Be careful – Your family trust may be deemed to be a foreign investor!
The Foreign Investor Duty Surcharge (FIDS) was introduced in 2018 to impose additional duty on foreign purchasers of residential land and primary production land in Tasmania.
For property purchases subject to the FIDS, the top rate of duty (4.5%) is increased by a further 3% for residential property or 0.5% for primary production property.
But be aware of the unintended consequences of the FIDS. The trap is in the definition of who is a foreign purchaser and this is producing some unwelcome consequences.
A foreign person is deemed to include:
- any person who is not an Australian citizen, holder of a permanent resident visa or a special category visa NZ citizen;
- any company which is incorporated outside Australia or in which a foreign person, foreign corporation or foreign trust has at least 50% interest or control;
- any trust in which a foreign person, foreign corporation or foreign trust has at least 50% beneficial interest in the capital of the trust.
A family trust is a common vehicle for property investment. Even though you may have no named beneficiaries of your family trust who are foreign persons, the list of potential beneficiaries of most family trusts is broad enough to include distant relatives who may be foreign persons or other trusts or companies which may be foreign persons.
Even though a potential foreign beneficiary may have never been a recipient of any distribution of income or capital from your family trust, the trust will still be deemed to be a foreign trust on the basis that a foreign person is a potential beneficiary.
Therefore inadvertently, an Australian investor using a standard family trust as an investment vehicle may incur the additional FIDS liability. On a residential investment property purchase of say $500,000, that amounts to an additional $15,000 in duty (on top of the $18,247.50 you would already be paying, totalling $33,247.50).
These same issues arise for companies whose shares are owned by family trusts or units trusts whose units are owned by family trusts.
There is some uncertainty about the status of self managed super funds (SMSF) although the State Revenue Office has unofficially advised that it considers a compliant SMSF not to be a foreign person.
There are also issues around what constitutes ‘residential property’ for the purpose of the FIDS which notably includes land which is capable of being residential under planning laws even if it is not currently used for residential purposes.
What to do?
- You may wish to consider firstly whether a family trust is the appropriate purchasing entity for you.
- If so, it may be that you can establish a new family trust which excludes any potential beneficiary who is a foreign person and therefore not expose the trust to the FIDS.
- You may also be able to amend your existing family trust deed to exclude any potential beneficiary who is a foreign person and therefore not expose the trust to the FIDS.
Please contact David Shelley or Daniel Morgan (contact details below), to discuss what options you may have in respect of your property purchase and the purchase structure you are choosing.
David Shelley
Managing Principal
M: 0427 183 217
E: dshelley@pageseager.com.au
Daniel Morgan
Principal
M: 0438 436 968
E: dmorgan@pageseager.com.au
Published: 17 April 2019
