Since being introduced on 1 July 2015, FPAD has applied if a foreign purchaser acquires residential property and one of the exemptions does not operate. Foreign purchasers of residential property not only have to pay normal land transfer duty of 5.5%, but must also pay FPAD of 8% (so total duty of 13.5% on residential property acquisitions).

In determining whether or not a discretionary trust is ‘foreign’ it has been the practice of the SRO (since 2015) to look at who is likely in the future to receive distributions from the trust. If the available information suggests that a foreign person will receive distributions, then the trust was considered foreign, and FPAD would be imposed the purchase of residential property.

With effect from 1 March 2020, the SRO practice of characterising trusts according to likely distribution patterns will cease. Instead, if a discretionary trust (including a family discretionary trust) has any potential foreign beneficiary, the trust will generally be regarded as a foreign trust for the purpose of the rules, irrespective of whether or not distributions are likely to be made to the foreign beneficiary.

As a consequence of this change, if a discretionary trust has any potential foreign beneficiary (capital and/or income), it will be considered a 100% ‘foreign trust’ and 8% FPAD (in addition to base 5.5% duty) will be payable on purchases of residential property.

The new ‘practice’ will apply to all discretionary trusts formed on or after 1 March 2020, and discretionary trusts formed before that date, which are used to acquire residential property on or after 1 March 2020.

In light of the change, careful consideration should be given to the preparation of new discretionary trust deeds. If foreign persons are not intended to benefit under the deed, then all foreign persons should be specifically excluded from benefiting under the trust.

Similarly, careful consideration should be given to the utilisation of a pre- existing discretionary trust to acquire residential property on or after 1 March 2020. If the deed does not already specifically exclude foreign persons from benefiting under the trust, then the deed should be amended prior to settlement to specifically exclude foreign persons.