FIRB Regime Reform Part II: Implications on Estate and Tax
In Part I of the discussion regarding the recent change to foreign investment laws, we look at the removal of specific exemption under the Foreign Acquisitions and Takeovers Regulation 2015 (“Regulation”). You can read the update here: https://www.cmigroup.com.au/post/firb-regime-reform-part-i, which sets the premise for this article.
According to the amendment to the FIRB (Foreign Investment Review Board) Regime, it is likely that an acquisition by will of interest, assets, trust or Australian land would require FIRB approval. This results in potential complication where an estate asset is to be distributed to a foreign person beneficiary in accordance with the terms of a will, which may not be possible under the amended framework.
A possible solution is to draft a gift in a will with a condition which must be fulfilled prior to the gift being effected; the condition being the beneficiary is not a foreign person under the FIRB Regime. This could be replicated in a testamentary trust, in which provisions are stipulated to ensure that the trustee is not a foreign person.
If there is no possible solution within a will, there are potential options for consideration:
A legal personal representative may make an application to the court for guidance and orders;
A deed of family arrangement may be drafted to determine the distribution of estate asset;
The beneficiary may disclaim the gift; or
Selling the relevant asset and managing tax consequences.
Each option above will give rise to different legal and tax implications. Hence, it is important to consider the provisions of Division 128 of the Income Tax Assessment Act 1997 (“ITAA”) and relevant State and Territory legislation.
Division 128 governs the CGT (Capital Gains Tax) consequences resulting from a person’s death. Generally, A CGT asset that devolves to a legal personal representative of a deceased estate before passing to a beneficiary does not trigger CGT consequences for the deceased estate. However, there are two issues to consider under Division 128 which may affect this:
Where a non-resident beneficiary inherits a CGT asset that is not a TAP (Taxable Australian Property), the deceased estate is deemed to have triggered a CGT event which can create estate tax liability. It is important to deduce whether a foreign person beneficiary under the FIRB Regime is also a foreign person under the ITAA;
The transfer of asset from a legal personal representative of a deceased estate to a beneficiary must comply with the requirements of Section 128.20. All options above must meet such requirements to avoid triggering CGT consequences.
Generally, for concessions to apply, a transfer of dutiable property from a legal personal representative to a beneficiary must be actioned in accordance with the trusts included in a will of the deceased or arising on an intestacy. Any transfer of dutiable property that is inconsistent with the trusts may trigger duty. Considering the complexity of the FIRB Regime, succession, trust and taxation laws, it may be worth to engage a specialist when planning or administering an estate to avoid legal issues and unwanted taxation outcomes in the future.