Discretionary trusts to be considered foreign persons for the purposes of Victorian residential land transfers from 1 March 2020

The Victorian State Revenue Office (SRO) announced this morning that it is removing its “practical approach” for not assessing discretionary trusts as foreign persons effective 1 March 2020.  This could mean an otherwise Australian trust is treated as a foreign person, with duty and surcharges giving rise to a headline 13.5% rate (duty of up to 5.5% plus 8% “foreign purchaser additional duty” – the Victorian version of foreign surcharge).

A discretionary trust is a foreign person in Victoria if the trustee has the power to make a capital distribution to a foreign person (e.g. most “charitable” beneficiary clauses make a discretionary trust a “foreign person”).  Up until now, many Victorian land purchasers have been relying on the “practical approach” to avoid the 8% surcharge.

This could affect any acquisition of residential land (or land to be converted to residential in the future) which settles on or after 1 March 2020 by a discretionary trust, or any entity controlled by a discretionary trust, unless the trust deed is amended. That is, it does not appear that agreements, options or nominations will be grandfathered.  This is something that NSW taxpayers have had to face recently in the context of both duty and land tax surcharges.  Unlike NSW, this change should not by itself impact exposure to Victorian land tax surcharge.

Due to a clawback of surcharge arising upon a later intention to convert land to residential in the future, purchasers should be mindful of this change even if the land is not residential at the time of acquisition.

As such, if you intend to purchase any land in Victoria in a discretionary trust (or entity controlled by a discretionary trust), the trust deed may need to be amended before the land is acquired.

Get in touch with your local Partner to find out how these changes may impact you.