Australian state level tax legislation targeting foreign persons

Australian state level tax legislation targeting foreign persons

As addressed in our recent article, Australian governments, both at the Federal and state level have for several years been targeting foreign individuals and other foreign investors in a range of ways. Most recently, 2017 has seen legislation at both the Federal and state levels which will introduce new provisions apply to foreign and non-resident persons or will extend laws already in place. In May 2017, the Treasurer announced several measures targeted specifically at foreign residents in the 2017-18 Australian Federal Budget.

Some of these provisions are in federal legislation and so apply to all Australia. Others were introduced by state governments. These will apply only to a particular state and may apply differently to similar provisions in other states. Having addressed the measures applying at the Federal level in a previous articles, this article addresses recent changes at the State level.

Foreign Purchaser Surcharges
As part of the State budgets delivered in May/June 2016, Victoria increased the rate of its foreign purchaser surcharge and New South Wales and Queensland introduced surcharges of their own for both stamp duty and land tax. New South Wales recently expanded the scope of both surcharges from 1 July 2017. The rates of stamp duty surcharge and land tax surcharge are as follows:

 

Victoria

New South Wales

Queensland

Surcharge purchaser duty on residential property    

7%

from 1 Jul 2016

8%

from 1 July 2017

3%

from 1 Oct 2016

Land tax surcharge for the 2017 land tax year

1.5% for residential and commercial property

0.75% for residential property

None

 

Surcharge purchaser duty on residential property (Surcharge Purchaser duty)

The key issues surrounding the foreign purchaser additional duty/surcharge are in respect of the definition of a foreign purchaser or foreign person and the definition of residential property/land. The issues can be summarised in the following table:

 

 

Victoria

New South Wales

Queensland

Name

Foreign Purchaser Additional Duty (FPAD)

Surcharge Purchaser Duty (SPD)

Additional Foreign Acquirer Duty (AFAD)

Start date

1 July 2015

21 June 2016

1 October 2016

Rate

7% (from 1 July 16)

8%
(from 1 July 2017)

3%

Property

Residential property

Residential land

AFAD residential land

Transferee

Foreign purchaser

Foreign person

Foreign person

Interest

Direct or indirect

Direct or indirect

Direct or indirect

Exemption regime

Yes

No

No

 

As is often the case with taxes and duties that directly fund the individual States, each State has introduced its own individual mechanisms to impose differing rates, for different types of property, on different classes of purchasers.

With that in mind and to avoid over complicating an already complex area, we will focus only on our home state of New South Wales. You should get appropriate advice where the residential property is subject to the surcharges of another state.

Surcharge purchaser duty in New South Wales
The 2016 NSW Budget introduced a 4 per cent surcharge purchaser duty on the purchase of residential real estate by foreign persons from 21 June 2016. However, the 2017 Budget increased the rate to 8% for agreements entered into on or after 1 July 2017. The surcharge is in addition to the duty payable on the purchase of residential property. This surcharge will also apply to landholder transactions if there is a landholder liability and one or more of the properties owned by the landholder is classified residential and the purchaser is a foreign person who purchases shares or units in the landholder.

Foreign persons will also no longer be entitled to the 12-month deferral for the payment of stamp duty for off-the-plan purchases of residential property. A purchaser/transferee declaration must be completed when buying or acquiring land in NSW.

Permanent residents (including New Zealand citizens)
From 20 June 2017 permanent residents, including New Zealand citizens holding a Special Category visa (subclass 444), are exempt from surcharge purchaser duty on their principal place of residence, if they occupy the home for a continuous period of 200 days within 12 months of purchase. The exemption will be granted if the person declares that they will complete the 200-day residence requirement.

Calculating surcharge purchaser duty
                 If 'A', who is a foreign person, purchases a residential property for $2 million, the duty is calculated as follows:

                 Stamp duty payable on $2 million       $95,490

                 Surcharge purchaser duty of 8% on $2 million $160,000

                 Total duty payable     $255,490

Land tax surcharge in New South Wales
The land tax surcharge applies to foreign persons owning residential land. If you meet the definition of a ‘foreign person’ and you own residential land in NSW above a certain value threshold you must pay a land tax surcharge of 0.75 per cent from the 2017 land tax year onwards. This is based on the taxable value of all residential land you own at 31 December each year including your principal place of residence. The surcharge is in addition to any land tax you may already pay and you may be required to pay the surcharge even if you do not pay land tax.

The surcharge is assessed in relation to each parcel of land, and is proportional to the extent of ownership. There are no joint assessments, secondary deductions do not apply and there is no tax-free threshold applicable to the surcharge.

Foreign persons, residential land and property
Surcharge purchaser duty and the land tax surcharge apply to foreign persons in respect of residential land or property. The definitions of foreign person and residential land or property therefore need to be considered in detail.

Residential land
Residential land does not include land used for primary production to which a land tax exemption applies. However, it includes any of the following:
          a. a parcel of land on which there are one or more dwellings, or a parcel of land on which there is a building under construction that, when completed, will constitute one or more dwellings, or
          b. a strata lot, if it is lawfully occupied as a separate dwelling, or suitable for lawful occupation as a separate dwelling, or
          c. a utility lot if its use is restricted to the owner or occupier of a strata lot, or
          d. a land use entitlement, if it entitles the holder of the land use entitlement to occupy a building, or part of a building, as a separate dwelling e.g. company title and residential flats, or
          e. a parcel of vacant land that is zoned or otherwise designated for use for residential or principally for residential purposes.

The surcharge is apportioned if a building has both residential and commercial purposes by applying an apportionment factor to the land tax value.

All other land tax exemptions may apply, including those for:
        • boarding houses;
        • low cost accommodation;
        • residential parks;
        • retirement villages;
        • primary production land; and
        • childcare centres.

Foreign person
The following are not foreign persons:
        • Australian citizens regardless of where they live.
        • Permanent residents of Australia who are ordinarily resident in Australia.
        • New Zealand citizens who hold a special category visa and are ordinarily resident in Australia.

However, any of the following persons can be a foreign person:
        • an individual
        • a corporation
        • a trustee of a trust
        • a beneficiary of a land tax fixed trust
        • a government
        • a government investor
        • a partner in a limited partnership.

To determine whether you are a foreign person, you need to consider:
       • the rules for the particular type of entity through which you hold the residential property; and
       • whether you hold a substantial interest or you and your associates hold an aggregate substantial interest

Foreign person
An individual, who is not an Australian citizen, is a foreign person if they are not ordinarily resident in Australia. An individual is ordinarily resident if they:
       • have actually been in Australia during 200 or more days in the previous calendar year (excluding the date of arrival or the date of departure), and;
       • is not (or, if not in Australia, was not immediately before their most recent departure from Australia) subject to any limitation as to time for their continued presence in Australia.

A corporation is a foreign person if:
       • an individual not ordinarily resident, a foreign corporation or a foreign government holds a substantial interest in it, or
       • two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest.

The trustee of a trust is a foreign person if:
       • an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest in the trust, or
       • two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest in the trust.

Where a trust is a fixed trust for land tax purposes, the beneficiaries are liable for their proportionate interests only. However, the trustee is responsible to pay the surcharge if the beneficiary defaults.

For special trusts, beneficiaries are not treated as owners and therefore they will not have to pay the surcharge. However, where any one or more of the potential beneficiaries are foreign persons, the trustee will be liable for surcharge land tax on the trust's interest in the property.

You will note that, for the surcharges to apply to a foreign person that is not an individual, an individual or individuals must hold a substantial interest in the entity or the trust. A person holds a substantial interest in an entity or trust if:
       a. for an entity: the person holds an interest of at least 20 per cent in the entity; or
       b. for a trust (including a unit trust): the person, together with any one or more associates, holds a beneficial interest in at least 20 per cent of the income or property of the trust.

Two or more persons hold an aggregate substantial interest in an entity or trust if:
       a. for an entity—the persons hold an interest of at least 40 per cent in the entity; or
       b. for a trust (including a unit trust)—the persons, together with any one or more associates of any of them hold, in the aggregate, beneficial interests in at least 40 per cent of the income or property of the trust.

The definition of associate includes:
       • individuals (e.g. relatives)
       • companies (e.g. substantial interest holders, holding entities, senior officers)
       • partnerships
       • trusts and super funds (e.g. substantial interest holders).

A relative of a person means:
       • the person’s spouse; or
       • the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendent or adopted child of that person, or of that person’s spouse (and the spouse of any of these persons).

Calculating the land tax surcharge
To assess the surcharge, calculate the taxable value of residential land, taking into account any relevant exemptions, the use of the land, and the proportion of ownership of each foreign person. The taxable value of residential land used for calculating the surcharge is the same as that used for land tax purposes. The tax liability will generally be the average of the unimproved land value for the current tax year and for the previous two tax years.

Example
'A' is a foreign person who owns land with a total land value of $2,000,000.  ‘A’ owns both commercial and residential land.
$1,200,000 of the land held by 'A' is 'residential land'. The remaining $800,000 is commercial land.
The land tax payable by 'A' is calculated on $2 million, which is $23,316.
The surcharge is calculated on the residential land which is 0.75% of $1.2 million = $9,000.

The implications of the surcharges for stamp duty and land tax for trusts in particular
If you are considering the surcharges for foreign persons in respect of both stamp duty and land tax you will need to take care about the terms of a trust deed, particularly if it is a discretionary trust. It is noted that where a foreign person has the potential to benefit under a discretionary trust, it may be possible for such a trust to be considered a foreign purchaser for the purposes of these additional taxes.

A revenue ruling (G10) has been introduced in New South Wales in respect of this.  It exempts a discretionary trust from surcharge taxes with retrospective effect if the trust deed is amended to remove foreign persons from the list of beneficiaries at any time between the introduction of the surcharges and the present date, and otherwise within 6 months after the liability was assessed.

It is therefore critical to speak with your lawyer to determine whether restrictions are required within the deed to ensure these additional taxes are not imposed on property holdings and transactions.