Clients falsely believe that Unit Trusts are immune to the foreigner surcharge stamp duty and land tax rules
They think,
“Since the Unit Trust is a fixed trust, the regulator can see that the unitholders are Australian. We are safe.”
Be careful. The rules for Unit Trusts are different to Family Trusts. The penalties are severe. If you get it wrong, you pay the surcharge on the entire value of the property, not just the foreign portion.
Why Legal Consolidated Fixed Unit Trusts escape the foreign land tax and stamp duty surcharge
The most common way a Unit Trust gets caught by the foreigner surcharge is when the Unit Trust Deed is a hybrid trust.
If the Unit Trust Deed gives the Trustee any discretion to distribute income or capital (often called a Hybrid Trust), the State Revenue Offices treat it as a Discretionary Trust.
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he Risk: If treated as Discretionary, the Revenue Office assumes the trust is foreign unless the Trust Deed irrevocably excludes foreign beneficiaries.
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The Result: You are hit with the foreigner surcharge on the purchase of the property. And you pay the foreigner land tax surcharge every year.
At Legal Consolidated, we do not provide Hybrid Trusts. Our Unit Trust Deed is fixed.
A Legal Consolidated Unit Trust Deed is strictly ‘fixed’. The unitholders have a fixed entitlement to capital and income. This provides certainty to the State Revenue Offices. It helps ensure that your Australian unitholders are treated as Australians.
Does a Family Trust unitholder make my Unit Trust foreign?
Unlike a Family Trust (which is guilty until proven innocent), a Fixed Unit Trust is judged by its unitholders. The State Revenue Office ‘looks through’ the Unit Trust to see who owns the units.
Often, the unitholders are Family Trusts. This is where the problem starts.
Example: The Smith Unit Trust buys a residential property in Sydney. The unitholder is the Smith Family Trust. Mr and Mrs Smith (who are Australian) are the default beneficiaries and appointors of the Smith Family Trust.
The State Revenue Office looks at the Smith Family Trust. Because the deed does not exclude foreigners, the Smith Family Trust is deemed foreign.
Therefore, the unitholder is foreign. Consequently, the Smith Unit Trust is deemed foreign.
Result: You pay the foreigner surcharge, stamp duty, and land tax.
To fix this, the unitholder (the Family Trust) must usually update its deed to exclude foreign persons. You can build that Deed of Variation on our website.
It is not the fixed Unit Trust deed you need to amend. You look to the entities that hold the Units in the fixed Unit Trust.
Unit Trust foreign surcharge rules for NSW, Victoria, QLD and WA Unit Trusts
The Unit Trust “look-through” test varies significantly between the states. You must know the rules for the state where your land is located.
New South Wales Unit Trust foreign surcharge
In New South Wales, your Unit Trust is often deemed foreign if a single foreign person holds 20 per cent or more of the units.
Victoria Unit Trust absentee owner surcharge
In Victoria, the rules are even tighter for land tax. If you have even one foreign unitholder, the trust may be classified as an “Absentee Trust”.
If classified as an Absentee Trust, the surcharge applies.
Queensland and Western Australia foreign purchaser duty
These states are generally more lenient. Usually, the Unit Trust is only foreign if foreign persons hold at least 50 per cent of the trust interests.
However, be careful when changing a Trustee in Western Australia and Queensland. If the trust is foreign, a simple change of trustee can trigger Foreign Transfer Duty.
How a Unit Trust escapes the Unit Trust foreigner surcharge
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Use a Fixed Unit Trust: Do not use a Hybrid Trust. Build a Legal Consolidated Fixed Unit Trust Deed. It is designed to satisfy the “fixed entitlement” rules, so the Revenue Office does not deem it to be discretionary.
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Check the Unitholders: The State Revenue Office looks through the trust. If a Family Trust holds the units, that Family Trust is likely deemed foreign.
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Fix the Unitholder: If the unitholder is a Family Trust, you may need to update that Family Trust deed to exclude foreign persons.
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Monitor Percentages: Be aware of the residency status of all unitholders. In New South Wales, you must keep foreign ownership below 20 per cent.
Unit Trust |
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| Unit Trust Deed – pre-emptive rights, asset protection and free bank certificate | |
| Vesting Deed – to wind up your Unit Trust | |
| Company to be trustee of a Unit Trust – corporate trustee for asset protection | |
| Update the Trustees of the Unit Trust – remove and replace the trustee of your Unit Trust | |
| Change the Name of your Unit Trust – update the name of your Unit Trust | |
| Unitholders Agreement – the Unitholders’ set of rules that also protects them from litigation |