Your trust can be "foreign" in the eyes of the tax law even when the family, the assets and the business are all Australian. The label does not depend on where the trust was set up or where the deed was signed. It depends on two separate tests, one federal and one state-based, and a trust that passes one can still be caught by the other.
This matters because the consequences are expensive. At the federal level a foreign trust misses out on the 50% capital gains tax (CGT) discount, and its beneficiaries face extra questions about how distributions are taxed. At the state level, a trust classified as foreign becomes a "foreign person" for duty and land tax purposes, which triggers surcharges of up to 9% on residential property acquisitions and 5% a year in land tax in New South Wales. This article explains how the two classification tests operate, where they catch people out, and what can be done about it.
The two tests that decide a trust's status
There is no single definition of a "foreign trust" in Australian law. Two separate regimes use the label, and they work differently.
The first is the federal income tax test, which asks whether the trust is an Australian "resident trust estate". If it is not a resident trust estate, it is a non-resident (foreign) trust estate. This test is found in the Income Tax Assessment Act 1936 (Cth) and looks at the trustee and at where the trust is actually run from.
The second is the state and territory test for surcharge purchaser duty and surcharge land tax. That regime does not ask about the trustee's residency at all. It asks whether the trust is a "foreign person" under the Commonwealth Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA), as adapted by each state's revenue legislation. The answer turns on the people who can benefit from the trust, not on where decisions are made.
The difference matters. An Australian family discretionary trust run entirely from Sydney with an Australian trustee can sail through the federal test as a resident trust estate and still be a "foreign person" for NSW duty purposes if the trust deed leaves open the possibility of a foreign beneficiary.
How the federal residency test works
Under s 95(2) of the Income Tax Assessment Act 1936 (Cth), a trust estate is a resident trust estate for a year of income if, at any time during that year:
- a trustee of the trust was an Australian resident; or
- the central management and control of the trust estate was in Australia.
Only one limb needs to be satisfied. A trust with two trustees, one Australian and one offshore, is still a resident trust estate because the Australian trustee satisfies the first limb. Equally, a trust whose trustee is a foreign company can still be a resident trust estate if the trust's central management and control is exercised in Australia, for example where an Australian-based trustee company or adviser makes the real investment and distribution decisions.
Central management and control is the "where is the trust actually run from" question. It looks at where the decisions that shape the trust's affairs are made, not where the paperwork is filed or where the deed was executed. If the decision-makers meet overseas and the Australian trustee simply implements what they decide, the trust may have moved its central management and control offshore and, with it, its residency.
Unit trusts use a different test
Unit trusts are treated differently. The general residency definition in Division 6AAA of the Income Tax Assessment Act 1936 (Cth) applies to all trust estates, but for unit trusts the legislation also sets out a two-part test in s 102Q of that Act. A unit trust is a resident unit trust for a year if it satisfies one condition from each of two columns at any time in that year:
- Column 1: any property of the unit trust was situated in Australia, or the trustee carried on business in Australia.
- Column 2: the central management and control of the unit trust was in Australia, or Australian residents held more than 50% of the beneficial interests in the income or property of the unit trust.
So a unit trust that holds only Australian property but whose units are more than half owned by non-residents can fail the second column and be treated as non-resident, while a unit trust run from overseas that is majority Australian-owned can still be resident. The columns interact, and the analysis is specific to the trust's facts in each year.
What foreign status means at the federal level
The CGT discount
The most common federal consequence of foreign trust status is losing the CGT discount. Under the CGT rules, an entity that sells a capital asset held for at least 12 months can generally reduce the capital gain by 50% before tax. The ATO's guidance is that the discount is available to Australian residents, and that Australian trusts can discount a capital gain by 50%. Foreign and temporary residents cannot use the full discount for capital gains made after 8 May 2012.
The practical effect is that a trust that loses its Australian residency status because control has drifted offshore, or because a foreign trustee has been appointed, loses the ability to halve its capital gains on assets like investment properties and shares. If the trust sells a property with a $400,000 capital gain, the difference between a 50% discount and no discount is $100,000 of extra assessable gain, and tens of thousands of dollars of extra tax at trust rates.
Distributions to beneficiaries
The classification also affects how distributions are taxed. A beneficiary who receives a distribution from a foreign trust needs advice on whether the amount is taxable in Australia and how it interacts with their tax position in the country where the trust is resident. There are also special attribution rules in Division 6AAA of the Income Tax Assessment Act 1936 (Cth) that can tax Australian residents on the income of certain non-resident trust estates, even before any distribution is made. These rules are technical, and whether they apply depends on who transferred property to the trust, when, and whether the trust is a discretionary trust. If a trust is or may become foreign, this is the area where professional advice pays for itself.
The state "foreign person" test
For surcharge purchaser duty and surcharge land tax, the states do not use the federal residency test at all. Instead they ask whether the trust's trustee is a "foreign person" in the trustee's capacity as trustee.
The definition of foreign person comes from FATA and includes:
- an individual who is not ordinarily resident in Australia, other than an Australian citizen;
- a foreign corporation, which is generally a company in which foreign persons hold a substantial interest;
- a foreign government and foreign government investors; and
- the trustee of a trust, where the trustee is a foreign person or, if there is more than one trustee, a substantial number of them are foreign persons.
The critical feature for trusts is that the trustee's status is assessed by reference to the people who can benefit from the trust. If any potential beneficiary is a foreign person, the trustee is a foreign person in that capacity, and the whole trust is treated as foreign. This is so even if no distribution has ever been made to that person, and even if the foreign person is only one name in a very long list of beneficiaries.
The states modify the FATA definition in their own legislation. In New South Wales, for example, s 104J of the Duties Act 1997 (NSW) adopts the FATA definition but treats Australian citizens as ordinarily resident in Australia in all circumstances.
Why discretionary trusts are the classic trap
The discretionary trust is where the state test bites hardest. Under s 104JA of the Duties Act 1997 (NSW), the trustee of a discretionary trust is taken to be a foreign trustee for surcharge purchaser duty purposes unless the trust prevents a foreign person from being a beneficiary. The equivalent rule for land tax is in s 5D of the Land Tax Act 1956 (NSW).
The trap is that a discretionary trust deed almost always names a class of beneficiaries rather than a closed list. If the class is drafted as "the children and grandchildren of the settlor" or "any person the trustee decides to appoint to", it can include a person who is not ordinarily resident in Australia. A child who has moved to London on a work visa, a grandchild born overseas, or a corporate beneficiary owned by foreign interests can each make the trust foreign for state purposes, whether or not they ever receive a cent.
The consequences: surcharge purchaser duty and surcharge land tax
If a trust is a foreign person and it acquires residential land, two additional taxes can apply on top of ordinary stamp duty and land tax:
- Surcharge purchaser duty: additional transfer duty charged on the acquisition of residential-related property. In New South Wales the rate is 9% of the dutiable value under s 104U of the Duties Act 1997 (NSW). It applies to transfers and agreements for the sale or transfer of residential-related property to a foreign person, including a declaration of trust that makes the declarant a foreign trustee. On a $1.5 million property, that is $135,000 on top of ordinary duty.
- Surcharge land tax: an annual tax on the taxable value of residential land owned by a foreign person. Under s 5A of the Land Tax Act 1956 (NSW) the rate is 5% from the land tax year commencing 1 January 2024, having risen from 4% in 2022 and 2023. It is payable in addition to ordinary land tax and applies even if no ordinary land tax is payable because the land's value is below the tax threshold. On a $2 million property, that is $100,000 a year before ordinary land tax.
Victoria and Queensland impose their own surcharges on foreign persons, including foreign trusts, at different rates. The rates and the definitions of foreign person vary by state, and a trust can be foreign in one state and not in another, which is why the governing law of the trust and the location of the land both need to be checked.
The fix: excluding foreign beneficiaries
The good news is that the state test is fixable for discretionary trusts. In New South Wales the legislation is explicit about what a trust must do to avoid foreign status. Under s 104JA of the Duties Act 1997 (NSW) and s 5D of the Land Tax Act 1956 (NSW), a discretionary trust prevents a foreign person from being a beneficiary only if both of these requirements are satisfied:
- No foreign beneficiary requirement: no potential beneficiary of the trust is a foreign person.
- No amendment requirement: the terms of the trust are not capable of amendment in a way that would result in a foreign person becoming a potential beneficiary.
The second requirement is the one that catches people out. It is not enough to insert a clause saying no foreign person can benefit. The deed must also prevent a future amendment from removing that protection, so the exclusion must be effectively irrevocable.
The state revenue offices have accepted amendments to existing trust deeds that add these clauses. Amending the deed of an existing discretionary trust to exclude foreign beneficiaries is a well-established mechanism for removing the trust from the surcharge net. The amendment must be in place before the transaction occurs, because the surcharge is assessed by reference to the trust's terms at the time of acquisition. Transitional rules that allowed late amendments and refunds of surcharge duty ended on 31 December 2020, so for current transactions the exclusion has to be genuine and effective before the property is acquired. The drafting must be done carefully: the amendment has to be validly made under the deed's own variation power, it must genuinely cover every class of potential beneficiary, and it must not create new tax consequences of its own.
Unit trusts need a separate look
The exclusion mechanism does not transfer automatically to unit trusts. A unit trust is assessed by looking through to its unitholders. If a unitholder is a discretionary trust that has not validly excluded foreign beneficiaries, the revenue office treats the unitholder as potentially foreign, and that flows through to the unit trust itself. A discretionary trust behind a unit trust therefore needs its own foreign beneficiary exclusion before the unit trust can be treated as non-foreign.
For fixed unit trusts the position is different again. The trustee of a fixed trust is not liable to surcharge land tax in NSW in respect of residential land; instead the foreign unitholders themselves can be assessed on their proportionate interests under s 5A(4)(e) of the Land Tax Act 1956 (NSW). The structure of the unit trust, whether it is fixed or discretionary and who sits behind it, determines who wears the surcharge, so the advice has to be specific to the structure.
Where professional advice is needed
There are four points in the life of a trust where the foreign trust question should be put to a lawyer or tax adviser:
- Before establishing a trust: particularly one that may hold residential property. The deed can be drafted from the start to exclude foreign beneficiaries and to lock that exclusion in, which is far cheaper than amending later.
- When a beneficiary's circumstances change: a beneficiary moving overseas, taking foreign residency, or a corporate beneficiary coming under foreign ownership can flip a trust into foreign status without any conscious decision.
- When control is moving offshore: appointing an overseas trustee, or letting investment decisions be made from overseas, can change the trust's central management and control and with it its federal residency and CGT discount.
- Before acquiring land: the surcharge calculations are large enough that the structure should be reviewed before a purchase is signed, not after the duty assessment arrives.
A practitioner's job at each of these points is to map the actual facts: who the trustees are and where they live, where the real decisions are made, who sits in the class of potential beneficiaries, and how the deed's amendment power operates. On that factual base they can apply the federal and state tests and, where a trust has drifted into foreign status, structure a fix such as a deed amendment that is valid and that holds up against the revenue office's scrutiny.
Getting the classification right early
The single point where the most value concentrates in this area is the trust deed's beneficiary clause combined with the location of real control. Both are fixable, but only if they are reviewed before a property is bought or a gain is realised. Once a surcharge duty assessment has issued, or once a trust has sold an asset without the CGT discount, the money is gone and the remedies are limited. A review of the deed and the trust's control arrangements, with an amendment to exclude foreign beneficiaries where needed, is a modest cost compared with a 9% surcharge on a property acquisition or the loss of a 50% discount on a capital gain. If your trust holds or plans to hold residential land, or if a beneficiary or trustee has moved offshore, this is the question to ask now, before the next transaction.