The State Taxation Acts Amendment Bill 2015 (Bill) which proposes changes to the Duties Act 2000 and Land Tax Act 2005 was made publicly available on 7 May 2015. A third reading is proposed for 21 May 2015. The proposed changes will impact foreign purchasers who are purchasing, or potentially who have purchased already, residential land or residential development sites in Victoria. Further, it may impact vendors who, subject to comments below, have existing contracts on foot.
Targeted at acquisitions of residential property, the Bill seeks to introduce the following:
- on and from 1 July 2015, a three percent stamp duty surcharge payable by ‘foreign purchasers’ on taking a transfer of residential property or forming the intention to affix a residential building on property in Victoria (Surcharge)
- on and from 1 January 2016, a 0.5 percent general land tax surcharge payable on taxable land in Victoria by ‘absentee owners’.
This update looks at the changes surrounding the Surcharge. Changes in the Bill to land tax, and recent changes to the FIRB process at a federal level will be explained further in updates at a later date.
The drafting of the Surcharge provisions of the Bill raise a number of potential concerns and uncertainty, including:
- The Surcharge will be payable on the full purchase price of the residential property. Therefore, for an ‘off the plan’ purchase or a ‘house and land’ purchase, a foreign purchaser will pay the ‘off the plan’ stamp duty amount on the land value of the property but the Surcharge on the total purchase price (land and construction).
- The transitional periods are limited and inconsistent – the wording in the Bill suggests that for any contracts of sale that have already been entered into (or are proposed to be entered into prior to 1 July 2015) which have a settlement date post 1 July 2015, the foreign purchaser will be required to pay the Surcharge. At the Property Council of Australia (PCA) business breakfast this morning, Maddocks raised this issue and it was suggested this is not the intention of the legislation. Maddocks is liaising with the Treasury department directly on this issue.
- In support of the suggestion above, if a foreign purchaser purchases an interest in a landholder that owns an interest in residential property, namely by way of share transfer or unit trust acquisition, and the agreement or arrangement for the relevant acquisition is entered into prior 1 July 2015, the Surcharge is not payable.
- Certain concepts in the Bill are very broad and open to interpretation – for example, the definition of ‘residential property’ includes non-residential property where after taking a transfer of the relevant property, the ‘foreign purchaser’ subsequently forms the intention to affix a building that is designed and constructed solely or primarily for residential purposes or may lawfully be used as a place of residence. It is unclear what action on behalf of the foreign purchaser will constitute an ‘intention’ as there is no test included (for example, issue of a building permit).
- The Bill seems to apply to development sites, in addition to established homes – the broad definition of foreign purchasers coupled with the definition of residential property means that many residential developers, including some of Australia’s most well-known residential developers, could be captured by this Surcharge. It may well be that the Commissioner intends to use discretionary exemption rights (as contained in the Bill) to provide exemptions for these developers – only time will tell.
Immediate actions required
The potential impact of the Bill needs to be taken into account by foreign purchasers who are purchasing residential land or residential development sites in Victoria and also any vendors who are selling or have existing contracts with foreign purchasers for residential land or residential developments which are entered into (subject to the comments above) or will settle after 1 July 2015. We’ve outlined our initial recommendations below.
- Foreign developers looking at purchasing should take into account the Surcharge in any feasibilities for residential development sites and in any purchase prices offered, including increased acquisition costs and the impact of Surcharge on end purchasers of any lots.
- If the Bill proceeds as drafted and if a foreign purchaser has a current contract on foot which will settle after 1 July 2015, consideration should be taken whether to bring the settlement date forward, to a date prior to 1 July 2015. In considering whether to bring settlements forward, vendors may wish to evaluate whether any purchasers would be willing to pay for such a change or indeed whether there is increased settlement risk for existing sales which settle after 1 July 2015.
- Developers should evaluate the current practice of offering stamp duty rebates, either stopping the practice until clarity has been provided or introducing caps on rebates (for example, excluding the Surcharge).
The pre-eminent industry bodies for residential development in Victoria, the Urban Development Institute of Australia (UDIA) and PCA, are on the frontline discussing the proposed Bill with the Treasurer and their concerns regarding the impact on the residential development industry in Victoria.