of duty, may be imposed on discretionary trusts.

For contracts of sale entered into before 1 March 2020, transitional arrangements are in place and the “practical approach” will still apply.

What was the “practical approach” and what will happen from 1 March 2020?

Typically, a discretionary trust is a trust where no person has a beneficial interest and the trustee has a power or discretion as to the distribution of the capital of the trust estate to a person or a member of a class of person. As many discretionary trust deeds contain very wide general beneficiary clauses (including foreign beneficiaries), they are considered foreign trusts for the purpose of the FPAD provisions, even if there is never any intention to distribute to a foreign beneficiary.

Under the Commissioner’s practical approach, a discretionary trust was not treated as a foreign trust for additional duty purposes if no foreign beneficiary had received or was likely to receive a distribution from the trust.

As from 1 March 2020 the practical approach will no longer apply. If a discretionary trust purchases Victorian residential land it will be deemed to be a foreign trust and will be subject to FPAD of 8%, unless its Deed already excludes foreign beneficiaries or its Deed is irrevocably amended before the property settlement to exclude foreign beneficiaries.

For example, if a trustee of a discretionary trust purchased a residential property with a dutiable value  of $1 million on 15 May 2020 and doesn’t amend the trust’s Deed prior to settlement to exclude foreign beneficiaries (if not already excluded), estimated duty would be as follows:

Land transfer duty                                         $1,000,000 x 5.5% =       $55,000
Foreign Purchaser Additional Duty           $1,000,000 x 8% =          $80,000
Total Duty                                                                                               $135,000

What action should be taken?

If you are considering entering into a contract to purchase Victorian residential property using a discretionary trust (or a corporate unit trust) we highly recommend that you discuss this further now with your Blaze Acumen adviser who will be able to assist you in identifying whether your trust Deed needs to be amended by a solicitor.