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Changes to the application of foreign surcharges for trusts acquiring or holding NSW residential property

ABL Private, Property & Development, Taxation
Sydney Kirribilly

The State Revenue Legislation Further Amendment Act 2020, which came into effect in New South Wales on 24 June 2020, includes changes to “foreign person surcharges” for purchaser duty and land tax relevant to residential land in NSW owned by discretionary trusts.

Since June 2016, a surcharge rate on purchaser duty and land tax has applied to a “foreign person” in respect of residential land owned by discretionary trusts. 

Previously, taxpayers holding land in discretionary trusts were able to avoid the surcharge by not including foreign persons as beneficiaries.  

The NSW Amendment amends the Duties Act 1997, Land Tax Act 1956 and Land Tax Management Act 1956 to deem the trustee of a discretionary trust to be a foreign person unless the trust deed expressly provides that:

  • no foreign person can be a “potential beneficiary”, and
  • the terms of the trust cannot be amended to allow a foreign person to become a potential beneficiary in the future.

It is now essential for trust deeds to include provisions that exclude foreign persons as beneficiaries as well as provisions that irrevocably prevent foreign persons from becoming potential beneficiaries.

Specifically, a “potential beneficiary” is a person who could have any property distributed to them, or applied for their benefit, as the result of the trustee exercising or failing to exercise a discretion under the terms of the trust even if they are not currently a beneficiary. This includes any possible future beneficiaries, such as future spouses of current beneficiaries, even if the current beneficiary is a child.

This means that if any potential beneficiary could be a foreign person, whether now or in the future, then the trustee is considered a ‘foreign trustee’. While it may seem absurd to be thinking about, for example, future spouses of currently infant beneficiaries, this is the approach provided for in the legislation and confirmed in a draft Practice Note circulated by the Commissioner.

Trusts that do not comply will be subject to the foreign surcharge rate of duty of 8% on dutiable transactions involving residential land. Similarly, a surcharge land tax rate of 2% will apply to residential land. These surcharges are in addition to the ordinary rates.

Retrospective effect

Importantly, these changes have retrospective effect. The duty surcharge applies to dutiable transactions from 21 June 2016 and the land tax surcharge applies from the 2017 and subsequent land tax years.

There are transitional provisions which provide retrospective relief if the terms of the trust are amended before 31 December 2020 to irrevocably remove foreign persons as beneficiaries and prevent them from becoming beneficiaries.

Any relevant discretionary trust holding NSW residential property before 31 December 2020 should consider whether amendments are necessary.

If a trust has recently purchased residential land but it is not yet settled so that duty is not yet due on that transaction, the terms of the trust must be amended before the earlier of the due date for payment of duty and 31 December 2020. This transitional concession grants relief from the surcharge if a discretionary trust acquires residential property without having an appropriate relevant foreign persons exclusion at the time, but does subsequently include one.

Testamentary trusts

The NSW Amendments also apply to testamentary trusts (i.e. a trust set up in your will as part of your estate plan). However, some “Australian testamentary trusts” may be eligible for an exemption from the surcharges.

“Australian testamentary trusts” are discretionary trusts that arise from a will or codicil or the administration of an intestate estate where the deceased was not a foreign person immediately before his or her death.

The trustee of an Australian testamentary trust will not be a foreign trustee, even if the trust allows foreign beneficiaries to be potential beneficiaries, if:

  • the will or codicil was executed on or before 31 December 2020, or
  • the deceased died intestate before, or within 2 years after, 24 June 2020, or
  • an order of a court varying the application of the provisions of a will or codicil or of the rules governing the distribution of an intestate estate was made on or before 31 December 2020.

However, any new will with a testamentary trust that is executed after 31 December 2020 must include provisions that irrevocably prevent foreign persons from being potential beneficiaries.


On 1 March 2020, Victoria’s State Revenue Office (“SRO”) changed its approach to how it will assess whether a “family discretionary trust” has foreign beneficiaries. These changes are not as drastic as the NSW changes.

Since July 2015, a foreign purchaser duty surcharge has applied to “foreign persons” in respect of residential land. This includes discretionary trusts with any foreign persons who are beneficiaries or potential beneficiaries.

Previously, the SRO stated that it would not consider the trustee of a “family discretionary trust” to be a “foreign person” if the trustee proved no foreign beneficiaries had received and, based on available information, were unlikely to receive any distributions. This was referred to as the “practical approach”.

On 1 March 2020, the SRO changed its practice such that if a discretionary trust does have foreign beneficiaries or potential foreign beneficiaries to whom the trustee can distribute capital of the trust to, then the “practical approach” would no longer be applied, and the trustee of the trust would be considered a “foreign person”. This applies even if the foreign beneficiary is unlikely to receive any distributions.

This change in approach in Victoria broadly applies to transactions where the contract of sale was entered into from 1 March 2020.

Similar to the NSW Amendments you must include provisions that exclude foreign persons as beneficiaries for residential property acquired after 1 March 2020, but unlike the NSW Amendments you do not need to irrevocably prevent foreign persons from becoming potential beneficiaries and these changes do not otherwise have retrospective effect.

What should I do?

If your discretionary trust has acquired or held residential land in NSW any time since 2016, or is going to acquire residential land in NSW or Victoria, the trust deed should be reviewed to ensure compliance with the new rules.

Some deeds may have already been amended or set up to include a “foreign beneficiary removal clause”. However due to the expanded concepts and practices of when the trustee of a discretionary trust will be a foreign person, particularly in NSW, you should consider a review of the terms of the trust even if “foreign beneficiary removal clauses” have already been included. 

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