New rules change the way trusts are taxed

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A bill has been introduced into parliament that is expected to lead to a number of changes to the tax world. Among other things, the State Revenue Legislation Further Amendment Bill 2019, which is expected to take effect shortly, will change the way trusts (including testamentary trusts) are taxed.

Does your trust own residential land? You have until December 31 to change the terms of your trust to avoid surcharge duty.

Since June 2016 surcharge duties have been imposed on certain foreign people (including foreign trusts) who own residential land. Discretionary trusts (commonly known as family trusts) which don’t expressly and irrevocably exclude foreigners as beneficiaries are considered to be foreign trusts for this purpose even if they haven’t actually distributed to foreign people. Revenue NSW has been permitting trustees to amend the terms of trust deeds to exclude foreign beneficiaries to avoid paying the surcharge. Under the bill new provisions are being introduced that specifically provide that the trustees have until December 31 to change their trust deeds, otherwise the trust will be deemed a foreign trust and the surcharge duties will apply.

Does your will contain a testamentary trust? You may need to change its terms.

New provisions are also being introduced which specifically provide that discretionary trusts created under the terms of a will are to be liable for surcharge duties if the terms of the trust don’t expressly and irrevocably exclude foreigners as beneficiaries. A two-year grace period will apply before the legislation takes effect.

Even where the terms of the trust allow for variation to be made by your executor, if it isn’t expected that a foreign person will need to benefit from the trust it would be wise to add the exclusion now.

This is because:

1. The power to vary may not extend to varying the beneficiary class; and 2. A variation can constitute a delegation of testamentary power and, if it does, the variation won’t be effective.

Without specific testing of whether the amendment will be effective, it is possible the terms of the trust may not be capable of variation after death.

You should seek advice regarding these changes and consider whether the terms of your will should be amended in light of this new law.

Lana Black is a solicitor – Commercial & Estate Planning at Osborn Law

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