A beneficiary named in an Australian Will classed as a ‘foreign person’ must apply to the Foreign Investment Review Board (FIRB) for approval before they can inherit certain assets.

FIRB reviews acquisitions by foreign persons and determines whether the acquisition will benefit Australia’s national interests and economy.

If you wish to leave part of your estate to foreign beneficiaries, you should consider the impact of the FIRB. The assets impacted include substantial interests in securities in an Australian entity and Australian land.

‘Foreign persons’ are generally persons who are not ordinarily resident in Australia., which can include Australian citizens living overseas. Companies incorporated outside Australia or controlled by foreign trusts or foreign persons may also be affected.

Applying for FIRB Approval

Seeking FIRB approval is not generally one of the executor’s duties. However, once the legal interest has been transferred in accordance with the terms of the Will, foreign beneficiaries must apply to FIRB for approval. Strict timeframes require an application to be made within 30 days after acquiring the interest. Non-compliance with the legislative requirements can attract significant civil and criminal penalties.

FIRB application fees are significant. Unless the Will states otherwise, the beneficiary is usually liable to pay the application fee. The beneficiary may also incur legal fees if they require a lawyer’s assistance to make the application.

FIRB approval is not guaranteed: each application is assessed on a case-by-case basis. The FIRB usually takes about 30 days to consider whether the acquisition is contrary to Australia’s national interest. If approval is not granted, FIRB may impose conditions around ownership or the asset may have to be sold.

Vacancy fees

In addition, foreign owners of residential property may be liable to pay a vacancy fee if their property is unoccupied or unavailable for rent for at least 183 days in a 12-month period.

Foreign owners of residential dwellings in Australia must lodge a yearly vacancy fee return. The vacancy fee is generally the same as the application fee paid for the property, but some exemptions apply (e.g. if the dwelling is damaged or is being substantially renovated).

Exemptions to the FIRB approval requirement

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

Establishing a testamentary discretionary trust (TDT) in your Will may avoid the FIRB requirements; however, a TDT is only likely to be effective if none of the trust’s potential beneficiaries are foreign persons. Unless the TDT expressly prohibits 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 while the TDT is being administered (which may be up to 80 years).

Other estate planning considerations

Other factors which may affect estates with foreign beneficiaries include:-

Capital gains events

In most circumstances, an asset passing from a deceased estate to a legal personal representative or beneficiary does not trigger a capital gains tax (CGT) liability. But an asset passed to a beneficiary who is a foreign resident would no longer be taxable Australian property and the estate must pay CGT on the transfer.

However, there are conditions and exemptions around triggering a ‘CGT event K3’, so seek tax advice if you’re thinking of leaving an asset to a foreign resident.

Foreign death duties

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 asset(s) inherited or the value of the estate.

Additional taxes for trusts

Testamentary discretionary trusts with foreign residents as potential beneficiaries may be subject to surcharge land tax (on the holding of residential land) and foreign person surcharge purchaser duty (on the acquisition of residential land).

Here to Help

If your Will includes beneficiaries who currently live overseas or intend to do so in future, contact us for estate planning advice to secure the best possible outcome for your estate and your beneficiaries.