Federal law revives state land tax surcharges on foreign owners

High Court upholds retroactive tax legislation 15 min read

The High Court has held that the Queensland and Victorian land tax absentee owner surcharges imposed on foreign persons owning land were formerly invalid to the extent they were inconsistent with non-discrimination articles contained in double tax agreements with Germany and New Zealand to which Federal Parliament gave the force of law. However, the court simultaneously upheld the validity of a federal law that retroactively removed that inconsistency, and thereby revived the operation of the surcharges and the liabilities of foreign persons to pay them.

In this Insight, we consider the broader implications the decision in G Global 120E T2 Pty Ltd v Commissioner of State Revenue (Qld) will have for all state and territory foreign purchaser/owner duty and land tax surcharges, as well as the Federal Parliament's future ability to pass further retroactive or retrospective tax laws, and laws that override double tax agreements.

Who in your organisation needs to know about this?

Heads of Tax; Tax Managers

Key takeaways

• All state and territory foreign purchaser surcharge duties and foreign owner land tax surcharges should be valid both prospectively and retroactively to 1 July 2018.
• The Federal Parliament's power to pass retroactive and retrospective tax laws has been affirmed, subject to certain constitutional limitations.
• Its power to override double tax agreements regarding federal taxes appears to be unlimited.
• While its power to override double tax agreements regarding state taxes is more limited, it can still pass laws permitting state taxes that discriminate on the basis of nationality or foreign ownership.

Treaty non-discrimination articles vs state foreign purchaser/owner surcharges

Treaty non-discrimination articles prohibit discriminatory taxes

Some of Australia's double tax agreements, which are treaties between Australia and foreign countries, include a non-discrimination article.

Broadly speaking, non-discrimination articles proscribe four kinds of discrimination in both federal and state tax laws (with mutual restrictions on the other country's tax laws):

• Discrimination on the basis of nationality: nationals of the other country must not be subjected in Australia to any tax or connected requirement that is other or more burdensome than those of Australian nationals in the same circumstances (in particular, with respect to residence).
• Discrimination against permanent establishments: a permanent establishment in Australia must not be taxed less favourably than an Australian enterprise that carries on the same activities.
• Discrimination against payments to foreign residents: disbursements or expenses paid by an Australian enterprise to a resident of the other country must be deductible under the same conditions as if they had been paid to an Australian resident.
• Discrimination against foreign ownership: Australian enterprises that are owned or controlled by residents of the other country must not be subjected in Australia to tax or any connected requirement that is other or more burdensome than that of similar Australian enterprises.

State duty and land tax foreign purchaser and owner surcharges

All Australian states impose surcharge transfer and landholder duty upon foreign persons that acquire direct or indirect interests in land (in some cases, restricted to residential or primary production land) at rates of up to 9% on top of the general transfer and landholder duty rates.

New South Wales, Victoria, Queensland, Tasmania and the Australian Capital Territory also impose surcharge land tax on foreign persons who own land (in some cases, restricted to residential land) at rates of up to 5% on top of the general land tax rates.

While the definition of a 'foreign person' varies between jurisdictions, generally speaking it means non-resident foreign citizen individuals, foreign incorporated or majority owned companies, and trusts with foreign person beneficiaries.

As such, these surcharges generally discriminate on the basis of nationality or against foreign ownership.

Non-discrimination articles have force of law and prevail over inconsistent taxes

Section 5(1) of the International Tax Agreements Act 1953 (Cth) (the Agreements Act) provides that each provision of a double tax agreement, including any non-discrimination article, 'has the force of law according to its tenor.' To the extent there is an inconsistency between a non-discrimination article given the force of law by the Agreements Act and a federal or state tax law:

• Section 4(2) of the Agreements Act effectively provides that the non-discrimination article has effect notwithstanding anything inconsistent in a federal income tax or fringe benefits tax law.
• Section 109 of the Constitution provides that a federal law, including the non-discrimination article given the force of law by the Agreements Act, shall prevail and the state law shall be invalid to the extent of the inconsistency.

In the 2021 case of Addy v Federal Commissioner of Taxation, the High Court ruled the so-called 'backpacker tax', which forms part of federal income tax law, was discriminatory and, consequently, ss4(2) and 5(1) had the effect that it did not apply to citizens of countries that had agreed a non-discrimination article in their double tax agreement with Australia. (For more details on the Addy case, see our earlier Insight.)

While the decision in Addy only concerned the federal income tax, it raised the prospect that state duty and land tax foreign purchaser and owner surcharges were inconsistent with the non-discrimination articles of double tax agreements given the force of law by the Agreements Act. This had the result that the non-discrimination article would prevail and the state law would be invalid under s109, to the extent the state taxes applied to foreign persons from a country that had agreed a non-discrimination article in its double tax agreement with Australia.

Federal Parliament retroactively removes inconsistency

On 8 April 2024, the Treasury Laws Amendment (Foreign Investment) Act 2024 (Cth) (the Amending Act) inserted s5(3) into the Agreements Act. Section 5(3) provides that the provisions of a double tax agreement given the force of law, including any non-discrimination article, are subject to anything inconsistent contained in a federal, state or territory law imposing a tax other than income tax or fringe benefits tax (unless the Australian law provided otherwise) – ie state foreign purchaser and owner stamp duty and land tax charges prevail over non-discrimination articles. This amendment was expressed to apply retroactively in relation to taxes payable on or after 1 January 2018, and in relation to tax periods that end on or after 1 January 2018.

Challenges to state foreign owner surcharges and retroactive federal legislation

Various proceedings originally commenced in the Supreme Court of Queensland, the Federal Court and the High Court were eventually resolved by the various parties stating a special case for the High Court's opinion. The relevant facts involved:

• the Australian corporate trustees of two unit trusts, the shares and units of which were ultimately owned by a German company, subject to the Queensland land tax absentee owner surcharge; and
• a New Zealand citizen individual, who was subject to the Victorian land tax absentee owner surcharge.

These companies and the individual argued that the surcharges were invalid under s109 of the Constitution because they were inconsistent with the non-discrimination articles in the German and New Zealand double tax agreements respectively; and that the Amending Act was unconstitutional because it affected an acquisition of their property, in the form of their right to be refunded the surcharge payments they had made, by the Federal Parliament other than on just terms, contrary to s51(xxxi) of the Constitution.

High Court holds formerly inoperative surcharges retroactively revived

Foreign owner surcharges formerly invalid and inoperative

The High Court agreed with the parties that 'there was clearly an inconsistency between Art 24 [the non-discrimination article] of the [German and New Zealand double tax] Agreements as given the force of law by s 5(1) of the ITAA and the higher rates imposed by the two land tax regimes on enterprises owned or controlled by residents of Germany and on nationals of New Zealand'.¹ This was because the surcharge land tax was taxation 'more burdensome' than that imposed on Australian owned-enterprises or citizens in the same or similar circumstances, as were the additional lodgment obligations imposed on foreign persons. It followed that before the Amending Act, the state land tax foreign owner surcharges were invalid in their application to the German-owned corporate trustees/unit trusts and the New Zealand citizen.

External affairs power supports Agreements Act and Amending Act

All federal laws must fall within a subject matter, known as a head of power, on which the Constitution permits the Commonwealth to make laws. This meant the High Court had to consider first whether s5(1), then s5(3), as introduced by the Amending Act, and then ss5(1) and 5(3) together, were supported by a head of power.

The High Court held that, to the extent s5(1) of the Agreements Act gives the force of law to provisions in double tax agreements concerning federal tax laws, it is supported by s51(ii) of the Constitution, which gives the Federal Parliament power to make laws with respect to federal taxation. However, to the extent such provisions operate on state tax laws, they are not supported by s51(ii), which does not confer a power to make laws regarding state taxes.²

Nevertheless, the court held that in giving effect to obligations imposed by treaties entered into by the Federal Government, s5(1) was also supported by s51(xxix) of the Constitution, which gives the Federal Parliament power to make laws with respect to external affairs (including laws 'reasonably capable of being appropriate and adapted to implementing a treaty prescribing a regime affecting a domestic subject matter such as taxation').³

In relation to the Amending Act introducing s5(3), the court held that a head of power supports both the making of new laws and the repeal or limitation of the operation of existing laws, subject to any limitation contained within the head of power. As there was no such limitation in the external affairs power, it followed that the introduction by the Amending Act of s5(3), which had the effect of limiting the operation of s5(1), was supported by the external affairs power.⁴

Finally, the court noted that the Agreements Act as amended by the Amending Act (ie ss5(1) and 5(3) read together) was still supported by the external affairs power. It confirmed that a law implementing a treaty will not be supported by the external affairs power if the law's deficiency in implementing the treaty is so substantial as to deny the law the character of implementing the treaty or the law is substantially inconsistent with the treaty.⁵ The court held that was not the case here because 'the core operation' of the double tax agreements as a whole remained incorporated into domestic law and was given 'partial implementation' under the Agreements Act, albeit with a 'reduced ambit' to only income and fringe benefits taxes.⁶

Amending Act retroactively removed inconsistency between state surcharges and non-discrimination articles

The High Court held that whether, or the degree to which, a law operated 'retroactively' (ie operating backwards to change the law from what it was) or 'retrospectively' (ie authorising a subsequent law to be made in respect of prior periods) is a matter of statutory construction. In that process, there is a presumption that laws should be interpreted consistently with recognised principles (including that the Federal Parliament does not intend legislation to operate retroactively or retrospectively, particularly the more fundamental the rights involved or the greater the effect on those rights).⁷

In this case, the terms, context and purpose of the Amending Act, confirmed by its relevant Explanatory Memorandum, indicated that the Federal Parliament did intend for s5(3) to operate retroactively (ie to remove the inconsistency between the non-discrimination articles and non-income or fringe benefits taxes), because it was 'inherently unlikely that the Commonwealth Parliament only intended to make [non-income and fringe benefits] taxes payable if it later enacted a further law reimposing a tax that it already imposed.'⁸

The court then overruled its earlier decision, in University of Wollongong v Metwally,⁹ to hold that the Amending Act/s5(3) was effective to retroactively remove the inconsistency between the relevant non-discrimination articles given the force of federal law by s5(1) and the state laws imposing the foreign owner land tax surcharges. This meant that the surcharges were retroactively no longer invalid under s109, with the result that the liabilities of the German-owned corporate trustees/unit trusts and the New Zealand citizen to pay those surcharges were retroactively revived.¹⁰

Amending Act was not invalid law with respect to acquisition of property other than on just terms

As anyone who has seen the iconic Australian film The Castle understands, s51(xxxi) of the Constitution provides the Federal Parliament with power to make laws with respect to the 'acquisition of property on just terms'. While noting that this meant any federal law with respect to the acquisition of property must be conditional on the provision of just terms, the court held that this just terms requirement does not apply to laws that do not involve an acquisition of property.¹¹ As federal laws imposing genuine taxation are not properly characterised as a law with respect to the acquisition of property, the just terms requirement does not apply to genuine taxation laws.¹² Otherwise, it would be impossible for the Commonwealth to impose tax.

In turn, the court held that:¹³

If a Commonwealth law imposing 'genuine taxation' is not properly characterised as a law with respect to the acquisition of property, it must follow that a Commonwealth law that revives the operation of a State law imposing genuine taxation is not properly characterised as a law with respect to the acquisition of property. This is so even if the Commonwealth law that revives the operation of a State law imposing genuine taxation is supported by a head of power other than s 51(ii) of the Constitution and even if the Commonwealth law can also be characterised as a law extinguishing choses in action for the recovery of payments of taxes levied pursuant to State laws that were previously rendered inoperative by s 109 of the Constitution.

In this case, as the Victorian and Queensland land tax legislation imposed genuine taxation, it followed that the retroactive operation of s5(3) provided for by the Amending Act was not a law with respect to the acquisition of property (and, thus, was not invalid because it failed to provide just terms to affected foreign taxpayers).¹⁴

Decision's broader implications 

State and territory foreign purchaser and owner surcharges valid

While the High Court's reasoning and conclusions related only to the Victorian and Queensland land tax absentee owner surcharges, they should equally mean that s5(3) of the Agreements Act has effectively validated the operation of all state and territory foreign purchaser surcharge duties and foreign owner land tax surcharges both prospectively and retroactively to 1 July 2018. Given its reasoning and conclusions that the original absentee owner surcharges were effectively revived, the court found it unnecessary to consider the validity of Victorian and Queensland land tax provisions passed after the Amending Act that sought to reimpose any surcharge land tax that was purported to be imposed before 8 April 2024 but was invalid.¹⁵ This should mean that it is equally unnecessary for any other state or territory to pass any similar legislation.

Historically, the New South Wales revenue office, Revenue NSW, was the only state or territory revenue office to accept that surcharge purchaser duty and surcharge land tax were inoperative in respect of entities protected by a non-discrimination article given the force of law by the Agreements Act, and such entities were entitled to refunds of any such duty paid (including after the commencement of the Amending Act on 8 April 2024). The precise basis for maintaining this position after 8 April 2024 remains unclear. While s9(2) of the Taxation Administration Act 1997 (NSW) requires any reassessment 'to be made in accordance with the legal interpretation and assessment practices generally applied by the Chief Commissioner in relation to matters of that kind at the time the tax liability arose', there is an exception for any departure from those interpretations and practices 'required by a change in the law … made after that time', which should include the Amending Act.

There may also have been other grounds upon which the taxpayers' claims could have been dismissed. The High Court proceeded on the assumption that they had sufficiently viable choses in action for restitution of the purportedly invalid surcharge land tax payments, but noted that other arguments had been advanced as to why these rights to claim restitution were not property that could be acquired, including that:¹⁶

• The relevant state limitation of actions Act provided that a right to recover payments of invalid taxes ends if an action is not commenced within a requisite time period.
• The relevant state tax administration Act extinguished causes of action for recovery of amounts paid or purportedly paid under tax laws otherwise than through the general objection, review and appeals process.

Retroactive tax legislation affirmed again, subject to certain limitations

The High Court's decision is consistent with earlier decisions upholding challenges to retroactive or retrospective tax laws. For example, in the seminal case of Chevron Australia Holdings Pty Ltd v Federal Commissioner of Taxation, the Full Federal Court held that new federal income tax transfer pricing rules enacted in 2012 to apply retrospectively from 1 July 2004 were not an arbitrary or incontestable tax that was beyond the Federal Parliament's power.¹⁷

The High Court has now confirmed that the Federal Parliament has the power to pass laws that retroactively or retrospectively revive the operation of genuine tax laws of the states, without having to provide just terms to taxpayers. It seems implicit from this reasoning that the Parliament also has the power to pass laws that retroactively or retrospectively change the operation of genuine federal tax laws, without having to provide just terms to taxpayers.

However, the court warned that the Parliament does not have unlimited power to pass retroactive or retrospective laws. Such laws may still be invalid if they infringe an express or implied prohibition in the Constitution, including the prohibition:¹⁸

• on laws that significantly impair, curtail or weaken the capacity of the states to exercise their constitutional powers or functions;
• on laws that impermissibly interfere with the exercise of judicial power in relation to proceedings that have completed or are pending; or
• on the acquisition of property other than on just terms, if the retroactive repeal or amendment of federal law would result in the revival of a state law that would result in an acquisition of property.

To those prohibitions can be added the qualification that only genuine taxation is not an acquisition of property for which the Commonwealth must provide just terms. The High Court did not definitely determine what constitutes 'genuine taxation', but referred with approval to the 'usual description' of a tax as being a pecuniary liability that is a compulsory exaction for government or public purposes, enforceable by law that is not arbitrary, incontestable or a fee for services rendered or a penalty.[5]

Treaty override affirmed again, subject to certain limitations

By upholding the Amending Act's constitutional validity, the High Court has affirmed the Federal Parliament's power to engage in treaty override of double tax agreements (ie the enactment of domestic legislation contrary to the relevant treaty's requirements). By recognising that s51(ii) of the Constitution supports laws giving the force of law to a double tax agreement, as well as laws repealing or limiting the operation of such a law, so far as the agreement applies to federal taxes, the court has effectively held that the Federal Parliament can choose to implement (or override) a double tax agreement regarding federal taxes to the extent it desires.

In contrast, by recognising that it is s51(xxix), and not s51(ii), that supports laws giving the force of law to, repealing or limiting the operation of a double tax agreement as it applies to state taxes, the court has effectively limited the Federal Parliament's ability to engage in treaty override in relation to state taxes. To be supported by the external affairs power, the federal law cannot be so deficient in implementing the double tax agreement as not to implement it at all, or to make it substantially inconsistent with the agreement. Having said that, these limitations were not contravened in this case, despite the non-discrimination articles expressly applying to all taxes (not just income and fringe benefits tax).

To what extent are other provisions of double tax agreements given force of law?

While the High Court did not give detailed reasoning on this issue, it did hold that the operation of s5(1) of the Agreements Act meant that the relevant double tax agreements 'were given the force of law in full'.²⁰ This conclusion is interesting, given that the Federal Court has previously been divided on the issue of whether s5(1) is sufficient to give the provisions of double tax agreements the force of law, particularly those not involved in the allocation of taxing rights, which would include non-discrimination articles, or whether additional implementing legislation is also required.²¹

If you would like to discuss the issues raised in this Insight, please contact any of the people below.