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. The assets impacted include Australian land.

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.

‘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.

Each FIRB 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 half of the year.

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.

Exemptions to the FIRB approval requirement

There are limited exemptions available where FIRB approval is not required. For example, one exemption is 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.

These taxes may be based on the value of the asset(s) inherited or the value of the estate, depending on the country.

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).

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