On 5 May 2015, the Victorian Government introduced into Parliament the State Taxation Acts Amendment Bill 2015 ("Bill") (and released a supporting Explanatory Memorandum ("EM")) which if passed, will result in increased rates of stamp duty and land tax being imposed on the purchase and holding of Victorian residential real estate by foreign investors.
Importantly, the surcharge will generally not apply to commercial property.
The Bill builds upon announcements by the Victorian Government made in the 2015-16 State Budget. King & Wood Mallesons published an alert on the announcement of the surcharge, which is available here.
Current rules regarding stamp duty and land tax
The Victorian Duties Act 2000 imposes transfer duty on the purchase of Victorian real estate at ad valorem rates on the “dutiable value” (being the higher of the consideration or market value) of the real estate. Concessional treatment is available where the real estate is a principal place of residence and for first home buyers. At present, the Duties Act does not distinguish between foreign or domestic purchasers, or the nature of the purchaser (i.e. natural person, corporation, trust etc).
The Land Tax Act 2005 imposes land tax on the owner of land in Victoria based on the value of the land at 31 December in the preceding year. Land tax is currently payable at rates of up to 2.25%.
As outlined in our earlier alert, the substantial increase in foreign investment in Victoria during the last financial year has caused the Victorian Government to reconsider its position on the application of stamp duty and land tax to foreign investors.
Key changes proposed to transfer duty and landholder duty payable by foreign investors
As a result of the issues identified in the 2015-16 State Budget, the Bill proposes to impose a special stamp duty regime for foreign investors of residential real estate in Victoria. In particular, the Bill:
- seeks to impose a 3% surcharge to the rate of transfer duty payable on a transfer of residential property to foreign purchasers;
- seeks to impose a 3% surcharge to the rate of landholder duty payable on a relevant acquisition of an interest in a Victorian landholder (i.e. a company or unit trust) that holds land-related interests in residential property;
- seeks to impose transfer duty in circumstances where
- property that is not residential property is transferred to a foreign purchaser on or after 1 July 2015; and
- after the transfer, the foreign purchaser forms an intention to affix a building on the property that is designed and constructed solely or primarily for residential purposes.
Where this occurs, the Bill seeks to require the foreign purchaser to lodge with the Commissioner a statement of the foreign purchaser's intention to affix a building onto the land and charge the purchaser transfer duty at a rate of 3% of the “dutiable value” of the interest in the property at the time of the transfer. Importantly, there is no time frame following the transfer in which the foreign purchaser must form the relevant intention;
- provides that, for the purpose of determining the transfer duty payable on purchases of apartments “off the plan”, the concession that is currently available for the cost of constructing a building on the land on or after the date of contract does not apply to foreign purchasers to the extent of the duty calculated at the 3% surcharge rate. Foreign purchasers are however still entitled to receive the “off the plan” concession in respect of the duty calculated at the general rate.
The EM provides an example to explain this position. It provides that if a foreign purchaser purchases an apartment "off the plan" for a contract price of $500,000, the purchaser will be entitled to deduct an amount of $200,000 for the cost of constructing the off the plan apartment. The duty payable on the transfer of the apartment will accordingly be calculated at the general rate on $300,000. The additional duty payable by the foreign purchaser will be calculated at the 3% surcharge of the “dutiable value” of the apartment of $500,000.
- provides that, for the purpose of the principal place of residence concession, a foreign purchaser is only entitled to the concession in respect of the duty that would be payable on an acquisition had the general rate of duty applied (and not on the duty actually payable by the foreign purchaser based on the surcharge).
For the purposes of the new rules, “residential property” includes land in Victoria on which a building has been affixed that may lawfully be used as a place of residence. Residential property also includes land in Victoria on which a foreign purchaser intends to affix a building that may lawfully be used as a place of residence.
Determining foreign purchasers
Under the Bill, the term “foreign purchaser” encompasses three types of transferees (or acquirers of a relevant acquisition in a Victorian landholder). These are:
- a foreign natural person: A “foreign natural person” is defined as a natural person who is not an Australian citizen, the holder of a permanent visa or a New Zealand citizen on a special category visa. Under this definition, a foreign natural person may include a person who is domiciled in Australia but who does not hold a permanent visa;
- a foreign corporation: The Bill provides that a “foreign corporation” is any corporation that is incorporated outside Australia or in which one of the following persons has a controlling interest:
- a foreign natural person;
- another foreign corporation; or
- the trustee of a foreign trust.
The definition of “controlling interest” closely mirrors the Corporations Act 2001 and is defined as any interest that a person has under which it is in a position to control more than 50% of the voting power (or potential voting power) in the corporation, or has an interest in more than 50% of the issued shares in the corporation.
- a trustee of a foreign trust: A “foreign trust” is any trust in which one of the following persons has a substantial interest in the trust estate:
- a foreign corporation;
- a foreign natural person; or
- another person that holds the substantial interest as trustee of another foreign trust.
The new rules provide that a person will have a substantial interest in a trust estate where the person has a beneficial interest of more than 50% of the capital of the estate of the trust.
In the case of a discretionary trust, the beneficial interest of a person is taken to be the maximum percentage of the capital of the trust that the trustee is empowered to distribute to that person (either individually or as a member of a class).
Timing and transitional rules
The new rules regarding the stamp duty payable by foreign investors in residential property are proposed to take effect on and from 1 July 2015.
Somewhat surprisingly, there is a differing duty treatment in relation to transfer duty and landholder duty where a contract is entered into before 1 July 2015 but is due to settle on or after 1 July 2015:
- the surcharge will apply to the transfer of “residential property” in Victoria where the transfer is a direct transfer of the property to a foreign purchaser; but
- the surcharge will not apply to a relevant acquisition by a foreign purchaser of an interest in a landholder that holds land-related interests in Victorian residential property.
Key changes proposed to land tax payable by absentee property owners
In addition to the stamp duty changes set out in the Bill, the Bill seeks to amend the Land Tax Act 2005to give effect to a 0.5% surcharge on the rate of land tax payable by “absentee land owners” as announced in the 2015-16 Budget.
For the purposes of the new land tax rules, the Bill sets out three categories of absentee land owners. These are:
- a natural person absentee: A “natural person absentee” is defined in the Bill as a natural person who is not an Australian citizen or resident and who:
- does not ordinarily reside in Australia; and
- was absent from Australia on 31 December in the year immediately preceding the tax year or was absent from Australia for a period of at least 6 months in total in the year prior to the tax year;
- an absentee corporation: The Bill defines “absentee corporation” in a similar manner to the definition of “foreign corporation” for the purposes of the Duties Act. In particular, the definition relates to corporations that are incorporated outside Australia or in which an absentee person has a controlling interest; and
- a trustee of an absentee trust: An “absentee trust” is any fixed trust in which an absentee beneficiary has a beneficial interest in the land, any unit trust scheme in which an absentee beneficiary is a unit holder or a discretionary trust in which an absentee beneficiary is a specified beneficiary.
The land tax surcharge seeks to apply to absentee land owners from the 2016 land tax year onwards.
Debate on the Bill is due to be resumed in the Victorian Parliament on 21 May 2015.