The introduction of foreign purchaser additional duty (FPAD) on 1 July 2015 meant any foreign purchaser that acquires residential property in Victoria had to pay duty on the share of the property acquired by the foreign purchaser. Effective 1 July 2019, the FPAD is 8% on top of the standard 5.5% rate.

A foreign purchaser is a transferee who is a foreign natural person, a foreign corporation or a trustee of a foreign trust.

For discretionary trusts, a person or member of a class of persons is taken to have a beneficial interest in the maximum percentage of the capital of the trust estate that the trustee of the discretionary trust is empowered to distribute to that person. The effect of this special rule is that a discretionary trust that has any potential foreign beneficiaries will generally be considered a foreign trust for the purposes of the FPAD provisions.

Previously, the Victorian State Revenue Office has adopted a practical approach when determining whether a family trust would be deemed foreign. If the family trust can demonstrate that the foreign beneficiaries of the trust are unlikely to receive any distributions in the future, the trust would not be considered a foreign trust.

However, from 1 March 2020, the State Revenue Office will no longer apply the practical approach for the following reasons:

  • The FPAD provisions have been in place for more than four years; and
  • The special rules for discretionary trusts are more broadly understood.

Instead, the special rules for discretionary trusts, discussed above, will be applied to all discretionary trusts (including family discretionary trusts), so that if the discretionary trust has any potential foreign beneficiary, the trust will generally be a foreign trust for the purpose of the provisions.

Therefore when contemplating to acquire residential property in Victoria it is important to consider whether to:

  • Set up a new discretionary trust which excludes foreign beneficiaries; or
  • Amend the trust deed of any existing trusts to specifically exclude foreign beneficiaries.