State Taxation Series: Issue #6 – Foreign Purchaser Additional Duty: Milestone Changes from 1 March 2020

The foreign purchaser additional duty (“FPAD”) provisions were introduced in Victoria with effect from 1 July 2015.

The additional duty provisions for foreign purchasers were incorporated in section 28A of the Duties Act 2000 (Vic) (“the Act”)

A foreign purchaser is either a foreign natural person, corporation or the trustee of a foreign trust.

A foreign trust means a trust in which a substantial interest (i.e. more than 50%) is held by either a foreign corporation, foreign natural person or person holding a substantial interest of another foreign trust.

The Act also states that should the trustee of the trust have a power or discretion as to the distribution of the capital of the trust estate to a person(s), that person is taken to have a beneficial interest in the maximum percentage of the capital of the trust (i.e. 100%).

On its website, the SRO states that it has previously taken a practical approach for family discretionary trusts:

In response to initial stakeholder representations after the provisions were introduced, the State Revenue Office adopted a practical approach in respect of family discretionary trusts: …so that trusts that have foreign beneficiaries who have not and who are, based on available information, unlikely in the future to receive any distributions, will not be considered a foreign trust.

However, the SRO has subtly announced recently that it will stop being practical in its approach, and will now adopt the strict statutory approach contained in the Act from 1 March 2020.

From 1 March 2020, all discretionary trusts that do not explicitly exclude foreign beneficiaries and intend to purchase property in Victoria may be liable to FPAD, which is currently at 8% of the dutiable value of a property.

This means that even if your family trust does not have any listed primary beneficiaries who fall under the definition of “foreign beneficiary” and never intends to distribute capital to foreign beneficiaries, it will be deemed by the SRO as a foreign trust!

The monetary implications of this are shown in the table below, indicating the difference in stamp duty applicable for a property purchase in Victoria worth $800,000:

Due to the significant monetary implications and the uncertainty as to how rigidly the SRO intends to apply this non-practical approach, please contact David Mazzeo or Thomas Abraham on (03) 9614 7707 of our firm to make all necessary amendments to your discretionary trust deeds and to ensure FPAD will not be applicable for your property purchase in Victoria.