Recently two Australian States have announced changes to the taxes imposed by them in relation to the acquisitions of real estate which will be of particular relevance to foreign investors in Australian property. Whilst one of the changes will benefit such investors, the other will increase the tax burden on foreign investors in Australian real estate.
This article provides a brief summary of the changes.
South Australia - stamp duty on transfers of non-residential real estate to be abolished
In the South Australian Budget handed down on 18 June 2015, the State Treasurer announced that stamp duty on non residential real property transfers would be phased out completely by 30 June 2018. This is to be done by phasing out the duty starting from 1 July 2016 with a reduction of one third to occur on each of 1 July 2016, 1 July 2017 and 1 July 2018.
The phasing out will apply to both direct acquisitions of non-residential real property in South Australia and indirect acquisitions of companies or trusts that hold such real property. The Commissioner will rely on information provided by the Valuer-General (generally, land use codes for land tax purposes) to determine whether land is considered to be residential or non-residential land for stamp duty purposes.
Currently, stamp duty is imposed on transfers of land calculated by reference to the value of the land at the time of the transfer. For real estate with a value of more than $500,000, the duty is $21,330 plus $5.50 for every $100 or part thereof over $500,000. This is clearly a significant cost in relation to the acquisitions of real property. Similar duties are imposed in each other State and Territory of Australia.
Although there are a number of concessions available for certain residential properties, these are not relevant to commercial transactions. As a result, the State Government’s decision to abolish the imposition of such duty as from 1 July 2018 will have a significant benefit for investors in South Australian real estate.
In addition to stamp duty on transfers, South Australia also imposes an ad valorem registration duty on transfers registered with the Land Services Department (which must occur in respect of all transfers of real estate). This fee is calculated at an amount equal to $264 plus $77.50 for every $10,000 or part thereof above $50,000. DLA Piper was recently involved in a transaction where the registration fee imposed was $2 million.
It is not clear whether, on the abolition of the transfer duty, registration duty will continue to apply. We note that the Regulations to the Real Property Act in South Australia provide that where the Commissioner of State Taxation determines that a transfer of land is exempt from stamp duty or no ad valorem stamp duty is payable, the registration fee is merely $155. Based on the current Regulations, once stamp duty is abolished completely, ad valorem registration duty should also no longer apply, although this has yet to be confirmed.
Victoria - additional stamp duty payable by foreign purchasers of residential real estate
In the Victorian Budget which was handed down earlier this year, it was announced that an additional 3 per cent duty will be payable by foreign purchasers of residential property. The legislation giving effect to the imposition of that duty was passed on 29 June 2015.
The effect of this change is that as from 1 July 2015, in addition to the normal stamp duty payable on the acquisition of real estate, an additional duty of 3 per cent of the value of the property being acquired will be payable where the real estate is residential property and is to be acquired by a foreign person. In certain circumstances, this will apply even if the foreign purchaser acquires its interest in the property by acquiring the entity which owns the property.
The duty will not apply in respect of transfers of land which are subject to contracts for sale of land entered into prior to 1 July 2015 but will apply to all purchasers or transferees of residential property in Victoria who enter into the contract, transaction, agreement or arrangement relating to the property on or after 1 July 2015. For example, if an option was entered into by an Australian purchaser prior to 1 July 2015 and subsequent to 1 July 2015, the purchaser nominates a foreign purchaser to exercise the option, the additional duty will be payable.
Who is a foreign purchaser?
In determining whether or not a person is a foreign purchaser, the following tests will apply:
- in the case of a foreign natural person, whether the person is or is not an Australian or New Zealand citizen or permanent visa holder;
- in the case of a foreign corporation, whether it is incorporated outside Australia or, if incorporated inside Australia, whether a foreign person has a controlling interest in that company; and
- in the case of a foreign trust, whether a foreign person has a substantial interest in the trust.
A controlling interest in a foreign corporation requires there to be a foreign person (whether alone or together with any associated person) to be in a position or potential position to control more than 50 per cent of the voting power of the corporation or has an interest in more than 50 per cent of the issued shares in the corporation. The Victorian Commissioner of Stamp Duties also has a discretion to deem a foreign person to have a controlling interest in a company where that person has direct or indirect influence on the outcome of decisions.
In respect of whether or not a foreign person has a substantial interest in a trust, this will be determined by reference to whether or not a foreign person (either alone or together with any associated person) has a beneficial interest of more than 50 per cent of the capital of the trust. The Commissioner has a similar discretion to determine whether a foreign person has such a substantial interest where he is of the view that the person has direct or indirect influence on the outcome of decisions.
What constitutes residential property?
The term “residential property” is not limited to a single dwelling but applies to:
- land that has a building on it that is designed and constructed solely or primarily for residential purposes and may be lawfully used as a place of residence;
- land on which a foreign purchaser intends to construct a building solely or primarily for residential purposes and may be lawfully used as a place of residence; and
- a company or trust which owns residential property where the foreign person acquires a 50 per cent interest or more in a private company or a 20 per cent or more interest in a unit trust.
Will the new provisions affect developers?
To the extent that a foreign purchaser acquires land which may not have been residential previously but will be re zoned as residential and on which a residential development is to be built, the additional duty will be payable. The legislation provides that should a foreign person acquire a non residential property and later change its intention to use the property as a residential property, the foreign person must lodge a statement with the Commissioner within 14 days of forming the relevant intention with liability for payment arising within 30 days of the intention being formed.
Where a foreign person is involved in a joint venture with a local developer, careful consideration needs to be given as to whether or not the joint venture can be classified as a foreign person for the purposes of the new provisions thereby triggering the obligation to pay the additional duty.
If property is acquired for both residential and commercial purposes, if the primary use of the property is to be for residential purposes, the property will continue to be regarded as residential property and the additional duty will be applied to the value of the whole property, including the parts that are not to be used for residential purposes.
The Victorian Treasurer has a discretion to relieve foreign persons from the imposition of this duty but such relief is entirely at the discretion of the Treasurer. Guidelines have been issued as to what the Treasurer will take into account in determining whether or not to grant such relief for foreign property developers. Generally speaking it is intended for the relief to apply to those whose commercial activities add to the supply of housing stock in Victoria.
Impact on transactions
Notwithstanding the Treasurer’s discretion to relieve foreign persons from the imposition of the new duty, this is clearly a significant impost on foreign purchasers. The normal transfer stamp duty is calculated at the rate of 5.5 per cent of the taxable value of property valued at more than $960,000. Accordingly, for residential properties valued at more than this amount, the above change has the effect of increasing the duty payable by foreign purchasers to 8.5 per cent, constituting an almost 54.5 per cent increase in duty payable.