Risks for discretionary trusts acquiring land where a beneficiary is overseas

By Jonathan Haeusler

1 August 2023

Our nation has a long history of migration. As such, many Australians have at least one relative who resides overseas. Young people leaving the nest to spend time with relatives back in the ‘old country’ is a common Australian story.

If a discretionary trust includes a person based overseas as a beneficiary, there is a real risk the acquisition of Australian land by the trustee would contravene Australia’s foreign investment laws.

This short article deals with that situation.

Australia’s foreign investment laws

The Foreign Acquisitions and Takeovers Act 1975 (Cth) and the Foreign Acquisitions and Takeovers Regulation 2015 (Cth) set out the rules about foreign ownership of land in Australia. The regime constituted by them is complex and I don’t propose to descend into the detail of it here.

The short point is that a foreign person who proposes to acquire Australian land may need Foreign Investment Review Board approval before doing so.

(This is particularly relevant to residential and vacant commercial land, but it can apply to other types of land too).

Most people are probably aware that there are rules that limit the acquisition of Australian land by foreigners. Perhaps less well understood though, is how easy it is for some investment vehicles to be deemed “foreign persons” under the regime.

Under the regime, a discretionary trust that has even a single foreign resident beneficiary—that is, a beneficiary who is not ordinarily resident in Australia—could be deemed a “foreign person”.

A way forward

If you have an aspiration to buy Australian land through the framework of a discretionary trust, you should consider whether any of the beneficiaries of the trust reside overseas. If they do, the trustee may be a “foreign person” for the purposes of the regime.

If the trustee is a foreign person under the regime, then it needs to notify FIRB and obtain approval before buying residential or vacant commercial land (potentially other types of land too). Failure to do so could expose the trustee to significant penalties, including infringement notices, civil and criminal penalties.

Trustees of discretionary trusts should be thinking about these matters before signing contracts to buy Australian land. Specifically:

1. A trustee that intends to buy Australian land, but thinks it may be a foreign person under the regime should take advice before it signs any purchase contracts. That advice could confirm (a) whether the trustee is in fact a foreign person, and if it is then (b) what (if any) steps it can take to alter that foreign person status.
2. Where the advice is that the trustee is a foreign person and that there is nothing it can do to alter that status, then the trustee should consider whether future contracts to acquire Australian land should be made subject to the grant of FIRB approval. Again, appropriate advices should be taken.

Conclusion

It is not uncommon for mum-and-dad investors to use a discretionary trust when buying land. It is also not uncommon for discretionary trusts to have a very wide field of beneficiaries, sometimes including basically every person to whom “mum and dad” are related. To avoid problems under Australia’s foreign investment laws, it is important that investors consider whether any beneficiaries could be considered not ordinarily resident in Australia.

My focus here has been on discretionary trusts but these issues can affect private companies too. These are complex matters which are difficult to convey in writing. Please contact the author if you require further information.

Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.