Foreign beneficiary clauses in Australian family trusts

How many years ago was your family trust set up? Perhaps five, 10 or even 20 years ago. Since then, your family's circumstances may have changed significantly.

Perhaps everyone in your family lived in Australia. Your children were at home, nobody had married, and there were no international business interests to consider.

Today, one child may live in the UK, another may have married someone from the US, or a family member may have moved overseas permanently and established an international business.

Your family has gone global. But has your family trust kept up?

Depending on how your trust deed is structured, these changes could potentially expose the trust to foreign purchaser duty or foreign owner land tax surcharges.

For globally mobile families, Australian cross-border tax advice can help identify potential issues arising from changes in family circumstances, residency and international interests.

You may not realise there is an issue until it becomes relevant.

"We don't have any foreign beneficiaries"

Are you sure?

Many Australian discretionary trusts were established years ago, before foreign purchaser surcharges and foreign owner land tax surcharges became an important consideration.

The trustee may be Australian, the trust's assets may be in Australia, and no foreign person may ever have received a distribution. But this may not be the right question.

The key issue is whether a foreign person could potentially become a beneficiary under the terms of your trust deed.

Many discretionary trust deeds contain broad definitions of who can benefit. Depending on the wording, this could include current family members, future spouses, future descendants, companies or trusts connected to family members, and other potential classes of beneficiaries.

If a foreign person could potentially fall within one of these categories, the trust or trustee may be subject to foreign purchaser duty or foreign owner land tax surcharge rules, depending on the state and the circumstances. Potential exposure can therefore arise even if that person has never received a distribution.

How can family changes affect an Australian family trust?

For globally mobile families, personal and business changes can introduce circumstances that did not exist when the trust was established.

For example:

• Your children move overseas
• A family member marries a foreign national
• Your family establishes international business interests
• Someone moves to Australia on a temporary visa

These are ordinary life events. However, depending on the trust deed and the relevant state rules, they could affect the trust's exposure to foreign purchaser duty or land tax surcharges.

Who is considered a foreign person for Australian trust purposes?

The definition of a foreign person varies between Australian states and can depend on the type of person or entity involved. Depending on the state, it may include:

• Individuals who meet the relevant state's foreign person definition
• Certain temporary visa holders
• Foreign companies
• Certain foreign trusts

A trust's exposure can depend on both the wording of the trust deed and the specific rules applying where the property is held.

What are the tax consequences for Australian property?

Depending on the state and the circumstances, a trust could potentially be exposed to additional property taxes, including:

• Foreign purchaser duty surcharges: Additional duty that may apply when acquiring certain residential property.
• Foreign owner land tax surcharges: Additional annual land tax that may apply to foreign owners.
• Reviews or reassessments by state revenue authorities: A trust structure may be examined to determine whether foreign surcharges apply.

For families with Australian property investments, these additional costs could be significant.

Foreign beneficiary exclusion clauses: What trustees need to know

A foreign beneficiary exclusion clause is a provision in a trust deed designed to prevent foreign persons from becoming beneficiaries of the trust.

If the people, assets or interests connected to your trust have changed, it may be worth reviewing the structure.

The requirements for an effective exclusion vary between states. Depending on the applicable rules, the trust deed may need to expressly and effectively prevent foreign persons from becoming beneficiaries, and amendments may need to be irrevocable. A generic clause may not necessarily achieve the required exclusion, so the specific wording of the trust deed matters.

A review of your trust structure could consider:

• The original trust deed and any subsequent variations
• How beneficiaries are defined
• Named and default beneficiaries
• Trustee and appointor provisions
• The ownership and control of any corporate trustee
• Whether the trust owns Australian property
• Whether it intends to acquire Australian property
• The relevant rules in each state where property is held

Depending on the outcome, specialist legal advice may be needed to determine whether a variation to the trust deed is appropriate.

How Sable International Tax Australia can help

We work with internationally mobile individuals and families to help them understand the cross-border implications of their financial and investment structures.

This can include:

• Reviewing family trust structures
• Assessing cross-border tax implications
• Considering Australian property ownership structures
• Identifying potential foreign beneficiary risks
• Coordinating with legal specialists where trust deed amendments may be required

Our clients include migrants, expatriates, returning Australians, South African and UK families, internationally mobile business owners and individuals with Australian investments.

If your family's circumstances, investments or business interests now extend beyond Australia's borders, a review of your trust structure could help identify potential foreign beneficiary and surcharge risks.

Important: This article provides general information only and should not be relied upon as legal or taxation advice. Foreign purchaser duty and foreign owner land tax surcharge rules vary between Australian states and depend on the specific trust deed and individual circumstances. Professional advice should be obtained before making decisions or amending a trust deed.

Speak to our cross-border tax experts to review your trust structure and understand whether changes in your family's circumstances could have cross-border tax implications. Contact Sable International Tax Australia by email at [email protected] or call +61 3 8651 4501.