You lay back in your hammock and take in the glittering ocean and warm, white sand. You are on a husband and kid-free holiday with your sister and have seven days of relaxation ahead of you. You are about to take a sip of your mojito, when your mobile rings - it’s work.
'Don’t answer it!' your sister scolds. 'It must be urgent' you reply as you take the call. It’s one of your conveyancers, Sharon: 'I’m so sorry about calling you on your holiday,' she says anxiously, 'but we have a pretty big problem regarding that conveyance you are doing for your brother, and we just don’t know how to handle it... '
'Well,' you say, 'I really didn’t want to be bothered on my holiday, but if you must, send me an email with the details and I’ll have a look and call you back
Your sister looks at you incredulously. 'Really?!' she says.
'It’s about Kel’s matter,' you reply 'I have to ...'
Your brother Kel has become quite the wheeler and dealer. He earnt most of his money playing professional cricket for Australia, but has now retired and, after making some very lucrative investments, is on a pretty good wicket. He recently decided to purchase a residential property in Sydney through his family trust. Kel and his wife, Kath, are the trustees and primary beneficiaries of the Trust. The deed gives Kel and Kath a discretion to distribute income and capital to a wide group of beneficiaries.
You had asked Kel why he was using a discretionary trust to buy the property as he would have to pay land tax and it wasn’t really a very secure form of ownership. He basically told you to butt out as he had things sorted with his accountant.
Before taking your holiday, you had asked Sharon to finalise and submit the documents to the Duties Office for stamping.
You read the email from Sharon which explains that, after she dealt with some queries from the Duties Office about the beneficiaries of the trust, the transfer was returned to her with a request for an extra 8% land transfer duty because, based on the information provided, the trust was regarded as a foreign trust. Oh for goodness sake, you think to yourself, how could it be a foreign trust? All of Kel’s family are Aussies, how ridiculous!
Rather than go back to Sharon, you decide to call the Duties Office directly and nip it in the bud so you can finish your mojito in peace and enjoy the rest of your holiday.
Your conversation with the Duties Office does not go well. Whilst you know the terms of Kel’s trust deed reasonably well, you failed to consider just how wide the class of beneficiaries is. The beneficiaries include, amongst others: (a) nieces and nephews of Kel and Kath; (b) the spouse and children of all the persons described in subclause (a).
Kath has a niece, Kim, that moved to Italy about a year ago. She was swept off her feet by an Italian man Bruno, married him and made her home in Italy. Bruno is considered a foreign person as defined in the Duties Act 1997. In accordance with the trust deed, Bruno is the spouse of Kim and is therefore a beneficiary who Kel and Kath can distribute to. Although they never have, and most likely never will, make a distribution of income or capital to Kim or Bruno, the trust is deemed to be a foreign trust for the purposes of the Act. Thus an extra 8% land transfer duty is payable.
You do a quick calculation – the property is worth $2.2m, you told Kel stamp duty would be about $106,000, so the Trust will have to come up with another
$176,000 before settlement.
You recall an email you received when the new rules came in about the importance of amending trust deeds to remove beneficiaries that are foreign persons, you didn’t even think about fixing Kel’s trust at the time.
'Oh bugger' you think as the problem starts looming bigger in your mind, 'I think he’ll have extra land tax too!'
You start to draft a reply to Sharon but stop yourself, knowing you really have to be the one who deals with this mess. You scull your mojito for some dutch courage and dial Kel’s number.
Take away points
1. A trustee of a landholding discretionary trust may be liable for foreign surcharges if any one of the potential beneficiaries is a foreign person, even if none of the beneficiaries who in fact receive or are likely to receive distributions are foreign persons.
2. Be mindful when dealing with landholding discretionary trusts with a wide class of beneficiaries and consider amending the deed where appropriate.
This article is published in this month’s edition of the Law Society Journal of NSW.