Foreign purchaser additional duty provisions were introduced with effect from 1 July 2015.
Controlling interest in a corporation
Where an Australian corporation is used to purchase property, the provisions use the concept of a controlling interest to determine if the corporation is nevertheless a foreign corporation. Essentially, the concept provides that if a foreign natural person, another foreign corporation or the trustee of a foreign trust controls more than 50% of the voting power of the corporation, or has an interest in more than 50% of the issued shares in the corporation, then the corporation is a foreign corporation.
When considering if a person has breached the controlling interest threshold, aggregation applies. This means the threshold is determined either alone or together with any associated person of the person, or with any other foreign natural person, foreign corporation or trustee of a foreign trust.
Substantial interest in a trust
Where the property is acquired by the trustee of a trust, the provisions use the concept of a substantial interest to determine if the trust is a foreign trust. Similar to the concept of controlling interest for corporations, the concept of substantial interest essentially provides that if a foreign natural person, a foreign corporation or the trustee of a foreign trust has a beneficial interest of more than 50% of the capital of the estate of the trust then the trust is a foreign trust.
Aggregation applies for determining substantial interest in the same way as for a controlling interest in a corporation. Accordingly, when considering if a person has breached the substantial interest threshold, the threshold is determined either alone or together with any associated person, or with any other foreign natural person, foreign corporation or trustee of a foreign trust.
Special rules for a substantial interest in a discretionary trust
Special rules apply for determining the substantial interest threshold for discretionary trusts given that typically under a discretionary trust there can be times when no person has a beneficial interest. In this context, a discretionary trust is a trust where 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. The special rules deem any such person to have a beneficial interest in the maximum percentage of the capital of the trust estate that the trustee is empowered to distribute to that person (as per section 3B(2) of the Duties Act 2000).
In 2015, the effect of the special rules was that many discretionary trusts – which typically contain very wide general beneficiary clauses with no restrictions on how much can be distributed to any particular beneficiary – were foreign trusts for the purpose of the provisions.
The State Revenue Office’s practical approach for family discretionary trusts
In response to initial stakeholder representations after the provisions were introduced, the State Revenue Office adopted a practical approach in respect of family discretionary trusts so that trusts that have foreign beneficiaries who have not and who are, based on available information, unlikely in the future to receive any distributions, will not be considered a foreign trust.
From 1 March 2020, the State Revenue Office will no longer apply the practical approach
The provisions have been in place since 1 July 2015 and the special rules for discretionary trusts are better understood by all.
Accordingly, from 1 March 2020, the State Revenue Office will no longer apply the practical approach. Instead, the special rules for discretionary trusts will be applied to all discretionary trusts (including family discretionary trusts), so that if the discretionary trust has any potential foreign beneficiary, the trust will generally be a foreign trust for the purpose of the provisions.
The State Revenue Office notes that this change may cause the continued use of some discretionary trusts that do not include an express beneficiary exclusion clause for foreign natural persons, foreign corporations or trustees of foreign trusts to be a foreign trust. However, this outcome is considered to be the result of broad beneficiary clauses in the trust deeds which is within the control of the purchaser.
Transitional arrangements
The State Revenue Office will continue to apply the practical approach in relation to dutiable transactions where contracts of sale were entered into (or nominations were made in a sub-sale context) before 1 March 2020.
From 1 March 2020, persons considering purchasing residential property can ensure that they are not liable for the foreign purchaser additional duty by using a different purchase vehicle (that is not a foreign purchaser) or by amending the trust deed so that there are appropriate restrictions on foreign persons as potential beneficiaries (e.g. include an express exclusion clause for foreigners). Importantly, any amendment will have to be done prior to the dutiable transaction completing (i.e. prior to settlement).
