Contributed by Karina Foo     

karinamei.foo@gmail.com

As Malaysian interest in Australian property continues to grow, so does the complexity of choosing the right ownership structure. Trusts are often promoted for asset protection, tax planning and succession but for non-resident investors, especially those with connections in both Malaysia and Australia, the reality is far from straightforward.

Recent tax changes, such as a 15% capital gains withholding tax for non-residents and rising state land tax surcharges (up to 5% in NSW from 2025) mean the stakes have never been higher.

Understanding non-resident trusts

A trust’s residency in Australia is determined by three aspects: Where the trustees reside, where the trust’s assets are located and where the trust’s management and control occur.

“Residency in this context goes beyond a passport or a postal address,” explained international tax specialist TJD Accounting Services principal Dominic Murphy. “It’s about effective control—who is actually pulling the strings and from where? If you try to appoint an Australian resident as a trustee but retain decision-making from overseas, the ATO (Australian Taxation Office) will see through that arrangement. You’ll face surcharges and penalties.”

The key rule: If any beneficiary, trustee, or controller is a non-resident, the trust will be classified as a foreign trust, triggering the following consequences:

• Land tax surcharges in all states (up to 5% in NSW, 4% in Victoria starting 2025)
• Stamp duty surcharges in all states (up to 8% in Victoria)
• Top marginal tax rates (45%) on rental income distributed to foreign beneficiaries

Who can use trusts?

Australian discretionary trusts are only effective if all trustees and beneficiaries are Australian citizens or permanent residents (PRs). If even one potential beneficiary is a non-resident, the trust will be classified as foreign and the surcharges and high tax rates will apply.

“We see many Malaysian families wanting to help their children buy property in Australia. But unless every person involved in the trust—trustees, beneficiaries, controllers—is a PR or citizen, the trust will be treated as foreign and lose its tax advantages,” Murphy said.

Key scenario:

If Malaysian parents want to help a PR child buy an investment property, the trust deed must exclude all non-residents (including themselves) as beneficiaries and controllers and the child must be the sole beneficiary and trustee. Parents can provide funds from overseas as a gift but must not be trustees, members or beneficiaries, nor have any control or entitlement. “Even a hint of involvement from a non-resident can trigger foreign trust status,” Murphy emphasised.

If both the investor and their family are non-residents, even with an Australian resident trustee, the trust will still be classified as foreign. This results in high state stamp duty, land tax surcharges and no tax efficiency.

For mixed residency families, the trust only works if the non-resident parent has no stake, control or entitlement and the deed explicitly excludes them as a beneficiary. Non-residents can lend funds to the trust on a commercial basis (with withholding tax on interest payments) but cannot otherwise participate. “The State Revenue Office assumes any non-resident named in the trust is in control, and from that perspective, the trust structure won’t work,” Murphy said.

Legal requirements for establishment

To establish a compliant trust:

• The trust must be established via a valid deed, clearly defining its terms, powers and beneficiaries.
• Trust deeds must explicitly exclude foreign persons, corporations and trustees from being beneficiaries.
• FIRB approval may be required before property acquisition; breaches can result in penalties of up to 50% of the property’s market value.
• All trusts require a Tax File Number (TFN) and must lodge annual tax returns, even if no income is earned.

Recent legal decisions, such as the 2024 Chloe Adolphi Family Trust case, reinforce that amending a trust deed after a tax event is unlikely to succeed. “Trying to fix a trust deed after a tax event is like buying insurance after a car crash. You have to get it right the first time,” Murphy warned.

Choosing the Right Trust Structure

Discretionary trusts offer flexibility in distributing income and capital but present specific risks for non-residents. Unless the deed excludes all foreign persons, the trust may be liable for additional state land tax and duty.

Trustees may be taxed at the top marginal rate (45%) on behalf of foreign beneficiaries. Only resident trusts are entitled to a discount on capital gains which can be passed on to resident beneficiaries. Often, a trustee company is recommended to act on behalf of the trust.

Unit trusts and companies

Unit trusts are used for joint ventures or syndicated investments. If any unit holder is a non-resident, surcharges may still apply. Companies must have at least one Australian resident director. The company tax rate is a flat 30%, and non-resident shareholders may face withholding tax on dividends. Companies do not receive a discount on capital gains tax and capital gains are treated as normal income. Both structures often use a trustee company to act on behalf of the trust.

Trusts are generally not suitable for principal places of residence (PPR). The main residence capital gains tax exemption does not apply to properties held in trust. Any property held in trust is treated as an investment and subject to capital gains tax (CGT) on sale.

Foreign surcharges: The new reality

Australian states and territories impose additional land tax and stamp duty surcharges on foreign trusts that hold residential property. For example, in NSW, the land tax surcharge will increase from 4% to 5% from Jan 1, 2025. Victoria and Queensland have their own rates and definitions of foreign trust. These surcharges can significantly increase the cost of property ownership for non-resident investors.

Trusts are powerful instruments but only for the right people. They require meticulous planning, tailored legal drafting and ongoing compliance. For Malaysian families, unless all parties involved are Australian PRs or citizens, trusts are unlikely to deliver the hoped-for tax or asset protection benefits. The ATO and State Revenue Offices are vigilant and foreign investors must pay both federal and state taxes.

“There’s no one-size-fits-all solution. But if you get the structure right from the start, a trust can be a robust tool for long-term planning. Just remember: any non-resident involvement will undo all the benefits. It’s best to speak to an accountant who is familiar and experienced with property trust structures,” Murphy noted.

Trusts can be useful but only if every trustee and beneficiary is a PR or citizen. Any involvement by non-residents, even as a potential beneficiary, means the trust will be classified as foreign and subject to extra taxes. 

Karina Foo is the marketing consultant of TJD Accounting Services and is based in Australia.

Stay ahead of the crowd and enjoy fresh insights on real estate, property development and lifestyle trends when you subscribe to our newsletter and follow us on social media.