Surcharge Land Tax on residential land owned by discretionary trusts

By Boris Kresic
Taxation Director
14 12 2020
  • Taxation
  • Discretionary Trusts

Under legislative changes, Discretionary Trusts that own residential land in NSW and which do not specifically exclude foreign persons (as defined) as beneficiaries, will be subject to surcharge Land Tax.

Such trusts have until 31 December 2020 to amend their Trust Deed. Therefore, where a Discretionary Trust is the owner of residential land in NSW, Trust Deeds should be reviewed as a matter of priority and relevant amendments made to the Deed.

Background to land tax surcharge and Discretionary Trusts

Foreign persons owning residential land in NSW, have been subject to a surcharge of 0.75% of the aggregated taxable value of the land for the 2017 Land Tax year and 2% of the aggregated taxable land value from the 2018 Land Tax year onwards.

Since 2017, there has been some uncertainty around the application of the surcharge to residential land owned by Discretionary Trusts where the Trust Deed does not specifically exclude foreign persons from being a beneficiary under the Trust.

Historically, the beneficiary clauses of most Discretionary Trusts have been drafted very widely and could potentially include a beneficiary who is a foreign person, even though a distribution to a foreign beneficiary has never been made or is never intended to be made.

Recent changes

Following the passing of legislation in June 2020,  Revenue NSW has issued a practice note, summarising the NSW Commissioner’s views on how the surcharge will be applied in situations where residential land is owned in NSW by a Discretionary Trust and the Trust Deed does not exclude foreign persons from being beneficiaries of the Trust.

To ensure that a Discretionary Trust is not subject to the NSW Land Tax surcharge on residential land owned by the Trust, the Trust Deed must include 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").
What needs to be done and when?

Discretionary Trusts which currently own residential land In NSW and do not have the requirements detailed above included in the Trust Deed, have until 31 December 2020 to make Trust Deed amendments or the surcharge Land Tax will be applied.  The amended Trust Deed should then be submitted to Revenue NSW online, by 31 December 2020. 

As the surcharge Land Tax has applied since the 2017 Land Tax year, Discretionary Trusts which do not make the relevant amendments by 31 December 2020 could be subject to the surcharge Land Tax for a number of years. By way of example, a Discretionary Trust which has a foreign person as a potential beneficiary and which has held residential land with a value of $1 million since the 2017 Land Tax year, would be subject to surcharge Land Tax of $67,500 for the four Land Tax years since 2017.

We therefore recommend that all Discretionary Trusts which hold residential land in NSW have their Trust Deeds reviewed as a matter of priority to ensure the surcharge Land Tax is not inadvertently triggered.