LSB February 2018_Web_LSSA

TAX FILES
a trustee of a foreign trust, or a number
of such persons in combination, hold
50% or more of the corporation’s shares
or are entitled to cast, or control the
casting of, 50% or more of the maximum
number of votes at a general meeting
of the corporation. 19 In this provision
the emphasis is solely on voting power,
rather than economic consequences (i.e.
dividends or capital distributions). 20
A foreign trust is one where the
beneficial interests are fixed, or one where
a beneficial interest of 50% or more of
the capital of the trust property is held 21
by one or more foreign persons. In the
case of a discretionary trust, it is a foreign
trust if one or more of the following is a
foreign person:
• a trustee;
• a person who has the power to appoint
under the trust; 22
• an identified object 23 under the trust; or
• a person who takes capital of the trust
in default.
The last three of these trust nexus
provisions each have the potential to
create real practical issues. The first is the
power to appoint where it is vested in a
foreign person, the second is an identified
object who is a foreign person and the
third is a person who may take the capital
of the trust in default.
Most discretionary trusts have a wide
range of powers to appoint, including the
power to appoint property, income, a new
trustee and a person to be a beneficiary.
Most such powers are held by the trustee,
though occasionally by a third person (e.g.
the power to appoint a new trustee). So,
if any person with any such power is a
foreign person then the trust is a foreign
trust without anything more.
It was suggested by the Government,
in the passage of the legislation, that the
simple way of avoiding having any issue
with this aspect was to ensure that the
person who has the power to appoint is
not a foreign person. In some cases, it can
be as simple as that. But in some cases,
the persons who have such control, attain
such power by death, divorce, bankruptcy
or possibly by the person becoming a
foreign person by migration. If any of
those events occur within three years of
the acquisition of the residential property
by the trustee then it appears that section
72(7) will apply to render the acquisition
by the trustee of the trust the acquisition
of the residential land by a foreign trust.
So, this can be triggered by involuntary
events not simply matters of choice.
The second is the trust nexus provision,
which simply requires, that an identified
44 THE BULLETIN February 2018
object 24 under the trust is a foreign person.
Does this provision simply mean a person
who is actually named as an object 25 or
is a reference to the brothers, sisters and
parents of the person named as, say, the
primary beneficiary, sufficient to be an
identified object. The response in the
course of the passage of the Budget Bill
was that the person must be identified
in the trust deed by name. The term is
apparently not intended to include all
persons within a broad class or range of
beneficiaries under a discretionary trust
deed. The Commissioner proposes to
address this issue in a circular.
It is still unclear how the provision will
work if, say, three brothers are named as
objects of the trust and one of them is
foreign person (as defined). Is it sufficient
that one person is a foreign person or does
it need to be a majority or all of them?
The current drafting appears to assume
there will only be one such person named.
The third nexus provision of concern
is that based on a foreign person being
a taker in default of the capital of the
trust. The provision applies to a “person
who takes capital of the trust property
in default”, presumably that means in
default of appointment by the trustees.
In most modern discretionary trusts, it
means those persons who take the capital
of the trust on the failure of the trustee
to appoint or distribute the capital prior
to the ultimate vesting of the trust. 26 The
response to the Budget Bill provision was
that the concept of a taker in default is
commonly understood. It is suggested
that the expression “takes capital of the
trust property in default” usually means,
in the context of most discretionary
trusts, the persons who take in default
of appointment by the trustee at the
expiration of the term of the trust, that
is on the vesting day. As the Victorian
decision in Lygon Nominees Pty Ltd v
Commissioner of State Revenue 27 highlighted,
such persons often cannot be determined
until the actual vesting day.
Notwithstanding the width of the
provision, the response to the Budget Bill
on this aspect was that it is a reference to a
specified person in the trust deed. That is,
the person must be identified in the trust
deed by name. The term is not a blanket
reference to persons who may potentially
take capital of the trust property in default
under a discretionary trust deed. In most
discretionary trust deeds, it is uncommon
to simply specify such a person by name.
In most cases the takers of the capital
in default are a broad class. It appears
this issue may also be covered by a
Commissioner’s circular
SECTION 72 – SUBSECTIONS (6) AND (7)
–ADJUSTMENT PROVISIONS
As if the provisions are not complex
enough they include mechanisms for
adjustments in respect of the surcharge
where there is a change in status of the
person in some limited situations. One
provides for a refund where a foreign
person or a foreign trust pays the
surcharge and within twelve months the
person or trust ceases to be a foreign
person or foreign trust. 28 The other one
provides that the surcharge is payable
where a person or trustee becomes a
foreign person or trust within three years
of the acquisition of residential land. 29
Section 72(7)(c), which provides for the
adjustment of any such claw back, where
the corporation or trust becomes a foreign
person within three years, is in my view
particularly difficult to understand and
apply, it is effectively an exclusion on an
exclusion coupled with an apportionment.
Further, the three-year adjustment
provision appears to be unduly harsh
where there are changes in the control
of a company or a trust for good
family reasons (e.g. death, divorce etc),
particularly as the legislation does not
provide any power for the Commissioner
to provide relief from the operation of the
claw back provision in such situations.
A simple example is a resident taxpayer’s
wholly owned company acquiring
residential land. The resident taxpayer dies
shortly after that acquisition. The shares
in the company are transferred to his nonresident
foreign citizen son pursuant to the
terms of his will. Section 72(7) will require
the payment of the surcharge in this
situation. Various other similar common
situations can be described. 30
Whilst there are adjustment provisions in
connection with the status of the foreign
persons, corporations or trusts, there are
no adjustment mechanisms where there is
a change in the status of the land acquired,
whether within twelve months or three
years. 31 In the passage of the Budget Bill
the Government indicated developments
that may benefit the State may be granted
ex gratia relief from the foreign owner
surcharge, where it is appropriate to do
so. Accordingly, it is proposed to publish
a ruling setting out factors that will be
considered in determining whether
ex gratia relief from the surcharge will
apply to certain land. 32 Apparently, all
other jurisdictions with a foreign owner
surcharge exclude significant residential
developments either by way of Treasurer’s
discretion or ex gratia relief.