- From 1 July 2015, ‘foreign purchasers’ of residential property will be subject to a 3 per cent surcharge over the standard duty rates. This will result in a combined duty rate of up to 8.5 per cent.
- This increased stamp duty can potentially apply to contracts entered into prior to 1 July 2015, that don’t complete until after 1 July 2015.
- A land tax surcharge of 0.5 per cent will apply from the 2016 Land Tax year (on land held as at 31 December 2015) to ‘absentee owners’. The surcharge applies to all landholdings (not just residential).
- There is opportunity to seek an exemption from both the stamp duty and land tax surcharges, and this should be actioned as soon as possible.
The State Taxation Acts Amendment Bill 2015 (the Bill) contains the proposed legislative amendments to facilitate the 2015 Victorian Budget announcements in relation to ‘foreign purchasers’ and ‘absentee owners’ for the new surcharges in stamp duty and land tax respectively.
Whilst much of the rhetoric has been around the impact on foreign nationals buying homes, the provisions have the potential to apply to a much more expansive group of taxpayers.
Stamp duty surcharge – 3 per cent - 1 July 2015
The Bill introduces a new 3 per cent stamp duty surcharge on acquisitions of ‘residential property’ by ‘foreign purchasers’. The concept of a ‘foreign purchaser’ includes a foreign natural person, a foreign corporation and a foreign trust.
Should the new surcharge apply to a transaction, the resultant duty could be up to a combined 8.5 per cent. The proposed amendments apply to both direct acquisitions of ‘residential property’ and indirect acquisitions by way of entity acquisitions (ie landholder duty) and also impacts listed entity transactions.
Am I a ‘foreign purchaser’?
The proposed definitions for a ‘foreign corporation’ or ‘foreign trust’ go beyond whether the entity is an Australian incorporated or resident entity, and look to whether there is a foreign ‘controlling interest’ directly or indirectly in the corporation or trust.
Broadly, for a corporation, a ‘controlling interest’ is an interest of more than 50 per cent of the shareholding, voting power or potential voting power of the corporation.
For example, the duty surcharge will apply to an Australian incorporated company that acquires residential property if there is a foreign controlling interest up the chain.
Is it ‘residential property’?
The proposed definition for ‘residential property’ is expressed broadly to mean land in Victoria on which:
- there is a building affixed that is designed and constructed primarily for residential purposes and may be lawfully used as a residence, or
- a foreign purchaser intends to affix a building that is designed and constructed primarily for residential purposes and may be lawfully used as a place of residence.
There is no further guidance as to what ‘residential purposes’ or ‘used as a place of residence’ means. This leaves open the possibility that short term, or commercial, residence providers, such as hotels, serviced apartments etc could be caught under these rules.
In relation to the limb of the definition that considers the intent of a foreign purchaser, there is a mechanism that looks to retrospectively apply the surcharge in cases where, when the land acquisition occurred, it was not ‘residential property’ (or intended to be acquired for that purpose), but subsequently, the foreign corporation decides that it will develop the land for residential purposes.
For example, a foreign corporation buys vacant land today to build an office tower (ie non-residential) - no surcharge paid. For various reasons, after 12 months it decides to build apartments instead. This would result in a requirement to pay the surcharge at the time of the ‘change in intention’, based on the value of the land when first acquired - even if the land value has decreased.
Start date and ambiguous transitional provisions
The public statements made on the foreign purchaser surcharge state that it is only intended to apply to contracts entered into after 1 July 2015.
However, the transitional rules for the surcharge are not consistent with this and can potentially apply to land contracts that have been entered into today, but will not complete until after 1 July 2015.
Land tax surcharge - 0.5 per cent - 2016 land tax year
The 0.5 per cent land tax surcharge applies to ‘absentee owners’ on all taxable Victorian land holdings – eg commercial or residential use. The concept of an ‘absentee owner’ includes a natural person absentee, an absentee corporation or an absentee trust.
The 0.5 per cent surcharge will be in addition to the existing land tax rates, and equates to an extra amount of land tax payable of $5,000 per $1 million of unimproved land value.
For example, under current rules, an Australian incorporated company with a foreign parent that holds land with an unimproved value of $3 million would pay approximately $25,000 in land tax for the 2015 year. Under the proposed changes, the same entity would pay approximately $40,000 on the same land for the 2016 year.
Am I an ‘absentee owner’?
The concept of an ‘absentee owner’ is very similar to the concept of a ‘foreign purchaser’ relevant to the stamp duty surcharge. An absentee corporation or trust looks to see whether there is an absentee ‘controlling interest’ directly or indirectly in the corporation or trust.
Broadly, for a corporation, a ‘controlling interest’ is an interest of more than 50 per cent of the shareholding, voting power or the ability to control the composition of the board.
Similar to the stamp duty surcharge, it will apply to an Australian incorporated company that holds taxable land if there are foreign controlling interests up the chain.
Importantly, it does not exclude taxpayers who actively conduct business or activities on the land.
Which land holdings are subject to the surcharge?
All taxable land holdings in Victoria are subject to the land tax surcharge if the owner is deemed to be an ‘absentee owner’. It is not limited to residential land.
Discretion not to impose surcharge rates
There is opportunity for affected taxpayers to request the Treasurer to grant an exemption not to impose the surcharge rates. This is based on the Treasurer’s discretion.
Broadly, in exercising his discretion, the Treasurer will have regard to the ‘foreign’ or ‘absentee’ persons' degree of control and influence of the corporation’s financial and operating decisions.
Assuming the Bill is passed in its current form, we recommend the Treasurer’s discretion to exempt the stamp duty surcharge is applied for as soon as possible and where relevant, prior to entering into the dutiable transaction in order to obtain certainty as to the potential application of the surcharge.
Similarly, for the exemption to the land tax surcharge to apply for the 2016 land tax year, we recommend a similar course of action is taken as ideally the exemption should be in place before 31 December 2015.