Lawpath - Variation of discretionary trust
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- Variation of discretionary trust
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State laws in Australia have introduced taxes of up to 8% for foreign residents or entities who hold or acquire interests in property through a discretionary trust. A variation of discretionary trust document allows you to vary a trust deed to legally exclude foreign beneficiaries.
We've put together a guide to writing a deed of variation and where to find a free template to help you get started.
A deed of variation document amends a discretionary trust to exclude foreign persons from receiving distributions of income or capital so that they are not liable for state property taxes. A "foreign person" – either a non-resident or foreign corporation – is defined by the Land Tax, Duties and Foreign Acquisitions and Takeovers Acts in various states. The variation is permanent and cannot be reversed in the future.
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If the discretionary trust already contains named or specified foreign beneficiaries, you do need to consult a lawyer to have a custom document drafted as they cannot be excluded by a deed of variation. If the trust does not have named foreign beneficiaries, it is still useful to consult a lawyer to make sure that foreign persons are excluded from the trust. It is especially necessary in states like Victoria where a trust is automatically considered a foreign trust without an explicit exclusion.
If you are not sure whether your trust is recognised under state law as a "foreign trust", you can apply for a ruling from your state or territory's revenue office.
You can use a deed of variation when you want to update your trust to exclude any foreign person who has not already been named as a beneficiary of the trust. This will prevent the foreign person from being liable for the following state taxes for land purchases and ownership:
From 1 March 2020, any discretionary trust in Victoria that does not specifically exclude foreign persons is automatically considered a foreign trust. You should be aware that a foreign person who has already been named a beneficiary is not excluded in a deed of variation.
A deed of variation defines a "foreign person" and includes an explicit clause that excludes foreign persons from becoming trust beneficiaries. It does not include persons that have already become beneficiaries.
A variation of discretionary trust is a specific document that includes the following details:
The deed of variation does not include distributions to an appointee of a foreign person before the date it comes into effect. A variation of trust document cannot exclude a foreign person that has already been named as a beneficiary of the trust.
As the law in states such as Victoria charges taxes based on the status of a discretionary trust, a deed of variation is specifically required to remove liability for taxes applicable to foreign persons.
A deed of variation should be written in concise language that makes it clear foreign persons are excluded from being beneficiaries of the trust. You can use a legal template to make sure the document is legally binding and save you from writing it from scratch if you are unsure of the wording you should use.
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