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Focus: NSW imposes stamp duty surcharge on foreign purchasers of residential land

30 June 2016

In brief: New South Wales has introduced a stamp duty surcharge of 4 per cent for direct and indirect acquisitions of residential land by foreign purchasers, with effect from 21 June 2016. A land tax surcharge of 0.75 per cent will also be imposed on residential land owned by foreign persons, commencing 31 December 2016. Partner Adrian Chek (view CV) and Associate Jay Prasad report.

 
 

How does it affect you?

  • New South Wales has introduced a stamp duty surcharge of 4 per cent on direct and indirect acquisitions of residential land by foreign purchasers. The surcharge will apply where a liability for transfer duty or landholder duty in NSW arises on or after 21 June 2016.
  • Foreign persons will no longer be entitled to the 12-month deferral for off-the-plan purchases of residential land.
  • New South Wales has also introduced a land tax surcharge of 0.75 per cent on residential land owned by foreign persons that will apply to the taxable value of residential land owned by a foreign person, commencing 31 December 2016. Foreign persons will also no longer be eligible for the tax-free land tax threshold, which is currently $482,000.
  • The class of purchasers who will be classified as 'foreign' and subject to the surcharges in NSW will be wider than under the corresponding provisions in Queensland and Victoria. A 'foreign person' will include a company, trust or partnership in which an interest of 20 per cent or more is held by a foreign person, or in which an interest of 40 per cent or more is held by two or more foreign persons.

Stamp duty surcharge

NSW will impose a stamp duty surcharge of 4 per cent on direct and indirect acquisitions of residential property by foreign purchasers. Foreign persons will pay stamp duty at a rate of up to potentially 11 per cent on certain direct dealings with residential land in NSW and relevant acquisitions of an interest in a company that holds residential land in NSW.

The stamp duty surcharge in NSW follows the introduction of a similar surcharge in Queensland and Victoria.

Definition of 'foreign person'

A 'foreign person' is defined by reference to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the FATA) and, in general terms, will include:

  • an individual not ordinarily resident in Australia;
  • a corporation, trustee of a trust or general partner of a limited partnership in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a 'substantial interest' of at least 20 per cent; or
  • a corporation, trustee of a trust or general partner of a limited partnership in which two or more persons, each of which is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an 'aggregate substantial interest' of at least 40 per cent.

Australian citizens and certain New Zealand citizens holding a special category visa under the Migration Act 1958 will be taken not to be foreign persons for the purposes of the stamp duty surcharge.

The net effect of importing the FATA definition of a 'foreign person' into the Duties Act 1997 will be that a foreign person who is required to seek foreign investment approval for an acquisition of residential land in NSW is also likely to be subject to the stamp duty surcharge.

The definition of a foreign person in NSW could potentially apply to a broader class of purchasers than the corresponding provisions in Victoria and Queensland. Generally, a company or trust will be treated as foreign for the purposes of the Victorian provisions if a foreign person has a controlling interest in the company or trust of more than 50 per cent. A similar test applies in Queensland, except that the 50 per cent interest may be held by one or more foreign persons.

By way of a simple example, a company with a single foreign shareholder who holds a 20 per cent interest would not be subject to the surcharge for an acquisition of residential land in Victoria or Queensland, assuming that the foreign shareholder did not have any foreign associated or related persons who had an interest in the same company. However, that company would be subject to the surcharge if it acquires residential land in NSW.

On the other hand, unlike under the Queensland provisions, there is no reassessment of duty if a purchaser who is not a foreign person subsequently becomes a foreign person.

Definition of 'residential land'

The stamp duty surcharge will only apply to a foreign person who is either the transferee under a dutiable transaction or the acquirer in a relevant acquisition in a private landholder. The surcharge will only be imposed to the extent of the foreign person's interest in the property and only on the value of the underlying property that is 'residential land' and to the extent that it is not used for non-residential purposes.

Broadly, residential land that will be subject to the surcharge will include:

  • a parcel of land on which there is (or is being constructed) a house or a room (or a suite of rooms) that is capable of being occupied or used as a separate dwelling, including a parcel of land on which there is more than one dwelling;
  • a strata lot, utility lot or a 'land use entitlement' that is, or relates to, a separate dwelling; and
  • a parcel of vacant land that is zoned, or otherwise designated, for residential purposes or principally for residential purposes.

Accordingly, the types of properties attracting the stamp duty surcharge in NSW would include:

  • established homes and residential apartments;
  • a parcel of land on which there is a home or a residential apartment block under construction; and
  • vacant land (including a potential large subdivision) that is zoned or designated for residential purposes.

Land that is used for primary production will not be subject to the surcharge.

Commercial residential premises, such as hotels, serviced apartments, retirement villages and student accommodation could be caught by the definition of residential land in NSW, since properties of this kind would typically contain rooms that would be capable of being occupied or used as a separate dwelling. This would be in contrast to the corresponding provisions in Queensland and Victoria. It remains to be seen in practice how NSW will administer the provisions.

Unlike in Queensland and Victoria, the definition of residential land is objective – it does not depend to any extent on the subjective intention of the purchaser as to the future use or development of the land. Further, there is no 'change of intention' provision in NSW and no power for the Commissioner to reassess duty if land becomes 'residential land' after the acquisition. For instance, vacant land that is acquired by a foreign person without a zoning or designation for residential use would not become subject to the surcharge even if the land was subsequently rezoned or redesignated for residential use, and even if the purchaser intended at the time of purchase to seek the rezoning.

The surcharge duty will only be imposed on the dutiable value of the residential land to the extent that it is not used for non-residential purposes. This will require an apportionment of the dutiable value of the residential land that is attributable to any non-residential use of the property.

Interaction with existing provisions

Generally, the exemptions and concessions for duty contained in the transfer duty and landholder duty provisions will also extend to the application of the surcharge. There are, however, certain concessions that will not apply where the stamp duty surcharge is imposed, eg:

  • the First Home Owners Grant and NSW Builders Bonus schemes;
  • certain transfers of property in connection with superannuation funds and trusts; and
  • the 12-month deferral of duty for off-the-plan purchases of residential land.

The lodgment and payment obligations for dutiable transactions and relevant acquisitions will remain unchanged; that is, a foreign person will be required to comply with its lodgment and payment obligations within three months from the date that a liability for duty arises.

Transitional rules

The stamp duty surcharge will apply to dutiable transactions or relevant acquisitions from 21 June 2016. The following transitional rules will apply:

  • where the liability for transfer duty or landholder duty arises before 21 June 2016, the transaction will not be subject to the stamp duty surcharge;
  • a transfer of residential property that is under an agreement entered into before 21 June 2016 will not be subject to the surcharge, provided that the transfer is in conformity with the agreement; and
  • the exercise of an option for the sale or purchase of residential property that was granted before 21 June 2016 will not be subject to the surcharge, provided that the option is not transferred (or taken to be transferred) for consideration to another person on or after 21 June 2016.

Land tax surcharge

NSW will impose a land tax surcharge of 0.75 per cent on residential land owned by a foreign person, in addition to the general rate of land tax of up to 2 per cent.

The key principles of the new land tax surcharge in NSW are as follows:

  • The land tax surcharge will apply to the taxable value of residential land owned by a foreign person at midnight on 31 December in any year, commencing on 31 December 2016. 'Foreign persons' and 'residential land' will have the same meanings as in the Duties Act (discussed above).
  • The land tax surcharge will only be imposed to the extent of the foreign person's interest in the land, and only to the extent that the land is not used by the foreign person for a non-residential purpose.
  • A foreign person who owns a principal place of residence in NSW will be subject to land tax of 0.75 per cent on the taxable value of their land. The land tax surcharge would apply even though the property would continue to be exempt from the general land tax rate.
  • Foreign persons will not be eligible for the tax-free land tax threshold, which is currently $482,000.

In the event of default by a foreign person to pay the land tax surcharge, the Commissioner may require a joint owner (whether or not that owner is a foreign person) to pay the surcharge land tax. The Commissioner will have the same power as against a trustee of a trust where the beneficiary of the trust is a foreign person. The joint owner or the trustee will have a statutory right to recover the amount of the unpaid land tax from the foreign person.

Conclusion

At the time of announcing the stamp duty and land tax surcharges, the NSW Treasurer commented on the successful implementation of similar surcharges in Victoria, 'The Victorian experience has demonstrated that the measures have not had an adverse impact on the property market.'1 The impact of the stamp duty and land tax surcharges on the NSW property market and its consequential impact on the State's revenue remains to be seen.

The introduction of the stamp duty and land tax surcharges in NSW coincides with the confirmation of the abolition from 1 July 2016 of the following heads of duty:

  • mortgage duty;
  • duty on share and unit transfers; and
  • duty on the transfer of business assets (including goodwill, intellectual property, statutory licences and gaming machine entitlements).

Potential purchasers of property in NSW need to consider if they are a 'foreign person' and whether any surcharge may be payable on the initial acquisition or holding of their investment. Investors should also consider whether foreign investment approval will be required before making such an investment.

Footnotes
  1. Media release, 'NSW Budget: Foreign investor surcharge on stamp duty and land tax', 14 June 2016.

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