From 1 July 2015, the State Revenue Office (of Victoria) introduced Foreign Purchaser Additional Duty (FPAD).

FPAD applies where a Foreign Purchaser (foreign natural person, foreign corporation or foreign trust) acquires an interest in a residential property including:-

• buying an existing residential property;
• buying a non-residential property with the intention of converting it into a residential property;
• being gifted a residential property; and
• certain leasing arrangements in respect of residential property.

Note that there is an exemption for FPAD if a foreign natural person acquires a residential property and the property is acquired jointly with their spouse/domestic partner, and the spouse/domestic partner is an Australian citizen, permanent resident or New Zealand citizen who holds a special category visa. Note that in order to be entitled to this exemption, the property must be lived in as their principle place of residence for a continuous period of 12, commencing from within 12 months of acquiring the property.

A foreign natural person is any person that is not:-

• a citizen or permanent resident of Australia.
• a New Zealand citizen with a Special Category Visa (Subclass 444).

A foreign corporations, is any company that is incorporated:-

• outside Australia.
• in Australia, if a foreign natural person, another foreign corporation, or a trustee of a foreign trust has a controlling interest (greater than 50% of the shares/voting rights or has the ability to influence the outcomes of the decisions about the corporation’s financial and operational policies) in those corporations.

A foreign trust, is a trust where a foreign natural person, foreign corporation or trustee of another foreign trust, has a substantial interest (greater than 50% interest in the capital of the trust or has the capacity to influence the decisions about the administration and conduct of the trust) in the trust estate of that trust.

Where a trust is a Discretionary Trust, any beneficiary that has the right to receive a distribution of capital of the trust is taken to have a beneficial interest in the maximum percentage of the capital of the trust (ie. if a foreign natural person, foreign company or foreign trust is a potential beneficiary of the trust, then the trust could be classified as a foreign trust).

As the definition of beneficiary in most discretionary trusts are usually quite broad (including relatives and entities they control/trusts they are beneficiaries of), it is likely that a significant number of existing discretionary trusts may be classified as foreign trusts.

Note that from the implementation of FPAD on 1 July 2015, the State Revenue Office (SRO) adopted what they considered the ‘Practical Approach’, whereby, if it could be demonstrated that any foreign beneficiaries (of the trust) have not received or are unlikely to receive any distributions, the trust would not be considered a foreign trust.

From 1 March 2020, the State Revenue Office (of Victoria) has advised that they will cease to apply the abovementioned Practical Approach.

This would result in any Discretionary Trust that is intending to acquire residential property after 1 March 2020 being required to review their Trust Deed prior to the purchase and consider the likelihood of FPAD applying.

If FPAD applies, this could result in a substantial increase in the costs associated with the acquisition of the residential property as the current rate of FPAD is 8% of the Dutiable Value of the property.

In order to avoid a Discretionary Trust from being liable for the payment of FPAD, it may be advisable for the trustees to consider amending the Trust Deed to exclude as beneficiaries any entities/individuals that would be considered to be foreign purchasers.