Considerations for Estate Planning With Foreign Beneficiaries

tDuring the administration of deceased estates, executors of a Will are not generally required to seek FIRB approval as part of their executorial duties. However, once the legal interest is transferred pursuant to the terms of the Will, foreign beneficiaries will be required to apply to FIRB for approval within 30 days. 

Applying to FIRB incurs significant application fees. For example, a property worth $1 million or less incurs a fee of $14,100, while a property worth between $1 to $2 million incurs a fee of $28,200. If the Will does not state who is liable to pay the application fee, the beneficiary will generally be liable for payment. Legal fees may also be incurred if assistance is required with making the application.

It is important to note that FIRB approval is not guaranteed and each application is assessed on a case-by-case basis. FIRB will consider each application and whether the acquisition is contrary to Australia’s national interest. It usually takes around 30 days for the application to be considered. If approval is not granted, the asset may need to be sold or conditions around ownership may be imposed. 

There are strict timeframes requiring an application to be made within 30 days of acquiring the interest. Significant civil and criminal penalties can be imposed for not complying with the legislative requirements. 

In addition, a vacancy fee may be levied on foreign owners of residential property if their property is not occupied or available for rent for at least 183 days (approximately six months) in a 12-month period. 

Foreign owners of residential dwellings in Australia are required to lodge a yearly vacancy fee return. If applicable, the vacancy fee charged is generally the same as the application fee paid in respect of the property, but some exemptions apply (for example, if the dwelling is damaged or undergoing substantial renovations). 

There are limited exemptions available where FIRB approval may not be required even if a beneficiary is a non-resident. For example, where an asset is acquired as a legal consequence of an involuntary act (such as where there is no Will and land is distributed according to the rules of intestacy), an exemption applies, voiding the need to apply to FIRB. 

Testamentary discretionary trusts (TDTs) established in your Will may avoid the FIRB requirements; however, using a TDT is only likely to be effective if none of the trust’s potential beneficiaries are foreign persons. Unless there are express provisions preventing foreign persons becoming beneficiaries of the TDT, the trustee will need to monitor the potential beneficiaries and notify FIRB should any of them become foreign persons at any stage while the TDT is being administered (which may continue for up to 80 years).

Even if you’re comfortable with the current FIRB approval process, it’s important to consider other factors that might affect estates with foreign beneficiaries.

In most circumstances, an asset that passes from a deceased estate to a legal personal representative or beneficiary does not trigger a capital gains tax (CGT) liability. But, if one of your beneficiaries is a foreign resident and, by passing to them, the asset would no longer be taxable Australian property, the estate must pay CGT (with regard to the value of the asset on the day the testator died minus its reduced cost base).

Keep in mind that there are exemptions and conditions around triggering a ‘CGT event K3’. Make sure you seek appropriate tax advice if you’re thinking of leaving an asset to a foreign resident.

If an asset is gifted to a beneficiary who is a foreign resident, Australian taxes aren’t the only consideration. Many countries have death duties and inheritance taxes that the beneficiary may have to pay. 

Depending on the country, these taxes may be based on the value of the estate or the value of the asset(s) inherited, and can be particularly problematic if the asset in question can’t easily be liquidated (for example, an heirloom or family property). 

In some Australian states and territories, leaving assets to foreign beneficiaries may attract additional taxes. In New South Wales, for example, testamentary discretionary trusts that have foreign residents as potential beneficiaries may be subject to foreign person surcharge purchaser duty (on the acquisition of residential land) and surcharge land tax (on the holding of residential land). Similar laws apply in both Victoria and Tasmania.