From 1 October 2016 there will be a new tax on foreign investment in residential land in Queensland. Following on from the introduction of a similar tax in Victoria in 2015, Queensland and New South Wales have now introduced their own version of the foreign investor surcharge.
The ‘additional foreign acquirer duty’ (AFAD) will add an additional 3% to the stamp duty payable on the purchase of residential property in Queensland by foreign investors. Duty in Queensland is currently charged on a sliding scale up to 5.75%. With the additional charge, this will rise to a maximum duty rate of 8.75% for foreign purchasers of residential land. This is in addition to the standard Foreign Investment Review Board (FIRB) application fees which can be in excess of 1% of the purchase price.
Who is a foreign person?
The surcharge will be imposed on acquisitions by a ‘foreign person’, being a foreign individual, foreign corporation or the trustee of a foreign trust.
A foreign individual is a natural person who is not an Australian citizen and does not hold any of the relevant permanent resident visas.
A foreign corporation will include any corporation incorporated outside Australia, or an Australian company in which foreign persons (i.e. a foreign individual, foreign corporation or trustee of a foreign trust), together with their associates, have a controlling interest, either through a shareholding of 50% or more, or where they exercise 50% or more of the voting power or potential voting power.
A trust will be classified as a foreign trust where foreign persons, together with their associates, hold interests of 50% or more. For discretionary trusts, only the default beneficiaries will be taken to have an interest in the trust.
What is residential land?
For the purposes of assessing AFAD, residential land in Queensland is land:
- that is or will be solely or primarily used for residential purposes, and
- which has a building, or will have a building constructed and approved for ‘human habitation by a single family unit’. This part of the definition covers a range of scenarios including established homes and apartments, vacant land on which a house or apartment will be built, land for development and established buildings to be renovated for residential use.
Where the land is for the purposes of a mixed-use development, the surcharge will only apply to the residential proportion of the land.
Considering the difficulty governments can face collecting tax from foreigners, the new rules give the Commissioner power to impose a first charge on the land for any unpaid AFAD and in extreme circumstances, the power to affect a sale of the property.
The Commissioner also has the power to pursue either the purchaser or vendor for any unpaid AFAD as they are jointly and severally liable; however in practice the Office of State Revenue’s general policy is to pursue the purchaser.
Concessions and exemptions
Where a transaction is exempt from transfer duty under the Act it will also generally be exempt from AFAD. That said, certain duty concessions, such as the transfer duty home concessions, will continue to apply to the non-AFAD related transfer duty but will not apply to reduce the AFAD component of an assessment.
The Queensland legislation does not include any express exemption from AFAD for acquisitions by developers, unlike in Victoria where the Commissioner can grant a discretionary exemption in circumstances where the developer is increasing the housing stock and contributing to the local economy.
However, the Queensland Office of State Revenue website states that the Commissioner has the power to grant an exemption (via ex gratia relief) in exceptional circumstances, taking into account ‘a range of factors such as benefits to the economy, competitive disadvantage … and the delivery of community benefits including jobs, infrastructure and housing supply’.
We understand that the Queensland Treasury is currently consulting with property industry bodies in an attempt to clarify the circumstances under which ex gratia relief from AFAD will be made available, particularly in the context of foreign developers. We expect a public ruling on this issue to be released before the introduction of the AFAD on 1 October 2016.
Landholder duty and corporate trustee duty
It is also worth noting that AFAD will also apply to landholder duty and corporate trustee duty to the extent that the underlying property is residential land and the acquirer is a foreign person.
One of the most interesting developments in the Queensland rules is the requirement to apply the ‘foreign person’ test for three years after the initial transfer duty liability is assessed.
For example, if a 100% Australian owned company (AustCo) purchases a residential property, it will not be liable to pay AFAD. However, if within three years of that purchase a foreign person acquires a controlling interest in AustCo, AustCo will become a foreign corporation and will become retrospectively liable for the 3% surcharge on the initial purchase of residential land.
Where the corporation or trust becomes classified as a ‘foreign person’ within three years of the liability for duty arising, they must notify the Commissioner within 28 days of the event occurring and arrange payment of the reassessed duty amount.
This raises the obvious potential for the imposition of double duty. Firstly, the acquisition of a controlling interest in AustCo by the foreign investor is likely to trigger landholder duty (subject to meeting the relevant monetary threshold) at a rate that will include the AFAD surcharge on any underlying residential land. Secondly the ‘clawback’ of the AFAD on the initial acquisition of the residential land by AustCo would appear to result in the 3% AFAD applying twice to the same land. There is no provision in the existing legislation to prevent this result, but we understand that it was not the intention of the legislature to trigger duty twice in these circumstances, which raises the possibility of ex gratia relief.
What you need to do
The AFAD will apply for all Queensland residential land acquisition contracts by foreign buyers signed on or after 1 October 2016. The message for foreign buyers currently considering purchasing is to sign up now, even if that contract is conditional, to lock in the lower duty rate.
Any buyers (including developers buying land for residential development) who are likely to be affected by this change should seek specialist duty advice prior to the introduction of the surcharge, to ensure the best possible duty outcome.