Additional duty and land tax surcharges for foreign purchasers of land in Australia

Foreign persons purchasing and holding real estate in Australia need to consider more than just whether they require the approval of the Foreign Investment Review Board (FIRB). They may also need to pay additional duty surcharge of up to 7% and an additional land tax surcharge of up to 1.5% per annum. This article explores these somewhat complex rules, which differ depending on the jurisdiction where the real estate in situated. Daniel Hui, Maddocks Lawyers

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Foreign duty surcharge

It is helpful to first discuss the rules imposing additional duty for acquisitions for residential land by foreign purchasers, both as a refresher and to provide context to the new land tax surcharge rules: both rules draw upon similar concepts and definitions.

The legislation in New South Wales, Victoria and Queensland all differ slightly and different terminology is used, so for simplicity we will refer to them all as the 'foreign duty surcharge' rules.

Effective date and rate of additional duty

The foreign duty surcharge rules were introduced in 2016 (or in Victoria's case, the rate of foreign duty surcharge was increased in 2016). Below are the effective dates for the new foreign duty surcharge rules and the rates of additional duty payable.

• NSW: 4% from 21 June 2016.
• VIC: 7% from 1 July 2016 (3% for transactions between 1 July 2015 and 30 June 2016).
• QLD: 3% from 1 October 2016.

Note that in Victoria the foreign duty surcharge is calculated on the value of the transaction exclusive of any concessions (for example, the off-the-plan duty concession) which may otherwise be available.

Which types of land are affected?

Broadly, the foreign duty surcharge rules are designed to apply to land used for residential purposes. However, each State differs slightly in terminology and what types of land are captured in the rules.

In New South Wales, foreign purchaser duty is imposed on acquisitions of 'residential land'. Residential land includes the following (and does not include land used for primary production):

• established homes and apartments;
• utility lots if their use is limited to the owner or occupier of an apartment which is residential land;
• land use entitlements, if it entitles the holder to occupy a building or part of a building as a separate dwelling; and
• vacant land zoned or designated for use for residential purposes.

In Victoria, foreign purchaser additional duty is imposed on acquisitions of 'residential property'. Residential property includes:

• land for use solely or primarily for residential purposes,
• land which includes a building, or part of a building, that a person intends to refurbish or extend solely or primarily for residential purposes;
• land on which a person intends to construct a building solely or primarily for residential purposes; or
• land on which a person intends to undertake land development for the purposes of:
  • constructing a building so the land is capable of being used solely or primarily for residential purposes, or
  • enabling another person to construct a building so the land is capable of being used solely or primarily for residential purposes.

Further, the foreign duty surcharge may also be payable in Victoria where land which was not 'residential property' at the time of transfer subsequently becomes 'residential property' (for example, because of a change to the use of the land or a change of intention by the purchaser).

In Queensland, the foreign duty surcharge is imposed on land that is solely or primarily used for 'residential purposes', where particular conditions are met. These include:

• established homes and apartments;
• vacant land upon which a home or apartment will be built;
• land for development for residential use; and
• refurbishment, renovation or extension of a building for residential use.

Which purchasers are affected?

In New South Wales, the definition of foreign person for foreign duty surcharge purposes is a modified definition of 'foreign person' from the Foreign Acquisitions and Takeovers Act 1975. This includes:

• an individual not ordinarily resident in Australia (except for Australian citizens or a New Zealand citizen who holds a Special Category Visa);
• a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest (>20%);
• a 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%);
• a foreign government; and
• 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.

In Victoria, a foreign purchaser includes a foreign natural person, a foreign corporation or a trustee of a foreign trust, as described below:

• a foreign natural person means an individual other than a citizen of Australia, a permanent resident of Australia or a New Zealand citizen who holds a Special Category Visa;
• a company is a foreign corporation if it is incorporated outside Australia, or a company incorporated in Australia where a foreign natural person, another foreign corporation or a trustee of a foreign trust and their associates have a controlling interest (>50%); and
• a trust is a foreign trust where a foreign natural person, foreign corporation or a trustee of another foreign trust has a substantial interest in the trust (>50%).

A 'controlling interest' may also exist where a person has the capacity to influence the outcome of decisions about a corporation's financial and operating policies, or the administration of a trust.

In Queensland, a foreign acquirer includes a foreign individual, a foreign corporation or the trustee of a foreign trust.

• a foreign natural person means an individual other than a citizen of Australia, a permanent resident of Australia;
• it is incorporated outside Australia, or a company incorporated in Australia where a foreign natural person, another foreign corporation or a trustee of a foreign trust has a controlling interest (50%); and
• a trust is a foreign trust where at least 50% of the trust interests are foreign interests.

And there's more — special rules for discretionary trusts

Discretionary trusts typically allow for distributions to a broad range of beneficiaries, but the beneficiaries are not usually considered to have an "interest" in the trust or the trust assets (merely the right to be considered as a potential recipient of the income and capital of the trust at the discretion of the trustee).

In New South Wales, each beneficiary of a discretionary trust is deemed to have the maximum percentage interest in the income or property of the trust. This is also the case in Victoria. Accordingly, a discretionary trust where even a single potential beneficiary of the trust is a foreign individual, foreign corporation or foreign trust (and remember that the class of potential beneficiaries can often be very broad) is considered a foreign trust for these purposes.

In Queensland, a discretionary trust may also be a foreign trust if the default beneficiary specified in the trust deed is a foreign individual. This is a different approach, in that the question is whether a foreign person is named in the deed, rather than whether a foreign person is a potential beneficiary.

Cleardocs now has available a Discretionary Trust — excluded beneficiaries document package that allows you to create all the documents you need to set up a discretionary trust that specifically excludes certain classes of beneficiaries. You have the option to create:

• a trust that excludes foreign beneficiaries; and/or
• a direct lineal relatives (or lineal descendants) trust.

New land tax rules for foreign owners and foreign purchasers of land

Effective from 1 January 2017, an additional land tax surcharge is payable by foreign owners:

• of residential land in New South Wales of 0.75%; and
• of all land subject to land tax in Victoria of 1.5% (0.5% prior to 1 January 2017).

This additional cost to foreign owners of land follows the measures introduced throughout 2016 by the New South Wales, Victorian and Queensland State Governments to impose additional duty for acquisitions of residential land by foreign purchasers.

Land tax surcharge

Which landholders are affected?

In New South Wales, the surcharge land tax affects foreign persons, which has the same definition as that used for the foreign duty surcharge.

In Victoria, the surcharge land tax unhelpfully uses a different definition from its stamp duty laws, namely that of 'absentee persons' whom own land. This can include:

• individuals other than a citizen of Australia, a permanent resident of Australia or a New Zealand citizen who holds a Special Category Visa, and who:
  • do not ordinarily reside in Australia; and
  • were absent from Australia on 31 December, or a cumulative period of at least 6 months, in the year before the current land tax year;
• a corporation that was incorporated outside Australian or in which an absentee person has a controlling interest (>50%); or
• a trust where:
  • in the case of a unit trust, the trust has at least one unitholder who is an absentee person;
  • in the case of a fixed trust, the trust has at least one beneficiary who has a beneficial interest in land subject to the trust and who is an absentee person; or
  • in the case of a discretionary trust, the trust has at least one specified beneficiary who is an absentee person.

What to do going forward

As can be seen, these new rules are complex and there are differences depending on whether the land is situated in New South Wales, Victoria or Queensland.

Any foreign entities or Australian entities with ultimate foreign ownership should check the jurisdiction specific requirements to determine if foreign duty surcharge and surcharge land tax may be payable before entering into any transactions involving real property, or if they currently hold real property.

Further, such entities acquiring real property may also need to seek approval from FIRB under the Foreign Acquisitions and Takeovers Act 1975 and should seek independent legal advice regarding this.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Revenue Practice Group.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of matters.

You can read about the introduction of the foreign duty surcharge here.

Order Cleardocs discretionary trust packages

• Discretionary (Family) Trust set up
• Discretionary Trust — excluded beneficiaries that provides options to exclude foreign and/or non blood beneficiaries from the trust set up
• Change of Trustee Discretionary Trust
• Discretionary (Family) Trust Minutes & Resolutions