Trustees of discretionary trusts could be contravening the Foreign Investment Review Board’s (FIRB) rules when purchasing Australian property.
Many are failing to realise how wide the net was cast when the FIRB regulations were updated in late 2015. The rules not only require Foreign Persons to seek permission to acquire Australian Residential property – payment of application fees is also required. The potential breadth of these rules is staggering, with many trustees not aware they can apply to them.
FIRB’s guidance notes explain that the definition of a “Foreign Person“ includes the trustee of a discretionary trust that has any potential beneficiary who is a non-resident. Many family trust deeds have a broad definition of eligible beneficiaries including long-lost siblings, uncles, aunts, nephews or even kids who may be residing offshore as part of their professional or lifestyle pursuits.
By simply having these extended family members included in a class of beneficiaries, even if they are extremely unlikely to benefit from a distribution, could mean that the Trust is subject to the obligations imposed by the Foreign Acquisitions and Takeovers Act 1975 (FATA). This would include the requirement to seek permission to purchase any residential land in Australia and potential liability for the new Vacancy Tax.
For discretionary trusts, any beneficiary is deemed to have an entitlement of 100% if the trustee could exercise its discretion in that beneficiary's favour. So even a discretionary trust that has only ever distributed to Australian citizens could still be a 'foreign person' if a member of one of the classes of beneficiaries is a foreign person. The issue then arises when the trustee holds an interest of 20% or more in Australian residential property – regardless of the value.
There may be some relief available if at the time of acquisition the non-resident beneficiary is an Australian or New Zealand citizen, or holds an Australian permanent visa.
Missing the issue could prove expensive with FIRB Application fees for the acquisition of residential property starting at $5,500 per property under $1million, $11,100 between $1 to 2million in value and with an additional fee per $1million of value thereafter. FIRB fees are updated in line with CPI in July each year.
If an acquisition is made without the required approvals, both civil and criminal penalties can apply with hefty fines of up to $787,500 or 10 per cent of the property value. The ATO has responsibility for policing the FIRB regulations for residential property and collecting the various fees and charges.
The issue has now been amplified with the 2017 Budget Announcements on the “Vacancy Tax” which were included in the Housing Affordability measures. Properties acquired on or after 9th May, 2017 by “foreign persons”, (which could inadvertently include your family trust as the definition refers back to the FIRB rules), will be subject to an annual vacancy charge where the property is not rented out or occupied for more than six months per year.
As such, you should review the position of any trusts holding property. It may be appropriate to amend the relevant trust deed to prevent any distributions to any person who is not ordinarily resident in Australia. This may also be something to consider when establishing new discretionary trusts or if there is potential for further property acquisitions.
FIRB have advised that they will not seek to impose penalties for trusts that may have foreign beneficiaries but had purchased the property prior to the new rules being implemented. However those that have transacted in residential property since the introduction of the regulations may need to consider if a voluntary disclosure and retrospective application is required.
Contact your advisors to discuss if there are any doubts about the list of potential beneficiaries in your trust or their residency status.