Family Trust update to Exclude Foreign Persons

Family Trusts owning land suffer additional stamp duty and land tax. This is because states believe all Family Trusts have foreigners.

Build this Deed of Variation to exclude foreigners to stop the penalty taxes.

Foreign person surcharges are additional taxes levied on top of the usual stamp duty and land tax. These surcharges are extra costs you pay over and above the normal stamp duty and land tax.

Deed of Variation to exclude foreign persons
Family-trust-foreign-person-pay-surcharge-land-tax-and-stamp-duty-foreign-person

Build the Deed of Variation to update your discretionary trust. This deed prevents foreign beneficiaries from receiving trust income and capital, thus avoiding penalty taxes. Once signed, the changes are permanent and cannot be reversed.

Why exclude Foreign Persons from your Family Trust?

State governments impose tax surcharges when the Family Trust holds residential land in that state. Family Trusts have ‘foreign’ beneficiaries. This is because the class of beneficiaries is so widely defined in a modern Family Trust. Most Family Trusts have over 400,000 beneficiaries.

What is a ‘foreign person’?

What makes a person ‘foreign’? Each state answers that differently.

Generally, a human is a ‘foreign person’ if they are not:

    • an Australian citizen; or
    • the holder of a permanent Australian visa.

An entity (non-human) is a ‘foreign person’ if it (does not ordinarily reside in Australia):

    • is a foreign corporation (company); or
    • the trustee of a foreign trust.

While not a legal definition and has no force of law, NSW Revenue helpfully explains:

‘You are generally considered a foreign person, unless:

  • you are an Australian citizen, or
  • you have lived in Australia for 200 days or more in the 12 months prior to the taxing date of 31 December, and you are a permanent resident of Australia.’

Definitions of ‘Foreign Person’ in Australian Legislation

  • New South Wales:
    • “Foreign person” as defined by the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FAT Act), as modified by section 104J of the Duties Act 1997 (NSW). (Revenue Ruling G9 explains the definition.) Status as a ‘foreign person’ is determined at the time a liability for duty or land tax would arise.
    • ‘Foreign person’ or ‘foreign trustee’ as defined in the Duties Act 1997 (NSW).
    • ‘Foreign person’ as defined in the Land Tax Act 1956 (NSW).
  • Victoria:
    • ‘Foreign natural person’, ‘foreign corporation’, or ‘foreign trust’ as defined in the Duties Act 2000 (Vic).
    • ‘Absentee person’ as defined in the Land Tax Act 2005 (Vic).
  • Queensland:
    • ‘Foreign person’ as defined in the Duties Act 2001 (Qld).
    • An individual who is not an ‘Australian citizen’ or ‘permanent resident’, a ‘foreign company’ or the trustee of a ‘foreign trust’ as defined in the Land Tax Act 2010 (Qld).
  • South Australia:
    • ‘Foreign person’ as defined in the Stamp Duties Act 1923 (SA).
  • Western Australia:
    • ‘Foreign person’ as defined in the Duties Act 2008 (WA).
  • Tasmania:
    • ‘Foreign person’ as defined in the Duties Act 2001 (Tas).
  • Australian Capital Territory:
    • ‘Foreign person’ as defined in the Land Tax Act 2004 (ACT).
  • Northern Territory
    • The Northern Territory has no ‘foreigner’ penalty tax. It has no land tax at all. Well done NT.

Does the removal of foreigners cause a resettlement?

A ‘resettlement’ occurs when changes to the trust are so fundamental that it effectively becomes a new trust. As a result, the tax regulator considers this as a ‘transfer’ of all the trust’s assets to a new trust. Such a transfer incurs state stamp duty and triggers Commonwealth Capital Gains Tax.

When it comes to changing beneficiaries in a trust there is a risk of a resettlement. However, Legal Consolidated’s Deed of Variation to Exclude Foreigners is not seeking to remove beneficiaries. It seeks to stop the Trustee and the Family Trust from ever being able to distribute to a beneficiary. This is now and forever into the future.

1. My Family Trust is new, it has no assets in it

For Family Trusts with no assets, any resettlement typically has no taxation impact. This is because stamp duty on nothing is nothing, and capital gains on nothing are also nothing.

Therefore, it supports our argument that each time you want to buy real estate in a Family Trust, you should establish a new Family Trust.

2. My Family Trust has assets in it

If you already have assets in your Family Trust then it is even more important that you present the state tax regulator with the unsigned copy of the Deed to Remove Foreigners. This is for their approval. However, even then they may approve the Deed to exclude foreigners but not address their mind to the question of resettlement. Years later the same regulator may argue that the Deed of variation triggered a resettlement. Consider going back to the regulator a second time seeking a second ruling that there has been no resettlement.

Capital Gains Tax is a federal tax. It is not controlled by states. Therefore, consider applying for a private ruling from the Australian Tax Office to confirm that there is no resettlement for any Commonwealth taxes. Your accountant should do this for you. Your accountant is your friend. Regulators like state and federal tax revenue officers are not your friends.

Does ‘holding’ land include ‘buying’?

From the legislation, it appears that it does not matter how the trust gets, controls or owns the real estate. It includes purchases, transfers, agreements for sale, declarations of trust, surrender, options, (probably) put options, call options, put and call options and options to purchase.

However, such states may offer refunds/exemptions on new home developments by Australian developer companies that are foreign persons

There are no foreigners in my Family Trust. I am a proud third-generation Australian!

Family trust beneficiaries are not limited to persons expressly named as Trustees, or Appointors including you and your children. Beneficiaries extend to the members of any class of persons who can potentially benefit from the family trust.

The family trust’s trustee (acting under the direction of the Appointor) can distribute to literally 1,000s of people.

Beneficiaries include broad classes of individuals, organisations, and companies, not just named persons. This allows for changes in your circumstances. For example, after you sign the family trust you get married, have children, divorce, die and your children take over.

They could also be foreign persons for surcharge’s purchaser duty and land tax.

Out of the 1,000s of these beneficiaries, some may qualify as foreign persons. For instance, most Australian Family Trusts include all religions, universities, and charities as beneficiaries.

Therefore, every Family Trust has foreigners as beneficiaries.

For most states, a single foreign beneficiary is enough to make the entire discretionary trust foreign.

Why not make every Family Trust foreigner free?

Reducing your class of beneficiaries reduces the value of the Family Trust. A Family Trust should have the widest group of beneficiaries possible. Removing foreigners from the class of beneficiaries damages the Family Trust. It makes it less valuable.

Therefore, only fetter your Family Trust to remove foreigners when you have to. And then, do not use that ‘damaged’ Family Trust for any other purpose. Build a second family trust if you want to buy a second piece of land in the same state. And then build a third Family Trust if you want to buy land in another state.

Build a fourth family trust on Legal Consolidated’s website to hold cash and buy shares — and ensure this Family Trust remains undamaged. There is no need to restrict foreigners in this fourth-family trust, as it does not own real estate.

The Deed to remove foreigners is irrevocable. The damage is permanent. This certainty prevents the state revenue officers from inflicting the penalty stamp duty and land tax imposts. But if you or your family ever live outside of Australia then you stop being beneficiaries of your own trust. What if all your bloodline end up living overseas?

Politics is full of short-term fads. What if the political or economic climate shifts to favour acquisitions of Australian real property by foreigners? You (or when you are dead, your family) are then burdened with a disadvantageous trust.

Do ‘foreign persons’ in my Family Trust change from time to time?

Whether a person is a ‘foreign person’ changes over time. For example, in some states, a permanent resident may be in Australia for less than 200 days in a given 12-month period – becoming a ‘foreign person’ at that time.
Similarly, changes in interests (direct or indirect) in a corporate trustee or a fixed trust (like a Unit or Bare trust) alter the characterisation of the company or trustee.
This is why the Legal Consolidated Deed to Remove Foreigners is designed to exclude current foreigners and beneficiaries who become foreigners in the future.

My Family Trust does not own real estate

The state land tax and stamp duty foreign penalty taxes are for land owners. If your Family Trust does not own land then you do not need to damage it by enforcing on it a Deed of Variation of a Family Trust to remove a Beneficiary.

If you do, one day, decide to buy land then it is prudent to do so in a separate Family Trust. You should have a separate Family Trust for each piece of land you want to buy.

What is ‘residential’ land for the land tax and stamp duty surcharge?

Every state is different. Some include commercial property as well. For some states, residential land includes land on which there are one or more dwellings (or will be following construction), strata lot dwellings, blocks of flats and vacant land zoned residential, but not land used for primary production. In some states, hotels, boarding houses, student accommodation and aged care facilities are not considered residential land
Farms are exempt in NSW.

In NSW residential land includes:

    1. parcels of land on which one or more dwellings are situated;
    2. strata lots;
    3. utility lots; and
    4. parcels of vacant land that are zoned for residential purposes.

NSW land that is used for primary production is excluded from this additional surcharge. (See section 10AA.)

However, Tasmania imposes surcharges on farms

As you can see every state is different. For example, unlike NSW, Tasmania imposes a foreign surcharge duty on acquisitions of primary production land.

Victoria and Queenlands define land wider

Victoria and Queensland apply a wider definition of land. (However, in Victoria and Queensland, an exemption may be available for organisations that make a significant contribution to their state economy.)

Why does not Legal Consolidated state that ‘commercial’ property is exempt from the foreign surcharges?

We do not know what ‘residential’ and ‘commercial’ mean for the particular property that your Family Trust is about to buy.

You are right. ‘Commercial’ property is not meant to be caught in this web of conflicting laws. But what you think is ‘commercial’ may, at a stretch, end up being ‘residential’ as well. For instance, a property primarily used for business could have a residential component, such as apartments above shops. Additionally, some mixed-use properties, despite their commercial activities, might be classified as residential for tax purposes depending on state laws and the specific usage proportions.

Whereas, the Victorian Revenue Office states:

‘Residential property does not include commercial residential premises, a residential care facility, a supported residential service or a retirement village and which may lawfully be used in that way.’

In some states, such as Queensland, the land tax is on all properties (including both residential and commercial), however, for stamp duty, in Queensland, it is arguable only on residential property.

Legal Consolidated is not providing advice on this. You need to speak with your lawyer and accountant about your specific circumstances. We do not consider or look at the assets of your family trust. We do not look at or consider what your family trust may acquire by way of real estate. Seek your own legal and accounting advice on such matters.

Is there power to change my Family Trust to remove foreigners?

Your family trust deed must allow this Deed of Variation. Some family trust deeds contain a broad power of amendment and variation. However, those without or with limited variation powers need to be carefully reviewed. Legal Consolidated does not provide that service. If you are unsure seek accounting and legal advice.

Further, some states (e.g. NSW) recognise that some family trusts cannot be amended and will review the family trust on a case-by-case basis. (See, for example, NSW Commissioner’s Practice Note CPN 004 version 2.)

So it is doubly important that you always lodge a request for a private ruling in that particular state of your unsigned Deed of Variation to exclude beneficiaries.

If the family trust deed does not permit amendments, consult with your accountant and lawyer about seeking Supreme Court directions to vary the trust terms or applying to the Court under the Trustee Act for approval of a specific transaction if deemed expedient.

Does the Family Trust owe ‘foreigners’ money? Unpaid Present Entitlements (UPEs)

If a family trust currently owes Unpaid Present Entitlements (UPEs) to foreign beneficiaries, it must sign Deeds of Debt Forgiveness from these foreigners to forgive the UPEs. This ensures that all financial obligations are settled in the family trust’s balance sheet.

After this deed to remove foreigners is signed, those entitlements cannot be paid.

The order of signing the two separate Deeds are:

  • sign all the Deeds of Forgiveness to forgive the UPEs first; and
  • then sign the Deed of Variation to Exclude Foreigners.

Get State Revenue approval BEFORE signing Family Trust Variation to remove Foreigners

Before signing your Family Trust variation to exclude foreigners, you must obtain a private ruling from the relevant revenue office. This ruling confirms that your planned changes comply with the law.

Pre-Approval is Essential

Do not sign the Deed of Variation to remove foreigners without prior written approval from the Revenue Office. Begin by submitting an unsigned copy of the Family Trust Deed to remove Foreigners.

Steps to Signing the Deed of Variation

Sign the deed only after receiving written confirmation from State Revenue. This ensures your deed meets all legal requirements. Only then sign the Deed of Variation.

How do I apply for a Private Ruling with the local revenue office?

Private rulings for each state (other than the Northern Territory, as the NT does not have these taxes.)

At a later time, reverse the Family Trust variation to remove ‘foreigners’?Family Trust update to Exclude Foreign Persons

Upon the Variation of Trust deed being signed, it cannot be revoked. Or, so the legislation states. See for example Revenue NSW Ruling number G 010v2 which states:
The [NSW] Chief Commissioner will not be satisfied that there is no scheme or arrangement to avoid tax, where the amendment of the trust deed to remove the trustee’s power to make a distribution to a foreign person is not irrevocable.
But this is untested in the Courts. Unlike the Constitution of Australia, there is no double entrenchment. So you can change your Family Trust deed whenever you wish. The only limit is the Family Trust Deed itself.
However, if you ‘go back on your word’ then you will be in breach of state laws. All states require continuous disclosure. See, for example, section 14 of the Land Tax Act 2004 (ACT).
Because of the changing nature of each state’s rules some property owners have over 16 Deeds of Variation just trying to deal with the removal of foreigners from the same Family Trust. Each Deed of Variation (Exclude Foreign Beneficiaries) Deed varies the same Discretionary Trust. They all expressly and irrevocably exclude any “foreign person” from benefiting from the Family Trust.
Best practice is that you use a separate Family Trust Deed each time you buy property.

Does a Deed of Variation work retroactively?

Q: I just got a big stamp duty and land tax penalty bill. Is there a document I can sign that works in the past to retrospectively exclude foreigners? Can I retroactively exclude foreigners?

A: At least in NSW, you cannot. Once you incur these costs, you cannot undo them by changing the trust deed retrospectively. You must prepare and amend trust deeds according to state laws before any property transactions. Legal Consolidated holds the view that other states would follow NSW in this approach.

In the case Chloe Adolphi Pty Ltd as trustee for The Chloe Adolphi Family Trust v Chief Commissioner of State Revenue [2024] NSWCATAD 48, the Trust tried to amend its trust deed with a deed of rectification to exclude foreign beneficiaries retroactively. The Trust was established in April 2021 and acquired NSW property in May 2021 without excluding foreign persons.

A deed of rectification was signed in December 2022, but the court held that such a deed cannot retroactively alter the trust’s status to avoid past liabilities. Therefore, a deed of rectification signed today cannot operate in the past.

To escape foreign surcharges the Family Trust must be amended before the trust acquires residential property. See, for example, the Victorian State Revenues’ comment:

‘…persons considering purchasing residential property can ensure that they are not liable for the foreign purchaser additional duty by … amending the [Family Trust] trust deed so that there are appropriate restrictions on foreign persons as potential beneficiaries (e.g. include an express exclusion clause for foreigners). Importantly, any amendment will have to be done prior to the dutiable transaction completing (i.e. prior to settlement).’ [italic inserted]

Rather than sign this Deed, can I just stop distributing to foreigners?

Merely choosing not to distribute to foreign beneficiaries does not stop the surcharge. This approach is ineffective because the applicable law evaluates whether a trust faces these surcharges based on the inclusion of foreign persons in the trust deed, regardless of actual distributions.

The surcharges still apply even where the discretionary trust has no foreign controllers and has never distributed to a foreign
beneficiary

What if the ‘foreigner’ is also an Appointor, Trustee or Default Beneficiary?

If a ‘foreign person’ holds the role of appointor, trustee, or director/shareholder of a trust, they exercise significant control over the trust’s operations. You need to build two separate Deeds of Variation:

  1. Foreigner Deed of Variation Update; and then build
  2. Change Trustee, Appointors and exclude a Beneficiary

Simply using a deed of variation to remove foreigners does not resolve the issue of a ‘foreign person’ occupying these key positions.

Is the Deed of Variation to exclude foreigners the right document for my Family Trust?

Legal Consolidated Barristers and Solicitors does not provide legal advice. This Deed of Variation is designed to apply across all Australian states and the Australian Capital Territory (it does not apply to Northern Territory land as the NT does not impose these surcharges).

However, not all jurisdictions require the exclusion of all such persons, and some may not require this Deed of Variation at all. Requirements can be less stringent in some states.

Moreover, the type of land your Family Trust intends to acquire might not necessitate excluding foreigners.

Do not sign this legal document until you have consulted with your accountant and lawyer to confirm its suitability for your Family Trust.

Additionally, ensure the local revenue office in the state where your family trust will own land has approved the Deed through a written private ruling before signing.

Is the Family Trust Deed to remove foreigners set and forget?

Australia comprises eight distinct jurisdictions, each with its own legal system. Each jurisdiction’s laws are constantly in flux, adapting to new legal interpretations and international agreements.

NSW’s Tax Treaty Adjustments in 2023

In 2023, NSW changed its surcharge laws following a court decision that found the previous regulations violated international tax treaties, including agreements with Finland, Germany, India, Japan, New Zealand, Norway, South Africa, and Switzerland. These treaties incorporate non-discrimination clauses that prohibit imposing higher taxation on foreigners compared to Australians.

As a result of the court’s ruling, Revenue NSW was required to refund the excess tax collected from nationals of these treaty countries. However, some states decided against implementing similar refund measures. This variation in response highlights the differing approaches to international tax treaty obligations across Australian jurisdictions.

The Commonwealth government, at NSW’s request, asked for the laws to be changed. But the changes may not have worked.

This is just one of many war stories reported to us by the 4,600 accountants, lawyers, and financial planners who build legal documents on our website.

The eight payroll systems were aligned, so why not these family trust foreigner rules?

Many accounting houses, financial planning groups and law firms, including Legal Consolidated, lobbied for many years to have some consistency in the state payroll taxes.

By 2010 all eight jurisdictions had aligned their payroll tax provisions. This major step simplified the tax landscape for cross-border employers, with NSW, VIC, TAS, NT, and SA adopting nearly identical payroll tax legislation. This alignment has significantly eased the administrative burden across state lines.

Legal Consolidated advocates for foreign penalty taxes to be unified across Australia

As a national law firm, Legal Consolidated actively lobbies state governments (and the Commonwealth) to align various areas of tax law. This includes the land tax and stamp duty foreigner surcharges. This alignment would significantly benefit investors and trust structures operating across Australia.

To answer your question, Legal Consolidated believes that this area of law has not settled down. In our law firm’s view, there will be government changes and court interpretations for some years to come. Join our free weekly newsletter to stay abreast of the changes as they unfold.