Foreign persons acquiring residential property in NSW on or after 21 June 2016 are liable to pay a 4% surcharge duty in addition to the usual duty payable on the purchase. A land tax surcharge of 0.75% will also apply to foreign persons owning residential property in NSW from 31 December 2016 for the 2017 and subsequent land tax years. Foreign persons will not be provided with a tax-free threshold (currently $482,000) for the land tax surcharge nor an exemption for the principal place of residence. This brings New South Wales into line with Victoria and Queensland.
The Duties Act 1997 (NSW) and the Land Tax Management Act 1956 (NSW) apply the same meanings for ‘Foreign person’ and ‘Residential land’.
Are you or your entities a 'Foreign person'?
‘Foreign person’ is defined by reference to the definition under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA), modified as follows:
- an individual not ordinarily resident in Australia (except for Australian citizens or a New Zealand citizen holding a special category visa under section 32 of the Migration Act 1958); or
- a corporation or trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest (20%); or
- a corporation or trustee of a trust in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest (40%); or
- any other person, or any other person that meets the conditions, prescribed by the Foreign Acquisition and Takeovers Regulation (Regs). Specifically, clauses 18, 46 and 47 of the Regs.
The modified definition of 'Foreign Person' excludes an Australian citizen and New Zealand citizen holding a special category visa from liability to the surcharges no matter where they reside. A non-Australian citizen will be ‘ordinarily resident’ in Australia at a particular time where the individual has actually been in Australia during 200 or more days in the last 12 months and is not (or was not from most recent departure) subject to any legal limitation as to time for continued presence in Australia. A person who falls outside of the exclusion or is not 'ordinarily' in Australia will be regarded a 'foreign person'.
Are you an (accidental) Foreign Trustee?
A trustee of a discretionary trust is a foreign trustee where the beneficial interest in the income or capital is held by a 'foreign person'. Under FATA, a beneficiary of a discretionary trust is taken to be entitled to 100% of the income and the capital of the trust regardless if a distribution is made to the individual or entity. If a beneficiary is not ordinarily in Australia, the trustee of the trust will be considered a 'foreign person' and will be liable for the surcharges where the trust acquires or owns residential land at the relevant taxing date.
In addition, an apparent purchaser (legal owner on behalf of another person) is taken to be a 'foreign person' where the real purchaser (the beneficial owner who paid the purchase money for the residential land) is a foreign person. This means arrangements held by an Australian citizen or non-foreign trustee on behalf of a foreign person will need to be disclosed to the NSW OSR for the purposes of the surcharges and it is likely the information will also be captured by the ATO to determine CGT withholding on the eventual disposal of the property.
What constitutes 'Residential-related property'?
The definition for ‘residential-related property’ broadly includes:
- residential land in New South Wales;
- an option to purchase residential land in New South Wales including nominations or assignment of the option; or
- partnership interest.
What constitutes 'Residential land'?
‘Residential land’ is defined to broadly include any of the following and does not include any land used for primary production:
- a parcel of land on which there is one or more dwellings or partially completed dwellings;
- strata lot, utility lot or a ‘land use entitlement’ that is, or relates to, a separate dwelling; and
- a parcel of vacant land that is zoned for residential purposes or principally for residential purposes.
Accordingly, the types of properties that are subject to the duty surcharge in NSW include:
- established homes and residential apartments;
- a parcel of land on which there is a home or a residential apartment block under construction; and
- vacant land (including property development site) that is zoned or designated for residential purposes.
At present, it does not include land intended to be used for residential purposes which is not otherwise residential land. For example, commercial office building to be converted into residential apartments. It is expected that further guidance will be released on boarder line examples of residential property.
Do surcharges apply to landholder companies and trusts?
The surcharge purchaser duty will only apply to a foreign person who is either the transferee under a dutiable transaction or is the acquirer in a ‘relevant acquisition’. An acquisition by a foreign person of an interest in a landholder which has an interest in residential land will be subject to the surcharge where the acquisition is otherwise dutiable. Listed entities are not subject to the surcharges. The NSW OSR purchaser's declaration currently requires the trustee of the unit trust scheme and company to identify the range of beneficiaries, unitholders or shareholders and seek copies of their citizenship identity documents to satisfy themselves that the purchaser is not a foreign person. This is a a difficult onus for widely held private landholders.
Example 1: Duty Surcharge – sole overseas purchaser
An overseas individual purchaser proposes to buy a $900,000 apartment in the city.
The duty payable is: $35,990
Duty surcharge is 4% of $900,000: $36,000
Total duty payable is: $71,990
The duty is payable by the transferee within 3 months after the liability arises.
Example 2: Land Tax Surcharge – overseas developer
An overseas developer owns a development site as at midnight on 31 December 2016 with a taxable value of $18,000,000. The usual land tax is payable with an additional land tax surcharge of 0.75%.
Example 3: Foreign owner acquires 50% shares in a landholder company with one residential land valued at $10,000,000 (assume no concession or exemption)
Stamp duty payable on $5,000,000 of: $150,490
Premium Duty (residential land valued over $3 million) of: $140,000
Duty Surcharge of: $200,000
Total duty payable is: $490,490
Where the aggregated value of land of $5,000,000, land tax payable of $80,600. Land Tax Surcharge payable on 50% of $5,000,000 at rate of 0.75%.
Example 4: Trust with discretionary beneficiaries including an individual, trust or company not ordinarily in Australia
Land tax surcharge of additional 0.75% is payable on aggregate taxable value of land relating to residential properties even if no distribution is made to person or entity because the trustee of the trust is deemed to be a 'foreign person'.
What does this mean for you and your clients?
- Carefully consider whether the purchasers of land in NSW are ‘foreign person’ or 'foreign trustee' for the purposes of the surcharges in relation to the land or interest being acquired.
- Review trust deeds prior to acquisition of residential property to consider amendment to deed to exclude 'foreign persons' under FATA and limiting the liability of Trustee where necessary.
- Ensure the NSW OSR’s purchaser’s declaration is completed correctly as the information will be used to assess duty surcharge, land tax surcharge and also used by the Australian Taxation Office for CGT withholding.
- Consider the consequences of duty surcharge on the purchase price and the transaction structure more generally (for example, nominations or assignments of options to purchase residential land).
Land Tax Surcharge
- The land tax surcharge will apply to taxable value of residential land owned by a foreign person at midnight on 31 December in any year commencing on 31 December 2016 including trusts with discretionary beneficiaries that may be ordinarily outside of Australia.
- Review trusts that own residential land prior to 31 December to consider amendment to discretionary trust deed to exclude 'foreign persons' under FATA and limit the liability of trustee.
- Foreign persons will not be eligible for the tax-free land tax threshold, which for the 2016 land tax year is $482,000.
- Foreign persons who own a principal place of residence in NSW will be subject to land tax of 0.75% on the taxable value of their land.
- The land tax surcharge applies to foreign persons even if the property is exempt from general land tax except where the property is predominantly used for primary production.
- Foreign persons must carefully consider the long-term holding costs for residential land in NSW taking into account the land tax surcharge.
- Land tax surcharge will be imposed to the extent the foreign person’s interest in land is used for residential purpose.
Other state taxes - opportunities
- There are opportunities for clients to consider restructures, asset protection and estate planning using CGT rollovers following the abolition in NSW of the following heads of duty on 1 July 2016:
- mortgage duty;
- duty on share and unit transfers; and
- duty on the transfer of business assets (including goodwill, intellectual property, statutory licences and gaming machine entitlements).
- Share transfer duty is no longer payable, however, landholder duty may be payable on any relevant transfer.
We can assist with stamp duty applications for exemptions under corporate reconstruction and corporate consolidation for landholders, advice on structuring and attend to objections to revenue assessments or land tax variations.