In addition to navigating Victoria’s complex stamp duty requirements involving the acquisition of real estate by foreign individuals, companies or trusts, a foreign purchaser needs to first consider the Foreign Investment Review Board (FIRB) acquisition rules.
‘Foreign persons’ generally need to apply for FIRB approval prior to purchasing residential property in Australia. Approval needs to be obtained before signing an unconditional contract for taking an interest in residential real estate. Australian citizens, New Zealand citizens and holders of Australian permanent residency visas are exempt from these requirements.
In most cases, it is clear as to whether a person is a resident of Australian or is a foreign purchaser. However, when it comes to discretionary trusts, it is very easy to be caught out, particularly where you may have previously purchased property in an existing trust.
Who is a foreign ‘person’?
A corporation is considered to be a foreign person if:
- an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest in the corporation; or
- two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest.
A trustee of a trust is considered to be a foreign person if:
- an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest in the trust; or
- two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest in the trust.
What is a substantial interest in a corporation or a trust?
A person holds a substantial interest in a corporation if the person holds, alone or with one or more associates, an interest of at least 20 per cent in the corporation (for example, voting or shares).
A person holds a substantial interest in a trust (including a unit trust) if the person, alone or with one or more associates, holds a beneficial interest in at least 20 per cent of the income or property of the trust.
When it comes to discretionary trusts (which are widely used by private family groups), the trustee of a discretionary trust where one or more foreign persons hold any beneficial interest in the trust is generally considered to be a foreign person in their capacity as trustee of the trust. This is because the trustee of a discretionary trust generally has the power to distribute income and/or capital of the trust to one or more beneficiaries, including non-resident beneficiaries. Unlike unitised trusts, a beneficiary does not own part of the trust, rather the assets are held for the contingent benefit of all beneficiaries until they are made presently entitled to income and/or capital of the trust.
The majority of discretionary trust deeds have very broad and far reaching beneficiary clauses. In other words, the general beneficiary clauses within the majority of discretionary trust deeds include beneficiaries by reference to their relationship with the specified or primary individuals named in the deed (for example, parents, grandparents, brothers, sisters, uncles, aunts of the named beneficiaries), as opposed to naming each and every beneficiary in the deed. This is intended to include beneficiaries who may not yet be in existence (for example, a future child or cousin) while also ensuring that particular beneficiaries are not inadvertently excluded.
While this provides great flexibility to Trustees for distribution purposes (although be mindful of the implications of making a Family Trust Election for taxation purposes), a foreign beneficiary who has a right to be considered by the trustee to receive income or capital of the trust is enough to deem a discretionary trust as a ‘foreign trust’ for FIRB purposes.
Before you acquire real property in a discretionary trust
It is imperative to ensure you obtain correct advice well before you proceed down the path of acquiring real estate as there are FIRB, stamp duty, land tax, income tax, capital gains tax and estate planning considerations. While it may be possible to acquire residential property in an existing discretionary trust, it is important to ensure that the trust deed is reviewed and/or amended prior to acquisition to ensure the trust is not a ‘foreign trust’ for FIRB or stamp duty purposes. Where a trust is being considered, it may be prudent to consider establishing a new trust with the relevant protective clauses already included for carving out non-resident beneficiaries from being eligible beneficiaries for this purpose, however, this should be considered in the context of your broader structure and overall situation.
Stamp duty should also be considered as there are some related rules around ‘foreign trusts’ for these purposes. Where a trust is not a ‘foreign person’ for FIRB purposes, the trust will generally not be a ‘foreign person’ for Victorian stamp duty purposes (although the same does not apply in reverse).
Please be aware that there are different FIRB requirements for commercial property and other financial investments to be acquired by ‘foreign persons’. In addition, effective from 10:30 am on Sunday 29 March 2020, the Federal Treasurer announced temporary measures that reduce any existing monetary thresholds to $0. In other words, where the value of certain transactions are under a particular threshold, FIRB approval may not be required. However, with all thresholds now reduced to nil, it is even more important to obtain advice to ensure the FIRB rules are not breached.