You are relaxing by an open fire nursing a mug of warm mulled wine when your phone starts ringing.  You look down and see it is work.  Whilst you had asked not to be disturbed on your skiing holiday, after spending most of the day splayed out on the snow in the star fish position – unsuccessfully trying to learn how to ski – it is a welcome distraction.  You take the call – it is your personal assistant, Lian.

Lian tells you that your longstanding client, Daryl, has called in quite a flap about some advice he received from an estate planning lawyer, Amy, that you had referred him to a couple of months ago.

You work as a sole practitioner mainly in the area of property law, though also prepare straightforward estate planning documents.  Daryl and his wife Sal have quite a complex structure, including numerous landholding family trusts, so you referred them on to Amy, as you used to work with her in another firm and she was an excellent lawyer.  You kept in touch with Amy and knew she had also started to specialise in trusts, taxes and duties.  You were certain Daryl and Sal were going to be in good hands.

The last time you acted for Daryl and Sal was about a year ago when they purchased a residential investment property in the name of their family trust, Castle Properties Trust.

At the time you advised Daryl and Sal that if they owned the property through their family trust, they would not be able to access the advantage of the tax-free threshold for land tax.  However he told you the firm opinion of his accountant was that the benefits from being able to split tax far outweighed this cost. Accepting this advice, you proceeded with the purchase by the Castle Properties Trust.

You ask Lian to email you a copy of Amy’s advice to have a look at before you call Daryl.

A few minutes later the email arrives.  You fetch another mug of mulled wine, sit back and start to read.  You finish the letter, your stomach churns and suddenly the thought of lying on the hard, cold snow while 4 years old glide smugly past you doesn’t seem like such a bad place to be after all……

The first sting 

Amy has reviewed the terms of the Castle Properties Trust and points out that the trust vested 2 months ago.

The default beneficiaries are ‘children of any of the first group beneficiaries’. The first group beneficiaries are Daryl and Sal.  They have 3 adult children, Tracey, Steve and Wayne so the property is now held by the trustee, Castle Investments Pty Ltd on trust for them.

You know Daryl and Sal are going to be extremely upset about this. They had a big falling out with Tracey about 5 years ago and Wayne, who unfortunately has a drug addiction that led to him holding up a service station, is in gaol.

The second sting

In addition to paying land tax, Amy has also advised that the Trust is liable to pay surcharge land tax as the deed does not prevent a foreign person from being a beneficiary of the trust.

According to CPN 004v2 issued by the Commissioner of State Revenue, a discretionary trust is considered to prevent a foreign person from being a beneficiary of the trust if (AND only if) both of the following requirements are satisfied:

(a) no potential beneficiary of the trust is a foreign person (the no foreign beneficiary requirement),

(b) the terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person (the no amendment requirement).

The surcharge rate is 2% and there is no tax-free threshold applicable to the surcharge.

The third sting 

You stamped in-house and must have overlooked, or failed to adequately consider, question 4.1 in the purchaser declaration because Amy’s advice confirms that the Trust (for the same reason it has to pay surcharge land tax) should have also paid surcharge duty when it purchased the property.  The surcharge rate is 8% and is on top of any transfer duty already paid.                                                        .

TAKE AWAY POINTS – snapshot 

  • Always check the trust’s vesting date
  • Where appropriate, ensure the trust deed, if purchasing a residential property, excludes foreign beneficiaries
  • Consider whether surcharge duty applies

Written by Amanda Tully & Jim Main