Focus: Victorian property tax surcharge on foreign purchasers and absentee landowners
12 May 2015
In brief: The Victorian Government has introduced legislation to impose a 3 per cent stamp duty surcharge on foreign purchasers of residential land and a 0.5 per cent land tax surcharge on 'absentee' owners of both residential and other land. The proposed legislation is very broad and applies to both direct and indirect acquisitions and holdings of land. In addition it applies not only to acquisitions by non-residents, but also to acquisitions by Australian resident companies and trusts that are ultimately controlled by non-residents. Partner Adrian Chek (view CV) and Senior Associate Jennee Chan report.
How does it affect you?
- The proposed 3 per cent stamp duty surcharge will apply to 'foreign purchasers' of Victorian 'residential property' from 1 July 2015. It applies to a direct acquisition of land, as well as to the indirect acquisition of land by the acquisition of an interest in a landholder company or trust.
- A foreign purchaser is a foreign natural person, a foreign corporation or a foreign trust (see detailed definitions below). It also includes an Australian company or trust that is ultimately controlled by a foreign natural person, a foreign corporation or a foreign trust.
- The proposed 0.5 per cent land tax surcharge will apply to 'absentee' owners of Victorian land. It applies to owners of all Victorian land, whether residential or otherwise. It will effectively first apply to the 2016 land tax year, based on landholdings as at 31 December 2015.
- An absentee person includes a natural person absentee, an absentee corporation and a trustee of an absentee trust (see detailed definitions below). There is also the tracing through of Australian companies and trusts to a natural person absentee, an absentee corporation and a trustee of an absentee trust.
The proposed legislation will impose a stamp duty surcharge of 3 per cent on 'foreign purchasers' of Victorian 'residential property'. In addition to the general rate of duty of up to 5.5 per cent that applies to dutiable dealings in land, a foreign purchaser will be required to pay additional duty of 3 per cent of the dutiable value of residential property. A foreign purchaser will also be required to pay the additional duty if it makes a relevant acquisition of an interest in a company or unit trust that holds residential property in Victoria. In other words, foreign purchasers will pay stamp duty at rates up to 8.5 per cent on the higher of the consideration or the market value of the relevant property.
Definition of foreign purchaser
A foreign purchaser is:
- A foreign natural person (being a person who is not an Australian citizen, a holder of an Australian permanent visa or a New Zealand citizen who is a holder of a special category visa).
- A foreign corporation (being a corporation that is incorporated outside Australia or a corporation in which a controlling interest is held by a foreign natural person, another foreign corporation or a trustee of a foreign trust). An Australian company that is ultimately controlled by non-residents would be a foreign corporation as defined.
- A foreign trust (being a trust in which a substantial interest is held by a foreign natural person, a foreign corporation or a trustee of another foreign trust).
A person will have a 'controlling interest' in a corporation if the person, alone or with associated persons, directly or indirectly, holds more than 50 per cent of the issued shares, the voting power or the potential voting power (under the meaning of the Foreign Acquisitions and Takeovers Act 1975 (Cth)). The Victorian Commissioner of State Revenue also has the power to determine that a person has a controlling interest if he is of the opinion that the person has the capacity to determine or influence the financial or operating policies of the company.
A person will have a 'substantial interest' in a trust if the person, alone or with associated persons, holds a beneficial interest of more than 50 per cent in the capital of the trust estate. The Commissioner also has the power to determine that a person has a substantial interest if he is of the opinion that the person has the capacity to determine or influence the administration or conduct of the trust.
Definition of residential property
'Residential property' means:
- land on which there is a building affixed that is designed and constructed solely or primarily for residential purposes and that may lawfully be used as a place of residence; and
- land on which a foreign purchaser intends to affix such a building.
The definition is broad enough to include a single house, a block of apartments, or a vacant subdivision that is zoned residential.
The meaning of 'residential premises' in the GST legislation has been the subject of substantial litigation, but it should be noted that there is a distinction in the GST legislation between 'residential premises' and 'commercial residential premises'. This raises the question of the treatment of commercial premises such as hotels and serviced apartments – are they 'designed and constructed solely or primarily for residential purposes'?
The proposed legislation can impose a liability on a change in intention that occurs at any time after the initial purchase of land. That is, if a foreign purchaser acquires property that is not residential property (and pays duty at the general rate), but at any time in the future 'forms an intention' (there is no guidance on what this means) to construct a house on the land, the foreign purchaser would then become liable for additional duty at a rate of 3 per cent calculated on the dutiable value at the time the land was originally transferred. The duty would be payable within 30 days of forming this intention. These provisions would apply, for example, where a foreign purchaser acquires a large block of vacant land, subdivides, and constructs a house on one of the subdivided parcels. In this example, under the proposed legislation, it appears that additional duty would be calculated by reference to the value of the original undivided block.
Scope of liability and transitional rules
The proposed legislation will apply to dealings in dutiable estates or interests in Victorian land, including a lease granted for consideration other than rent. The proposed legislation will apply to all dutiable transactions, and not just to a transfer of land. For example, it would also apply to a declaration of trust over land or a surrender of an interest in land.
The transitional provisions are drafted in such a way that a direct transfer of land to a foreign purchaser on or after 1 July 2015 will be subject to the surcharge. This is even if the agreement for transfer is entered into before 1 July 2015. In other words, the additional 3 per cent duty will apply to a completion that takes place on or after 1 July 2015 (even if the relevant contract was exchanged before 1 July 2015, despite what was suggested by the budget papers). However, a relevant acquisition of an interest in a landholder will be subject to the proposed legislation only if the relevant agreement is entered into on or after 1 July 2015.
A foreign purchaser will not be entitled to the general exemptions and concessional rates of duty in respect of the additional 3 per cent duty. For example, under the proposed legislation, it appears that even if a change in trustee exemption or an 'apparent purchaser' exemption might apply in respect of that part of the duty that is calculated at the general rate, the exemption would not apply to the 3 per cent surcharge.
Further, the 'off the plan' concession would not apply for foreign purchasers for the 3 per cent surcharge. For example, under the proposed legislation, a foreign purchaser in an 'off the plan' transaction would pay duty at the general rates calculated under the rules (ie by excluding the consideration payable for the construction of a building on the land after the contract is entered into), plus an additional duty of 3 per cent calculated without excluding the consideration payable for the construction of a building on the land after the contract is entered into.
A foreign purchaser who acquires a significant interest in a landholder that holds residential property will be subject to the duty surcharge of 3 per cent (as well as landholder duty at the normal rates). This would apply even if the foreign purchaser acquires a part interest (which of itself, would not be a significant interest) in the landholder, if the foreign purchaser would make a 'relevant acquisition' when aggregated with associated persons (including Australian entities). This has important implications for the landholder and other shareholders or unitholders (who might be Australian entities) given the joint and several nature of landholder duty liability.
Legislation has been proposed to introduce a land tax surcharge on 'absentee persons' at a rate of 0.5 per cent, in addition to the general rate of land tax of up to 2.25 per cent. In other words, an absentee landowner will pay land tax at rates up to 2.75 per cent on the taxable value of their landholdings.
The new rate of land tax will apply to all land (including tenements) owned by the absentee person, and not just to land used for residential purposes. An absentee person on 31 December every year must lodge a notice with the Commissioner before 15 January of the following year.
An absentee person includes a natural person absentee, an absentee corporation and a trustee of an absentee trust.
A natural person absentee is a person:
- who is not an Australian citizen, or a holder of an Australian permanent visa, or a New Zealand citizen who is a holder of a special category visa; and
- who does not ordinarily reside in Australia; and
- who was absent from Australia on 31 December in the year immediately preceding the tax year or was absent from Australia for at least six months (in aggregate) in the year immediately preceding the tax year.
An absentee corporation is a corporation incorporated outside Australia or a corporation in which an absentee person has a controlling interest. An absentee person would have a controlling interest in a corporation if the person, alone or with other absentee persons, holds more than 50 per cent of the issued shares in the corporation, is in a position to cast or control more than 50 per cent of the votes at a general meeting of the corporation, or can control the composition of the board of the corporation. An Australian company that is controlled by an absentee person would be an absentee corporation as defined.
An absentee trust is a fixed trust, a unit trust scheme or a discretionary trust that has at least one absentee beneficiary.
The above tax measures were said to 'help ensure that all property owners contribute to funding the improved infrastructure and services which contribute to rising property values'.1
Despite the suggestion that '[t]hese measures do not increase the tax burden on Victorian residents and are consistent with the Government's commitment not to fund its election commitments through increased taxes on the Victorian community'2, the proposed legislation has far wider implications than might have been suggested in the budget papers, including for example on Australian resident companies and trusts which are ultimately controlled by non-residents.
Any taxpayers who may be affected by the proposed amendments should consider completing their land sale contracts before 1 July 2015.
- Victorian Budget Paper No. 2: Strategy and Outlook 2015-16, page 16.
- Adrian ChekPartner,
Ph: +61 2 9230 4800
- Martin FryPartner, Practice Leader, Tax,
Ph: +61 3 9613 8610
- Michael GravesPartner,
Ph: +61 3 9613 8814
- Jennee ChanSenior Tax Counsel,
Ph: +61 3 9613 8537
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