An article by Majed Kheir (Senior Partner at Kheir Lawyers) | Family Law, Estates, Commercial, Property and Trust Lawyer – 25 Years’ Experience

For decades, purchasing property through a family trust has been regarded as a sound and effective strategy for asset protection, succession planning and tax structuring. Across New South Wales, many families, investors and business owners have acquired residential and investment properties through discretionary trusts, family trusts and corporate trustee arrangements without giving a second thought to the wording of their trust deed.

Unfortunately, many trustees are now discovering that a hidden legal trap exists within older trust deeds — one capable of triggering substantial foreign purchaser surcharge duty and annual surcharge land tax liabilities, even where the trustee and beneficiaries are Australian citizens.

The issue is simple but potentially very costly:

Your trust may inadvertently be classified as a “foreign person” under NSW law.

If that occurs, the trust may become liable to pay:

• an additional 9% surcharge purchaser duty when residential property is acquired in NSW (effective from 1 January 2025); and
• an annual 5% surcharge land tax on residential land owned in NSW.

For many families and investors, this can translate into tens or even hundreds of thousands of dollars in unexpected taxation liabilities.

The Problem Most Trustees Do Not See Coming

A common misconception exists that foreign purchaser surcharges only apply to overseas buyers or non-residents purchasing Australian property.

That is not entirely correct.

In NSW, a trust can be deemed a foreign person even where:

• the trustee is Australian;
• the appointor is Australian;
• all present beneficiaries are Australian citizens or permanent residents; and
• the property was acquired entirely with Australian funds.

The issue turns on who may potentially benefit under the trust deed.

This is where many trustees unknowingly encounter serious difficulties.

Under NSW legislation, a discretionary trust may be classified as a foreign trust if:

• a foreign person is a beneficiary; or
• a foreign person could potentially become a beneficiary under the trust deed, even if they never actually receive any income or capital from the trust.

In other words, the law is not solely concerned with who receives distributions.

It is concerned with who could receive distributions.

That distinction has caught many property owners completely off guard.

Why Many Older Trust Deeds Are at Risk

Historically, trust deeds were drafted broadly to maximise flexibility.

Lawyers and accountants often drafted discretionary trusts to include expansive beneficiary classes to ensure trustees had wide discretion in future estate planning and tax management.

Accordingly, many trust deeds permit benefits to:

• spouses and former spouses;
• children and grandchildren;
• future descendants;
• relatives;
• associated companies and trusts;
• beneficiaries residing overseas; and
• persons connected to the family unit in a broad sense.

On paper, this flexibility appeared commercially sensible.

However, under the NSW foreign surcharge regime, that same flexibility may now create substantial taxation exposure.

For example:

If a trust deed permits a child’s spouse to benefit under the trust, and that spouse is a foreign person, the trust may potentially be classified as foreign.

Similarly, if the deed is broad enough to include future descendants or relatives living overseas who are not Australian citizens or permanent residents, the trust may also fall within the definition of a foreign trust.

The practical reality is confronting:

Many ordinary Australian family trusts may inadvertently be “foreign” without the trustee ever realising it.

A Real-Life Example

Consider the following scenario.

A married couple establishes a discretionary family trust in 2010.

The trustee is an Australian proprietary company. The appointor and primary beneficiaries are Australian citizens. The trust purchases an investment property in Sydney.

At the time of purchase, there appears to be no issue.

However, the trust deed includes a broad beneficiary class allowing distributions to:

“children, spouses, grandchildren, related entities and associated family members.”

Ten years later, one of the children marries someone residing overseas who is not an Australian citizen or permanent resident.

Although no distribution is ever made to that person, and despite the trustee never intending to benefit them, the trust may nevertheless be considered a foreign person under NSW legislation because the foreign individual could potentially benefit under the trust deed.

The consequences may include:

• liability for surcharge purchaser duty;
• ongoing surcharge land tax;
• disputes with Revenue NSW;
• reassessments of prior liabilities; and
• significant financial exposure.

In many cases, the trustee only discovers the problem after consulting an accountant, lawyer or receiving correspondence from Revenue NSW.

By then, substantial liabilities may already have accrued.

The Importance of Reviewing Existing Trust Deeds

One of the most concerning aspects of this issue is that many property owners assume that because they established their trust years ago, or because everyone involved is Australian, they are protected.

Unfortunately, assumptions can be dangerous.

The real question is:

What does your trust deed actually say?

Many trust deeds drafted prior to the introduction of the foreign surcharge regime were never designed with these issues in mind.

Even trust deeds prepared by competent professionals may now require urgent review and amendment due to legislative changes and evolving Revenue NSW requirements.

Simply assuming compliance may expose trustees to avoidable taxation consequences.

Can the Problem Be Fixed?

In many circumstances, yes.

However, it must be done correctly.

A trust deed may often be amended to include an irrevocable exclusion of foreign persons as beneficiaries.

Such amendments are commonly referred to as foreign beneficiary exclusion clauses or no foreign beneficiary clauses.

However, trustees should exercise caution.

This is not merely a matter of inserting one paragraph into an old trust deed.

The amendment must be carefully considered to ensure:

• the trust deed actually permits amendment;
• the amendment is validly executed;
• the amendment does not invalidate the trust structure;
• it complies with Revenue NSW requirements;
• foreign beneficiaries are properly and irrevocably excluded where necessary; and
• broader estate planning and taxation consequences are addressed.

Poorly drafted amendments may create additional complications, including uncertainty regarding the effectiveness of the trust or whether Revenue NSW will recognise the amendment.

Equally important is timing.

In some circumstances, amending the trust deed after a property acquisition may not fully resolve prior surcharge exposure, particularly where residential property has already been acquired.

Early legal advice is therefore critical.

Companies Holding Property as Trustee Are Not Exempt

A common misunderstanding is that using a company as trustee solves the issue.

It does not.

Even where a property is purchased by:

XYZ Pty Ltd as trustee for the XYZ Family Trust

the relevant question remains:

Who can benefit under the trust deed?

If a foreign person may potentially benefit under the trust, the trust itself may still be classified as foreign for surcharge purposes.

The existence of a corporate trustee alone does not avoid the problem.

Why This Issue Matters More Than Ever

With rising property prices and increased enforcement activity by revenue authorities, trustees can no longer afford to ignore the wording of their trust deeds.

What may once have appeared to be a routine family trust could now expose owners to significant and recurring liabilities.

For a trustee purchasing a residential investment property worth $2 million, a 9% surcharge purchaser duty could mean an additional $180,000 payable upfront, in addition to standard transfer duty.

The annual surcharge land tax consequences may also be substantial.

For many families, this exposure arises entirely unintentionally.

The issue is not dishonesty or wrongdoing.

Rather, it is a failure to appreciate how broad trust drafting can interact with modern taxation laws.

A Short Legal Review Today Could Save Significant Cost Tomorrow

If you have acquired property in NSW through:

• a discretionary trust;
• a family trust;
• a unit trust;
• a trust with a corporate trustee; or
• an investment trust structure,

it is prudent to obtain legal advice regarding whether your trust deed exposes you to foreign surcharge duty or surcharge land tax.

In many cases, an early review and properly drafted amendment may significantly reduce future risk.

Ignoring the issue, however, may prove costly.

We Can Help

At Kheir Lawyers, we regularly advise clients regarding:

• trust deed reviews;
• amendments to discretionary and family trusts;
• foreign purchaser surcharge issues;
• Revenue NSW compliance;
• property structuring;
• succession planning; and
• asset protection strategies.

If you have purchased property in NSW through a trust — or are considering doing so — we strongly encourage you to seek advice regarding whether your trust structure may inadvertently trigger foreign surcharge liabilities.

A relatively simple legal review today may avoid substantial taxation exposure tomorrow.

Contact Kheir Lawyers on 02 9790 2522 or email me on majed@kheirlawyers.com.au to arrange a review of your trust deed and obtain advice tailored to your circumstances.

Disclaimer: This article provides general information only and does not constitute legal, financial or taxation advice. Every trust and property transaction is different. Specific advice should be obtained having regard to your individual circumstances.