Foreign Investor Surcharge – Additional tax payable by foreign purchasers of residential land
On 1 July 2015, Victoria introduced a controversial new tax known as ‘foreign purchaser additional duty’. One year on, both New South Wales and Queensland have introduced similar provisions and Victoria has increased the surcharge from 3% to 7%. The remaining states and territories are yet to confirm whether they will be looking to introduce similar legislation in the near future.
It is important to note that these charges are in addition to the transfer duty payable on the transfer of land (of up to 5.75%) and the standard Foreign Investment Review Board (FIRB) application fees which can be in excess of 1% of the purchase price.
From 1 July 2015, a foreign purchaser acquiring residential property in Victoria is liable to pay ‘foreign purchaser additional duty’ in addition to any transfer duty on the dutiable value of the property. Originally starting at 3%, the additional duty rate was increased to 7% for contracts, transactions, agreements and arrangements entered into on or after 1 July 2016.
Duty in Victoria is currently charged on a sliding scale up to 5.5%, rising to a maximum duty rate of 12.5% for foreign purchasers of residential land.
New South Wales
From 21 June 2016, foreign purchasers acquiring residential property in New South Wales were liable to pay 4% ‘surcharge purchaser duty’ in addition to any transfer duty on the dutiable value of the property.
Foreign purchasers are also no longer entitled to the 12 month deferral of stamp duty for off-the-plan purchases of residential property.
Duty in New South Wales is currently charged on a sliding scale up to 5.5%, rising to a maximum duty rate of 9.5% for foreign purchasers of residential land not exceeding $3 million.
Residential properties exceeding $3 million will be subject to a ‘premium property duty’ on a sliding scale up to 7%, rising to a maximum duty rate of 11% for foreign purchasers.
From 1 October 2016, the ‘additional foreign acquirer duty’ will add an additional 3% to the duty payable on the purchase of residential property in Queensland by foreign investors.
Duty in Queensland is currently charged on a sliding scale up to 5.75%. With the additional charge, this will rise to a maximum duty rate of 8.75% for foreign purchasers of residential land.
Although known under a slightly different name in each state, the general principles remain predominately the same between jurisdictions; however it is recommended you seek specialist advice in relation to the relevant jurisdiction prior to signing the purchase contract.
Who is a foreign person?
The surcharge will be imposed on acquisitions by a ‘foreign person’. Unhelpfully, the definition of foreign person for the purpose of these surcharges differs between jurisdictions, with only New South Wales adopting a definition that is consistent with the definition used in the relevant federal legislation, the Foreign Acquisitions and Takeovers Act 1975 (Cth). Generally however, a foreign person will include a foreign individual, a foreign corporation or the trustee of a foreign trust.
A foreign individual is generally characterised as a natural person who is not an Australian citizen and does not hold any of the relevant permanent resident visas.
A foreign corporation will generally include any corporation incorporated outside Australia, or an Australian company in which foreign persons (i.e. a foreign individual, a foreign corporation or trustee of a foreign trust), together with their associates, have a controlling interest. This controlling interest threshold varies between 20% and 50% depending on the jurisdiction.
A trust will be classified as a foreign trust where foreign persons, together with their associates, hold a controlling interest. Again, the threshold for controlling interest varies between jurisdictions, as does the treatment of non-default beneficiaries under discretionary trusts.
In working out the interests of foreign persons to be taken into account, Queensland and New South Wales aggregate the interests of all foreign persons, regardless of whether or not they are associates. In Victoria only the interests of associated persons are aggregated, not all unrelated foreign persons.
What is residential land?
The definition of residential land also varies between jurisdictions. Generally it will include residential land in the relevant State that is or will be used solely or primarily for residential purposes. This may include both developed and vacant land. Where the land is used or intended to be used for the purposes of a mixed-use development, the surcharge will generally only apply to the residential proportion of the land.
The legislation in each State is slightly different, for example:
- In Victoria, the definition of ‘residential property’ specifically excludes premises used or intended to be used as commercial residential premises (e.g hotels and motels), residential care facilities, supported residential services or retirement villages.
- In New South Wales it includes:
- land on which there are dwelling(s) or building(s) under construction that, when completed will constitute one or more dwellings
- strata lots, utility lots or land use entitlements that relate to a separate dwelling, or
- vacant land that is zoned or otherwise designated for residential or principally residential purposes.
(Although there is no specific exemption for ‘commercial residential premises’, the New South Wales Office of State Revenue (OSR) has confirmed that such land will not be subject to the surcharge.)
- In Queensland it includes land:
- that is or will be solely or primarily used for residential purposes, and
- which has a building, or will have a building constructed and approved for ‘human habitation by a single family unit’. This part of the definition covers a range of scenarios including established homes and apartments, vacant land on which a house or apartment will be built, land for development and established buildings to be renovated for residential use but will generally exclude ‘commercial residential premises’.
Considering the difficulty governments can face collecting tax from foreign investors, both the Victorian and Queensland legislation give the relevant Commissioner power to impose a first charge on the land for any unpaid duty surcharge and in extreme circumstances, the power to affect a sale of the property. New South Wales does not currently give the Commissioner power to register a charge.
The Queensland Commissioner also has the power to pursue either the purchaser or vendor for any unpaid surcharge as they are jointly and severally liable; however in practice the OSR’s general policy is to only pursue the purchaser.
Concessions and exemptions
Under the Victorian legislation, the Commissioner can grant a discretionary exemption in circumstances where the foreign purchaser of residential land is a developer that is increasing the housing stock and contributing to the local economy. Neither the Queensland nor the New South Wales legislation includes any express exemption from the surcharge for acquisitions by developers, however it is expected that some discretionary relief from the surcharge may be available for developers in Queensland.
Specifically, the Queensland OSR website states that the Commissioner has the power to grant an exemption (via ex gratia relief) in exceptional circumstances, taking into account ‘a range of factors such as benefits to the economy, competitive disadvantage … and the delivery of community benefits including jobs, infrastructure and housing supply’.
At this time, New South Wales has not indicated any intention to offer any form of special relief for developers.
Landholder duty and corporate trustee duty
It is worth noting that the surcharge will also apply to landholder duty and corporate trustee duty to the extent that the underlying property is residential land and the acquirer is a foreign person.
Land tax surcharge
It is also important to consider the affect on the land tax surcharge which applies in Victoria and New South Wales to land owned by a foreign person.
In Victoria, the land tax surcharge (called the absentee owner surcharge) is broad, applying to both residential and commercial land owned by an ‘absentee owner’, which is a broader interpretation than the ‘foreign person’ test as set out above. The surcharge came into effect on 1 January 2016 at a rate of 0.5% on Victorian land owned by an absentee owner and will increase to 1.5% from 1 January 2017.
The New South Wales land tax surcharge commences on 31 December 2016 and will apply from the 2017 land tax year to all residential land owned by a foreign person at midnight on 31 December in any year, at a rate of 0.75% of the value of the property. It is applied using the same definitions of ‘residential land’ and ‘foreign person’ as for the New South Wales duty surcharge and will only apply to residential land.
Currently, Queensland does not have a specific land tax surcharge on foreign persons (but in effect, there are higher land tax rates for absentee owners and the availability of certain exemptions is also limited for absentee owners).
What you need to do
Any foreign investors proposing to acquire residential land in Queensland, New South Wales or Victoria (including developers buying land for residential development) or shares or units in companies or trusts that hold residential land in those jurisdictions, should seek specialist duty advice to ensure the best possible duty outcome.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.