Defining a Foreign Trust for Property Acquisitions
Many investors use a family trust or discretionary trust to buy real estate in Australia. These structures offer flexibility for tax planning and asset protection. However, a trust that is managed by Australians and holds Australian assets can still be classified as a foreign entity. This classification has direct consequences for any foreign trust property purchase, including higher acquisition costs and ongoing tax liabilities.
Under the Foreign Acquisitions and Takeovers Act 1975, the Act generally considers a trust foreign if a foreign person holds a "substantial interest." In legal terms, this means a foreign person or their associates hold at least 20% of the beneficial interest in the trust. If multiple foreign persons hold an aggregate interest of 40% or more, the Act also deems the trust foreign. For a discretionary trust, the rules are even stricter. Because the trustee has the power to distribute 100% of the income or capital to any beneficiary, the presence of a single foreign beneficiary can make the entire trust a foreign person.
The Discretionary Trust Trap
Standard family trust deeds usually include a wide range of potential beneficiaries. This often includes distant relatives, future children, and related companies or trusts. If any of these potential beneficiaries are foreign persons, the trust faces immediate hurdles. A foreign person includes individuals who are not habitually resident in Australia and do not hold a permanent residency visa. Temporary visa holders, such as those on 482 or 457 visas, are also classified as foreign persons for many property tax purposes.
State revenue offices in New South Wales, Victoria, and Queensland apply their own tests to determine if a trust is foreign. In South Australia, the state identifies a foreign trust by the level of control or beneficial interest held by non-residents. If the trust deed does not explicitly exclude foreign persons from benefiting, the trustee may be liable for the foreign purchaser duty surcharge. This surcharge is an additional tax paid at the time of purchase, often ranging from 7% to 8% of the property value depending on the state.
Land Tax Surcharges and Ongoing Costs
The financial impact of being a foreign trust extends beyond the initial purchase. Most Australian states impose an annual land tax surcharge on foreign-owned land. In Victoria, the absentee owner surcharge recently increased to 4%. This is paid in addition to the standard land tax rates. For a property with a high land value, these annual costs can diminish the investment return.
Federal rules also require foreign trusts to seek approval from the Foreign Investment Review Board (FIRB) before signing a contract. According to reports on residential real estate transactions, the government closely monitors the flow of international capital into the housing market. Failing to obtain FIRB approval before becoming "bound" by a contract is a breach of the Foreign Investment Reform (Protecting Australia's National Security) Act 2020. Penalties for non-compliance are severe and can include forced divestment of the property and criminal fines.
Amending Trust Deeds to Avoid Foreign Status
It is possible to prevent a trust from being classified as foreign by amending the trust deed. This process involves inserting a "foreign person exclusion clause." This clause must do more than just limit distributions. It must permanently and irrevocably disqualify any foreign person from ever being a beneficiary of the trust. It must also prevent the trustee from amending the deed in the future to include foreign persons.
Timing is everything. In states like New South Wales, the exclusion clause must be in place before the property is transferred to avoid the surcharge. If you already own property and your trust is deemed foreign, you may be able to amend the deed to stop future surcharges from applying. We provide legal reviews of trust deeds to ensure they meet the specific requirements of the state revenue office where the land is located. Each state has different wording requirements, and a "one size fits all" approach rarely works.
FIRB Application Requirements for Trusts
When a trust applies for FIRB approval, the government looks through the structure to identify the ultimate controllers. This includes the trustee, the appointor, and any person who can influence the trust's decisions. Our FIRB application services include a review of these roles to determine the likelihood of approval. The government generally allows foreign persons to buy new dwellings or vacant land for development, but purchasing established dwellings is usually restricted to temporary residents who use the property as their principal place of residence.
FIRB application fees are a necessary cost of the acquisition process. These fees are indexed on 1 July each year. For residential land, the fee is based on the purchase price. For properties valued at $1 million or less, the current minimum FIRB fee is $14,100. It is a non-refundable fee, even if the application is rejected or the purchase does not proceed. We offer fixed fee FIRB applications to provide certainty for investors during the due diligence period.
Corporate Trustees and Shareholding
The status of the trustee also matters. If a trust has a corporate trustee, We analyse the residency and shareholding of the company. A foreign corporation property purchase occurs when a company with 20% or more foreign ownership buys land. If such a company acts as the trustee of your family trust, the law automatically considers the trust a foreign person. This applies even if all the beneficiaries are Australian citizens.
We work with property developers and international investors to structure these acquisitions correctly. Investors must also consider the interaction between land tax and federal taxes. While we specialise in the legal aspects of FIRB and property law, we recommend that clients seek separate advice from tax and immigration specialists regarding thin capitalisation rules, visa requirements, and capital gains tax implications for foreign residents.
Summary of Compliance Steps
- Review the trust deed before signing any purchase contract or expression of interest.
- Identify if any beneficiaries, including children or relatives living overseas, are foreign persons for tax purposes.
- Determine if the trust requires FIRB approval under the Foreign Acquisitions and Takeovers Act 1975.
- Calculate the potential stamp duty surcharge and annual land tax surcharge for the specific state.
- If necessary, execute a deed of variation to exclude foreign beneficiaries before the property settlement.
- Submit the FIRB application and pay the required fee to the Australian Taxation Office.
The rules surrounding foreign investment in Australian property are technical and change frequently. Errors in the application process or the trust structure can lead to delays in settlement or unexpected tax bills. We assist foreign investors by providing direct, pragmatic advice on how to meet their legal obligations while pursuing their investment goals in the Australian property market. This information is general in nature and FIRB rules change frequently. Contact us for advice specific to your situation.
