Foreign persons purchasing residential real estate in New South Wales will now have to pay a duty surcharge from 21 June 2016 and land tax surcharge from and including the 2017 land tax year, in measures announced in this week's State Budget.
The Treasurer also announced that foreign investors will no longer be entitled to the 12 month deferral for the payment of stamp duty for off-the-plan purchases of residential property. Foreign persons will not be provided with a tax-free threshold for the land tax surcharge, nor will there be an exemption for the principal place of residence.
This brings New South Wales into line with the other States on the eastern seaboard.
From 1 July 2016, the State Government is proposing that Victoria will have a 7% foreign investor surcharge on residential stamp duty (increasing from the current 3%). From 1 January 2017, it is also expected that the existing 0.5% land tax surcharge will increase to 1.5%.
Queensland also recently announced a 3% duty surcharge on the foreign acquisition of residential property, with effect from 1 October 2016.
As a result, foreign entities should carefully check the jurisdiction specific requirements for surcharge duty and land tax before entering into new transactions.
Duty surcharge at a glance
Rate of duty surcharge
New South Wales: 4% surcharge from 21 June 2016.
Victoria: 7% surcharge proposed from 1 July 2016 (increasing from 3%).
Queensland: 3% from 1 October 2016 - known as AFAD (Additional Foreign Acquirer Duty).
Type of property affected
New South Wales: Residential-related property, which includes:
- residential land in New South Wales;
- an option to purchase residential land in New South Wales (including nominations or assignment of the option).
Residential land includes:
- a parcel of land on which there are one or more dwellings;
- a strata lot;
- a utility lot;
- a parcel of vacant (or substantially vacant) land that is zoned for residential purposes,
but does not include any land used for primary production.
The definitions of "residential-related property" and "residential land" are complex and the above summary is intended as a guide only.
Victoria: For contracts entered into on or after 1 July 2015 but before 1 July 2016, residential property is either:
- land that has a building on it; or
- land that is vacant but on which a foreign purchaser intends to construct a residential building.
For contracts entered into on or after 1 July 2016, it is proposed that residential property include:
- land which includes a building, or part of a building, that a person intends to refurbish or extend;
- land on which a person intends to construct a building;
- land in respect of which a person has undertaken or intends to undertake land development for the purposes of constructing a building,
to be used solely or primarily for residential purposes and which may lawfully be used in that way. Some exceptions are expected to apply for commercial residential premises, residential care facilities, supported residential services and retirement villages.
Queensland: Residential land is land that is or will be solely or primarily used for residential purposes, and on the land:
Who does it affect?
New South Wales: A foreign person within the meaning of the Foreign Acquisitions and Takeovers Act 1975 of the Commonwealth, as modified for individuals by the Duties Act (section 104J), being:
- an individual not ordinarily resident in Australia (except for Australian citizens or a New Zealand citizen who holds a Special Category Visa (Subclass 444)); or
- a corporation or trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest (20%); or
- a corporation or trustee of a trust in which 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 (40%); or
- a foreign government; or
- any other person, or any other person that meets the conditions, prescribed by the Foreign Acquisition and Takeovers Regulation, which includes a foreign government investor.
Victoria: Foreign purchasers, who are foreign natural persons, being persons who are not:
- citizen or permanent residents of Australia; or
- New Zealand citizens with a Special Category Visa (Subclass 444).
Foreign corporations, including:
- corporations incorporated outside Australia; and
- corporations incorporated in Australia if a foreign natural person, another foreign corporation or a trustee of a foreign trust and their associates have a controlling (> 50% or the ability to control) interest in the corporation.
Trustees of a foreign trusts, being trustees of trusts in which a substantial interest (>50% or the ability to control) is held by a foreign natural person, a foreign corporation or the trustee of another foreign trust and their associates, noting that any foreign beneficiary of a discretionary trust will be deemed to hold the maximum interest in the trust that the trustee has power to distribute to it.
Queensland: Foreign persons are:
- Individuals who are not Australian citizens or permanent residents (including the Subclass 444 visa New Zealanders);
- Companies incorporated outside Australia, or Australian companies in which foreign persons have an interest of 50% or more; and
- A trust where 50% of the "trust interests" are held by foreign persons. For a unit trust this will simply mean looking at the unit register, and in the case of discretionary trusts, identifying the "takers in default" to see if any are foreign persons. The trust interest is simply the proportion available to each taker in default - in a case where there were two takers in default, if one was a foreign person the trust would be a foreign person also.
Are indirect acquisitions caught?
New South Wales: Yes. An acquisition by a foreign person of an interest in a landholder which has an interest in residential land will be subject to the surcharge where the acquisition is otherwise dutiable.
Victoria: Yes. Any acquisition by a foreign purchaser of an interest in a landholder which has an interest in residential property will be subject to the surcharge where the acquisition is otherwise dutiable.
Queensland: Yes. Any acquisition by a foreign person of an interest in a landholder which has an interest in residential land will be subject to the surcharge where the acquisition is otherwise dutiable.
When does it apply?
New South Wales: Surcharge duty transactions entered into on or after 21 June 2016.
Victoria: Contracts entered into (or relevant acquisitions made) on or after 1 July 2015.
Queensland: Contracts entered into on or after 1 October 2016, whether or not pursuant to a pre-existing option.
Land tax surcharge at a glance
New South Wales
- 1.5% surcharge from 2017 land tax year
- No tax-free threshold for the surcharge
- No principal place of residence exemption
- 0.5% from 1 January 2016
- 1.5% proposed from 1 January 2017
No land tax surcharge to be applied in Queensland
Type of property affected
New South Wales: Surcharge land tax is payable in addition to any land tax payable in respect of the residential land under the other provisions of this Act, and is so payable even if no land tax is payable under those other provisions.
Residential land has the same meaning as for the amendments to the Duties Act for the surcharge duty.
Victoria: All land subject to land tax in Victoria.
Who does it affect?
New South Wales: The land tax surcharge applies to the same foreign persons as the surcharge duty.
Victoria: "Absentee persons", being:
- A natural person absentee: a person that is not an Australian or New Zealand citizen or a permanent resident of Australia, who does not ordinarily reside in Australia;
An absentee corporation: a corporation incorporated outside Australia or a corporation in which an absentee person, or that person together with another absentee person, has a controlling interest; or
A trustee of an absentee trust: a trust that has at least one absentee beneficiary.
When does it apply?
New South Wales: From midnight on 31 December 2016
Victoria: From 1 January 2016.
Responding to the duties surcharge
Purchasers of residential land in NSW, Victoria and Queensland should carefully consider whether they are "foreign" for the purpose of the relevant jurisdiction and, if so, whether the surcharge will apply to the land or interest being acquired.
If the surcharge applies, purchasers will then need to carefully consider what consequences this might have on the purchase price and the transaction structure more generally (for example, nominations or assignments of options to purchase residential land).
In Victoria and Queensland, purchasers should also consider whether they are eligible for a discretionary exemption from the Commissioner. For example, in Victoria, the Treasurer and Commissioner have discretion to exempt persons where the activities of the entities they control or have a substantial interest are involved in the development or re-development of property that adds to the supply of housing stock in Victoria. There is currently no similar exception in NSW, although it is anticipated that there may be a similar process in Queensland.
Queensland retains the lowest duty rate on the East Coast, and moreover there is still a window of opportunity to invest in Queensland property without the duty surcharge applying until 1 October 2016.
Responding to the land tax surcharge
Purchasers of residential land in NSW and Victoria will also need to consider the long-term holding costs for residential land (in NSW) and all land subject to land tax (in Victoria) having regard to the stamp duty surcharge.
In NSW, for residential developers, along with the abolition of the 12 month deferral for the payment of stamp duty for off-the-plan purchases of residential property, two other changes could have an impact on off-the-plan sales: the abolition of both principal place of residence exemption and the tax free threshold for land tax for foreign persons.
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