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Know Changes to the Application of Foreign Surcharges for Trusts Holding NSW Residential Property

The State Revenue Legislation Further Amendment Act 2020, which came into effect in New South Wales on 24 June 2020, includes changes to “foreign person surcharges” for purchaser duty and land tax relevant to residential land in NSW owned by discretionary trust.

So, if you are concerned about some changes of foreign surcharges for trusts holding NSW residential property, this article can tell you more about it.

Surcharge Purchaser Duty & Surcharge Land Tax

Surcharge purchaser duty (since June 2016) and surcharge land tax (since the 2017 land tax year) have applied to ‘foreign persons’ acquiring or holding NSW residential property. Currently, surcharge purchaser duty is 8% and surcharge land tax is 2%, in addition to ordinary rates.

Where an interest in a property is acquired directly or indirectly by or held through a discretionary trust, the trustee of the trust may be liable for foreign surcharges if any one of the potential beneficiaries is a foreign person.

Each beneficiary in a discretionary trust is deemed to have the maximum percentage interest in the income or property over which the trustee may exercise a discretion to distribute.

New Measures

There are several new changes which may influence your prior discretionary trusts and the future planning.

Firstly, the new measures provide that a trustee of a discretionary trust holding NSW residential property is deemed a foreign person unless the trust deed expressly excludes foreign persons as beneficiaries and irrevocably prevents foreign persons from becoming beneficiaries.

It is important to keep in mind that a discretionary trust that does not exclude foreign persons as beneficiaries will be liable to foreign person surcharge purchaser duty and surcharge land tax even if the trust has never distributed to a foreign person and intends to never distribute to a foreign person. So, it is essential for trustees to clarify relevant terms in the discretionary trust.

Secondly, the new measures also contain transitional provisions that have retrospective effect to the time the surcharges were introduced in 2016/17.

Gradually, if a trustee incurred the surcharge purchaser duty and surcharge land tax, they could claim a refund of the surcharge. However, for this to apply, the trust deed must be varied before 31 December 2020.

From our perspective, it is necessary to check your previous discretionary trusts because Revenue NSW may reassess relevant discretionary trusts for previous transactions or years to include surcharge purchaser duty or surcharge land tax if they find that the deed for the relevant trust has not been amended by 31 December 2020. If you are planning foreign surcharges for trusts in the future, it is better to read the new measures.

Potential Beneficiary

We have known, it is now essential for trust deeds to include provisions that exclude foreign persons as beneficiaries as well as provisions that irrevocably prevent foreign persons from becoming potential beneficiaries.

A person is a ‘potential beneficiary’ of a discretionary trust if the exercise or failure to exercise a discretion under the terms of the trust can result in any property of the trust being distributed to or applied for the benefit of the person.

Thus, to avoid being a foreign trustee, the potential beneficiary must be clarified. The discretionary trust must meet both of the following requirements:

  1. no potential beneficiary of the trust is a foreign person (the “no foreign beneficiary requirement”); and
  2. the terms of the trust must not be capable of amendment in a manner that would result in a foreign person being a potential beneficiary (the “no amendment requirement”)

Considering the new changes, we are suggesting clients to reassess their discretionary trust deeds where the trust holds NSW residential property and, if necessary, seek advice about varying the terms to comply with the requirements as soon as possible.

If you are interested in knowing more about foreign surcharges for trusts which may impact your future planning, careful consideration should also be made because the duty and land tax surcharge provisions operate differently in different jurisdictions.

If you want more suggestions and seek for assistance about trusts, call BOA & Co. accountants on 02 9904 7886 and our Trust Specialist will be pleased to assist you.

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Advantages and Disadvantages of a Discretionary Trust

If you are considering starting your business through a discretionary trust, it is important to understand how the discretionary trust will impact your business running and understand this structure is appropriate for meeting your purposes. In this article, we’ll explain the advantages and disadvantages of a discretionary trust.

What Is a Discretionary Trust?

Discretionary trusts are often called “family trusts” because they are usually connected with tax planning and asset protection of family members. In a discretionary trust (or family trust) the beneficiaries do not have a fixed entitlement or interest in the trust funds. The appeal of a discretionary trust is that the trustee has better control and flexibility on the disposition of assets and income because the nature of a beneficiary’s interest is that they only have a right to be considered by the trustee in the exercise of his or her discretion. This offers a great deal of flexibility, but might seem too nebulous for some stakeholders.

So, this business structure may work well for one business, but may not be the best option for another business. That’s why it is essential to balance the advantages and disadvantages of a discretionary trust.

Advantages of Discretionary Trusts

There are several benefits of discretionary trusts when you determine to operate your business through a discretionary trust. It may be more suitable to achieve some business objectives.

1. Flexible and Easy Distribution of Trust Income and Capital

Discretionary trusts provide ways for the trustee who has better control and flexibility on the disposition of assets and income. The trustee could use their discretion to change the allocation of funds to beneficiaries without having to make any major changes.

2. Asset Protection

A Trustee of a discretionary trust holds the property beneficially for the beneficiaries. Property held by a person as trustee cannot be taken by a creditor in bankruptcy, unless the debt relating to the creditor was a trust debt. Similarly, property held by a company, as trustee for a trust, cannot be taken by creditors in a liquidation of that company unless the debt is a debt of the trust.  Any properties held in trust can only be attacked by creditors of that trust.

3. Tax Efficiency

Discretionary trusts allow for the accumulation of assets for beneficiaries.

Then, the trustee can distribute income which is regard to tax-specific individual circumstances. Such ‘income splitting’ can minimise overall family tax obligations if the trustee chooses to distribute the trust income to the beneficiaries that have an unused tax-free threshold or a lower marginal tax rate. For example, trust income may be paid to a wife who is on a lower tax rate or to a private company associated with the spouse. The way a trustee distributes income can be changed from year to year to reflect marginal rates for that year.

4. Discount on Capital Gains

If you select your company as a discretionary trust, the trust entitled to a discount on capital gains made on the disposal of assets held by the trust for longer than 12 months. Other tax benefits include availability of the 50% CGT concession where capital gains are distributed to natural person beneficiaries; potential for application of the CGT small business concessions; and capacity for loans to be made to beneficiaries tax-effectively and with flexibility.

Disadvantages of Discretionary Trusts

Unfortunately, there are also some disadvantages when you choose the discretionary trust.

1. Family Trust Distribution Tax

This Family trust distribution tax applies when a distribution is made outside of the “family group.”And a family trust does pay tax is if the income isn’t distributed to its beneficiaries. In this case, the trust gets taxed at the highest marginal tax rate. So, it’s highly important for trustees to make the election and choose the appropriate “test individual” for the family group, and the “family group” is designated by making the election.

2. Losses cannot be distributed

The trust structure cannot distribute capital or revenue losses to its beneficiaries. Hence, when a trust incurs a loss, beneficiaries are not able to offset that loss against any other assessable income such as salary, interest, dividends etc.

3. Beneficiaries Lack Legal Interest in Trust Property

Since the trustee or trustees can use their discretion to change allocations, beneficiaries don’t have certain legal interests in the trust property. Beneficiaries can’t rely on receiving their “share” of the assets because allocations could be changed on a whim.

Although there are some disadvantages of discretionary trusts, this type of trust is still a common business structure in Australia because it maintains a high degree of flexibility and protection for beneficiaries.

Although there are some disadvantages of discretionary trusts, this type of trust is still a common business structure in Australia because it maintains a high degree of flexibility and protection for beneficiaries.

If you want more suggestions and seek for assistance about discretionary trusts, call BOA & Co. accountants in Chatswoodon 02 9904 7886 and our Trust Specialist will be pleased to assist you.

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Make Trusts Part of Your Future Planning

Clients often ask, “Why do I need a trust?” This question comes up when people want to make lifetime gifts to their children in the future, and even more frequently when it comes to the potential tax consequences which can arise where they are misused.

A trust can provide some protection from creditors and can accommodate a relationship between employers and employees. In family matters, the flexibility, control, and limited liability aspects relevant with potential tax savings, make trusts very popular.

What Is a Trust?

A trust is a legal concept that can look complex, but when explained, are easier to understand. A trust is a legal obligation or a relationship that is recognized by the courts which exists where one party gives a second party (the trustee) the ability to hold asset or property for a third party (the beneficiary). The trustee can be an individual, group of individuals or a company.

There can be more than one trustee and there can be more than one beneficiary. Where there is only one beneficiary the trustee and beneficiary must be different if the trust is to be valid.

Common Types of Trusts

Although the basic structure of different trust types is pretty much the same, there are several different types of trusts with different aims and characteristics. Generally, there are six common types of trusts:

1. Unit Trusts

Unit trusts are usually fixed trusts where the beneficiaries and their respective interests are identified by their holding “units” much in the same way as shares are issued to shareholders of a company. The beneficiaries are usually called unit holders.

For example, it is common for property that the trustee owns the property of the trust and distributes each year, income of the trust, to various unit holders with a common purpose. This common purpose includes minimizing the total income tax, capital gain tax and asset protection. Also, investment trusts (e.g., managed funds) and joint ventures can be structured as unit trusts.

Furthermore, a fixed trust is eligible for the land tax threshold. Revenue NSW’s definition of a Fixed Trust states that it is a trust where the beneficiaries (or Unit Holders) are considered to be owners of the land at the taxing date of midnight on 31 December prior to the tax year. This type of Trust applies only to NSW.

2. Discretionary Trusts

These are often called “family trusts” because they are usually connected with tax planning and asset protection of family members. In a discretionary trust (or family trust) the beneficiaries do not have a fixed entitlement or interest in the trust funds. The appeal of a discretionary trust is that the trustee has better control and flexibility on the disposition of assets and income because the nature of a beneficiary’s interest is that they only have a right to be considered by the trustee in the exercise of his or her discretion.

Also, a Family Trust Election (FTE) is a choice by the trustee of the trust to specify a particular individual around whom the family group is formed. Why should some clients consider making FTE? A trust is a family trust at any time when a family trust election (FTE) for the trust is in force. Generally, an FTE is in force from the beginning of the income year specified in the FTE (the election commencement time). The FTE must also specify an individual who forms the point of reference for defining the family group that is considered in relation to the election.

There are some circumstances a trustee should consider making FTE: the trust receives franked dividends, the trust has losses, the trust owns shares in a company with losses, to bring the trust within the family group of another trust, or where the trust is involved in a restructure under the new small business restructure roll over relief.

3. Holding Trusts (Bare Trusts)

Where there is only one trustee, one legally competent beneficiary and no specified obligations, the beneficiary has complete control of the trustee (or “nominee”). Put simply, as for property, a bare trust arises where the trustee simply holds property of and on behalf of the beneficiary. The trustee has no discretion and no active duties other than to transfer the property to the beneficiary when required.

When considering the use of a Bare Trust by a SMSF to borrow money and purchase assets, please keep in mind an SMSF can only borrow money to purchase an asset using a limited recourse borrowing arrangement and in such borrowing arrangements the SMSF Trustee receives the beneficial interest in the purchased asset but the legal ownership of the asset is held on trust by another holding trust or what is sometimes called a Bare Trust.

4. Hybrid Trusts

A hybrid trust, as the name suggests, is generally a hybrid of a discretionary and a unit trust. This type of structure is attractive because it contains the advantages of both and is an extremely useful structure. You can split the trust up into units while also having beneficiaries to distribute to at your discretion. The trustee of a hybrid trust has the power to allocate income and capital among the beneficiaries in a standard discretionary trust.

There are several advantages when considering hybrid trust, for example, asset protection, fixed interest, flexibility of distributions, capital gains tax, tax-free distributions, entry of new parties, employment benefits and low-cost. Make it with more details, as for capital gains tax, Hybrid Trust can help in redeeming units without triggering CGT, and for CGT to only be assessable in the hands of beneficiaries (although this depends on how the trust deed is drafted and detailed advice should be sought). Also, it is generally easier for tax-free (or low tax) distributions to be made through a Hybrid Trust as compared to a unit trust or a company.

5. Testamentary Trusts

A testamentary trust, often called a will trust, is an agreement made for the benefit of a beneficiary and only effective once the trustor has died. The assets included in a testamentary trust are overseen by the nominated trustee, whose job is to distribute the trust’s assets to beneficiaries complied with the trustor’s wishes.

6. Self-managed Superannuation (SMSF)

All superannuation funds in Australia operate as trusts. The deed sets up the basis of calculating each member’s entitlement, while the trustee will normally keep discretion regarding to such matters as the fund’s investments and the selection of a death benefit beneficiary.

There are also other different types of trusts which can satisfy additional specific needs. For example, instalment warrant trusts (superannuation), charitable trusts.

If you want more suggestions and seek for assistance about trusts, call BOA & Co. accountants in Chatswood  on 02 9904 7886 and our Trust Specialist will be pleased to assist you.

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