Extra stamp duty when Family Trusts with foreigners buy Western Australian land

The Western Australia government follows other Australian States by starting a stamp duty surcharge on foreign persons. See the Duties Amendment (Additional Duty for Foreign Persons) Act 2018. The surcharge duty is on residential property purchased by ‘foreigners’. Commercial and aged care property are exempt.

Foreigners acquiring residential property in Western Australia pay a massive extra 7% stamp duty. This is on top of the already excessive duty normally paid in WA. This helps to destroy what is left of the failing WA residential market. Great timing! Also, this is strange law given that ‘foreigners’ have never been able to buy established residential land under the Foreign Investment Review Board rules.

What is ‘residential property’?

The stamp duty surcharge is on WA residential property used for residential purposes. Residential property includes:

1. established homes
2. established apartments
3. land on which a person intends to construct residential property (buying off the plan)
4. land on which there is a building that a person intends to convert into residential property
5. land for residential developments
6. vacant land zoned solely for residential purposes.

However, it does not include:

1. retirement villages
2. aged care facilities
3. commercial residential premises such as hotels and motels
4. commercial and industrial property
5. mixed-use properties used primarily for commercial purposes
6. residential developments over ten properties
7. easements and security interests

What is a ‘foreign person’?

A ‘foreign person’ is a:

1. ‘foreign individual’ – is neither an Australian citizen, the holder of a permanent visa nor the holder of a special category visa
2. ‘foreign corporation’ – incorporated outside Australia or has ‘foreign persons’ with at least a 50% controlling interest voting or 50% of the shares
3. the trustee of a foreign trust

Your spouse is caught: In working out the ‘controlling interest’ your spouse is also automatically treated as a foreigner if you are a foreigner. This is the case even though your spouse is not a foreigner. Therefore, if you, as a foreigner, have 25% of the shares and your Australian spouse has 25% then you pay the foreign tax surcharge. In Western Australia bigamy is alive and well. You are ‘married’ to your mistress, gay partner and wife. We tried to speak to the Minister, but he has not replied.

Your business partner is caught: Also, your business partner (‘associate’) is automatically treated as a foreigner if you are a foreigner. Again, this is the case even though your business partner is not a foreigner.

Are Family Trusts caught?

A discretionary trust (family trust) may suffer the surcharge. Your family trust pays the surcharge if, at any time in the future:

1. the majority of default beneficiaries (takers in default) are foreigners
2. the default beneficiaries and their spouses are in the majority
3. the default beneficiaries and their business partners (associates) are in the majority
4. the default beneficiaries and their spouses and their business partners, are together, in the majority
5. a foreigner is in a position of influence either directly or indirectly
6. a trustee of the family trust is a foreigner
7. an appointor of the family trust is a foreigner

Beware if:

* the default beneficiaries become foreign persons, and

* the trust purchases residential property while foreign persons are still ‘takers in default’.

What about Unit Trusts?

A ‘fixed’ trust is a trust where you get a percentage of the assets and income of the trust. The most common fixed trust is a ‘Unit Trust’. A fixed trust suffers the surcharge. This is if foreign persons, together with their associates, hold at least 50% of the trust income or assets.

The legislation is silly

The legislation is completely unworkable for Family Trusts. Many Family Trusts do not even have default beneficiaries (takers in default). The people at the Commissioner of State Revenue are in revolt with nowhere to turn. This legislation is poorly thought out.

We are amending many Family Trust Deeds to cater to this strange law. It is likely that the Commissioner takes many new approaches. This is as he tries to breathe life into bad law. This requires the Deed to be amended a number of times until the law settles down.

For further help speak to your lawyer, accountant and financial adviser. As a private taxation law firm we only take instructions through those professions.

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
Australia wide law firm
Head Office: 39 Stirling Highway, Nedlands, WA
Mobile: 0477 796 959
Direct: 08 6389 0400
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Email: brett@legalconsolidated.com
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Online: https://www.legalconsolidated.com.au/

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