Talking Point: Foreign investor rules could ensnare Tasmanian family trusts

LYNDAL KIMPTON: Surcharge aims are welcome but review of “foreign person” definition is vital

ISSUES OF TRUST: Almost all discretionary trusts these days will have a potential foreign beneficiary — how many of your siblings and children have partners who are not Australian?

THERE has been some discussion about the Tasmanian Government’s proposed land tax surcharge on foreign-owned land potentially inadvertently applying to Tasmanians due to the definition of a “foreign person”. This definition also applies to the foreign investor duty surcharge (FIDS).

Last year, the Government introduced a foreign investor duty surcharge (FIDS) to “ensure foreign investors pay a fair share of state taxation and do not artificially drive up prices by reducing the supply of housing and primary production land.”

With Tasmania’s housing supply issues attracting more and more attention, this move was widely welcomed and brought the state in line with other states and territories except the Northern Territory.

Chartered Accountants Australia and New Zealand’s Tasmanian Regional Council applauds legislation of this nature because it levels the property playing field and attracts additional foreign income that can be used for valuable state projects.

However, due to unintentional consequences, FIDS may have ended up applying to many bona fide Tasmanian residents who purchase property through a family discretionary trust.

A family discretionary trust is a widely used financial structure set up to protect and manage family assets for current and future generations and allows income and assets to be distributed to beneficiaries in the trust. Beneficiaries of family trusts typically include children, grandparents, parents, siblings, spouses, grandchildren or any de facto spouses of family members.

All states and territories have mechanisms to capture discretionary trusts when determining whether or not FIDS (or equivalent legislation) applies, however when a discretionary trust is captured differs between jurisdictions.

Under the Tasmanian system, a discretionary trust that has any potential foreign beneficiaries will be classified as a foreign trust and is therefore subject to FIDS. This is regardless of whether the foreign beneficiaries are actually likely to receive any distributions from the trust.

For example, John runs a farm in the Southern Midlands that has been in his family for generations. To keep his most important asset in the family, John set up a discretionary trust 30 years ago, which outlines his three daughters as beneficiaries. After studying business at university, John’s eldest daughter moved to Hong Kong and eventually married a local citizen.

John had the opportunity to purchase a neighbouring property, which he had been eyeing off for years. After John’s offer was accepted, he found out he was liable to pay FIDS on the purchase because his son-in-law was a “foreign person” and due to the way the trust was set up was able to receive trust disbursements. This is despite his son-in-law never receiving any income or capital from the trust and not being likely to do so in future. John was faced with either paying extra duty on the land or paying to amend his family trust structure.

At the moment, Tasmanian legislation places the onus on landholders to amend existing discretionary trust deeds to ensure they are not captured by FIDS. Such an amendment may result in the resettlement of the trust. To minimise compliance costs, it would be welcomed if the Tasmanian Office of State Revenue would clarify whether or not such an amendment would or would not constitute a resettlement.

In this year’s Budget, the Treasurer announced a review into the definition of “foreign persons”. This review is most welcome.

It will have a number of difficult issues to deal with. Virtually all discretionary trusts these days will have a potential foreign beneficiary — how many of your siblings and children have partners who are not Australian? How can you distinguish between foreign investors using discretionary trusts and Australian families becoming part of the global community?

In NSW, discretionary trusts are required to permanently exclude foreigners as beneficiaries. The NSW revenue authority has issued guidance with practical examples of when a deed needs amendment and has provided the Commissioner with the ability to exercise a discretion, allowing time to make the amendment without incurring land tax surcharges — is that the appropriate response?

Victoria has a mechanism whereby a trust with foreign persons who are unlikely to receive benefits can ask for the Commissioner to exercise a discretion to exempt the discretionary trust from the surcharge. It will be interesting to understand the consequences of a foreign person receiving a distribution when a trust has obtained such a discretion and whether or not such discretions come with obligations such as reporting to the Office of State Revenue. Could a pattern of distribution test similar to that used for trust losses be used in this situation? What does unlikely mean? Does it mean they receive no distributions or only a minor proportion? What is a minor proportion?

Each state has taken a different approach to these questions, taking into account the amount of foreign investment, impact on state revenue and state-based trust legislation. Chartered Accountants Australia and New Zealand has consistently advocated for harmonisation of laws. Obtaining alignment in how discretionary trusts are treated for determining whether a foreign investor surcharge is applicable is strongly encouraged. We urge the Tasmanian Government to consider how its legislation fits with the other states and its impact on revenue and expenses. I look forward to participating in these discussions.

Lyndal Kimpton FCA is chair of Chartered Accountants Australia and New Zealand’s Tasmanian Regional Council.