“The impact of the changes to Australia’s foreign investment laws and the stamp duty and land tax surcharge regimes will be far-reaching and substantial for many willmakers and their beneficiaries,” Mr Cox said.

“Similarly, if you plan to make a will benefiting foreign persons, it is important to be aware of how these laws could affect your estate plan.

“It is strongly recommended that you seek estate planning advice if your existing will includes any beneficiaries who currently live overseas, who plan to live overseas in the future or if you intend to make a will which benefits a foreign person in any way. 

“If the idea of forever excluding foreign persons from your will is not desirable, there are alternative strategies that can help you to achieve your estate planning objectives.”

Recent changes to Australia’s foreign investment laws now mean that gifts of certain types of assets by will, including residential land of any value, are no longer exempt from the Foreign Investment Review Board (FIRB) regime, according to Mr Cox. 

As a result, if assets caught by the FIRB regime are gifted by the will directly to a “foreign person”, that beneficiary may need to seek FIRB approval before they can receive the asset from your estate.    

“As defined in the Foreign Acquisitions and Takeovers Act 1975 (Cth), broadly speaking, ‘foreign person’ includes individuals who are not Australian citizens or permanent residents, companies incorporated outside of Australia or that are controlled by foreign persons and foreign trusts,” he noted.

“In relation to residential land specifically, a beneficiary who is a foreign person is now required to seek FIRB approval before the land can be transferred to them. Failure to do this could have serious consequences for the beneficiary, including substantial civil and even criminal penalties. The FIRB approval application fees are otherwise considerable.

“The fees payable increase based on the value of the land. For example, for a property worth between $1 million and $2 million, the fee is currently $12,700. If your will does not state who pays the application fees in this instance, it will be the responsibility of the beneficiary who may not have readily available funds.”

However, Mr Cox said that FIRB approval is also not guaranteed. If approval is denied and the will does not state what happens then, the options will need to be considered including selling the land and paying the net proceeds to the beneficiary instead, entering a deed of arrangement with other beneficiaries of your estate to adjust distributions, or the executor may even need to seek directions from the court about what to do.

“Each of these steps could have their own unintended tax and cost consequences depending on the terms of your will,” Mr Cox said.

“For example, if the property is sold by your executor and capital gains tax is payable by your estate, in the absence of specific provisions in your will, the tax will be payable firstly out of the residue of your estate, thereby potentially reducing the entitlements of other beneficiaries of your estate.

“If assets caught by the FIRB regime are otherwise to pass into a testamentary discretionary trust (TDT) set up in your will (rather than directly to a beneficiary) and the (often very wide) class of the TDT’s potential beneficiaries does (or may in future) include anyone who is a foreign person, then the trustee of the TDT will automatically be deemed to be a foreign person as well.

“This means that the trustee may need to seek FIRB approval (and pay an application fee) to receive certain assets from your estate and/or to acquire certain assets within the TDT in the future.”

Senior associate Krystal Bellamy noted that even if none of the TDT’s potential beneficiaries are a foreign person when you die, the trustee will need to monitor whether any of the TDT’s beneficiaries is or has become a foreign person in the future. 

For example, a foreign person your child chooses to marry, or a grandchild of yours who is born overseas. 

“The trustee needs to promptly notify the Treasurer if the trustee has, as a result, automatically become a foreign person themselves,” she said

“Given that a trust can continue for up to 80 years, and that failure to comply with these requirements could expose the trustee to substantial civil and criminal penalties, this could lead to your chosen trustee resigning from their role to avoid these responsibilities.” 

Stamp duty and land tax surcharges

Meanwhile, legislation has further been introduced in a number of Australian states and territories which impose stamp duty and land tax surcharges on trusts (including TDTs) which have foreign persons as potential beneficiaries. 

Incidentally, the surcharges will also apply where a foreign person acquires Australian land directly (assuming, of course, they have first obtained FIRB approval), whether through a will or otherwise, according to Ms Bellamy.

“In relation to TDTs specifically, the issue is mainly one that arises if, at the date of your death, you own land in one or more of the jurisdictions that have these surcharge regimes in place and that land passes into a TDT which has foreign persons among its class of beneficiaries,” she explained.

“The issue also arises if the TDT is used to acquire real property in those jurisdictions in the future. Where applicable, the surcharges can be considerable, particularly in respect of land tax which is an ongoing annual cost.

“For land held (or acquired) in New South Wales, if your will was made on or after 1 January 2021, the surcharges will apply to the trustee of a TDT set up in your will, unless the terms of the TDT expressly prevent any foreign person whatsoever from ever being a potential beneficiary, and further prevent the terms of the TDT from ever being amended in this regard. 

“This contrasts with most other states and territories which only impose the surcharges where the relevant trust’s default beneficiaries (for example, those whose entitlements result from the trustee not exercising their discretion) are foreign persons.”