Over the past few months, there have been various announcements made in state budgets on Australia's eastern states introducing or making changes to real property tax and duty, all of which are awaiting Royal Assent (which is expected imminently in all relevant states). The Australian federal government has also recently introduced a capital gains tax withholding regime which applies to various assets, including Australian real property. The recent changes to both the state and federal property duties and taxes are aimed specifically at foreign investors, and mainly in relation to investments in residential properties. We discuss the impact of these changes below.
Australian Federal Government—New Capital Gains Tax Withholding Regime
Capital gains tax applies to the disposal or sale of capital assets in Australia, where the contract or market value figure is higher than the cost base of the asset. The disposal or sale of real property attracts capital gains tax in Australia. The Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2016 (Cth) introduces a new foreign resident capital gains tax regime which commenced operation from 1 July 2016.
The new regime will apply where the following requirements are satisfied:
There is a CGT asset, which means:
- taxable Australian real property;
- an indirect Australian real property interest (i.e. an interest owned via an entity); or
- an option or right to acquire such property or such an interest.
The vendor is a foreign resident, which includes:
- knowledge or reasonable belief that the vendor is a foreign resident;
- that the purchaser does not reasonably believe that the vendor is an Australian resident and the vendor has an address outside of Australia or is authorised to provide a related financial benefit to take place outside Australia;
- the entity has a connection outside Australia of a kind specified in the regulations; or
- the CGT asset is taxable Australian real property or an indirect Australian real property interest, the holding of which causes a company title interest.
The transaction is not an excluded transaction. Excluded transactions include:
- transactions with a market value of less than $2 million;
- on-market transactions on an approved stock exchange;
- transactions using a broker-operated crossing system;
- transactions subject to another withholding obligation;
- securities lending arrangements; or
- if the foreign resident is under external administration or bankruptcy.
The regime also includes exclusions where the Federal Commissioner of Taxation (the "Commissioner") provides a clearance certificate or declaration to the effect that the vendor is not a foreign resident.
The effect of this new regime is that on or before settlement, unless the Commissioner approves a variation, the purchaser must withhold a 10 percent withholding tax, to be paid to the Commissioner on or prior to completion of the transfer of the property. Vendors are then entitled to a credit for the amount paid to the Commissioner, and the credit can be claimed by lodging an income tax return.
Reminder on Foreign Investment Review Board Fees
As a reminder, any foreign investment into the Australian property market will be subject to increased fees to apply to the Foreign Investment Review Board, which were introduced late last year. These fees are approximately 1 percent of the purchase price. Please see our earlier Commentary, "New Taxation Conditions to be Imposed on Investors as Australia's Foreign Investment Law Overhaul Continues", on the recent changes to the Foreign Investment Review Board regime in Australia.
Australian Property—Overview of State Taxes
In each state mentioned in this Commentary, there are two taxes affecting real property which are payable to the state (in addition to any federal taxes).
Land tax is a tax levied on residential owners of land based on a valuation of the land by the state government as at 30 June each year. Each state has a tax threshold, and the rates vary between states.
Stamp duty (also known as transfer duty in Queensland) applies on the acquisition or sale of real property. Similarly to land tax, the rate of stamp duty levies differ between states. The definition of what constitutes "residential property" and "land" also may vary between the states.
The new measures, in broad terms, apply to:
- Foreign natural persons: a person who is not an Australian citizen, holder of an Australian permanent visa or New Zealand citizen holding a special category visa;
- Foreign corporations: corporations with controlling interests held by foreign natural persons or foreign natural corporations or a trustee of foreign trusts; and
- Foreign trusts: trusts in which a substantial interest is held by a foreign natural person, corporation or trustee of another foreign trust.
Below we discuss recent specific changes as announced in the relevant state budgets.
New South Wales. The New South Wales state budget was handed down on 21 June 2016, which announced the proposed implementation of an additional 4 percent stamp duty surcharge on residential real estate for foreign property buyers. Subject to Royal Assent, which is expected shortly, this surcharge will be effective on contracts entered into from 21 June 2016. There is also a 0.75 percent annual land tax surcharge on residential investments, applicable from land tax year 2017.
The changes in New South Wales follow the surcharges that have recently been proposed in Queensland and Victoria.
Queensland. On 14 June 2016, the Queensland budget was released which set out an increase of 3 percent in stamp duty for foreign investors, applied in addition to the current rate of duty. The 3 percent stamp duty surcharge will be effective on contracts entered into from 1 October 2016, following the anticipated Royal Assent. The Queensland government has also increased tax compliance activities by the Office of State Revenue, particularly focusing on land tax compliance. In Queensland, no land tax surcharge currently applies to foreign investors.
Victoria. The Victorian government handed down its budget on 27 April 2016. Victoria was the first state to announce changes in stamp duty levies for foreign investors. Under this budget and subject to the imminent enactment of the legislation, stamp duty for foreign buyers of Victorian residential real estate will increase from 3 percent to 7 percent, and it will apply to contracts signed on or after 1 July 2016. Land tax surcharges will also increase for foreign investors from 0.5 percent to 1.5 percent above the current rates, effective from the 2017 land tax year.
South Australia. Presently, South Australia does not impose stamp duty or land tax surcharges on foreign investors purchasing real estate in South Australia. It remains to be seen whether material changes might occur, with the state's budget to be delivered on 7 July 2016.
However, in a boost for investment, the South Australian government recently announced its decision to extend stamp duty concessions for off-the-plan apartments. These concessions, effective from 20 June 2016, will apply as follows:
- Contracts entered into from 31 May 2012 to 30 June 2014 (capped at stamp duty payable on a $500,000 apartment): receive a full stamp duty concession.
- Contracts entered into between 20 June 2016 to 30 June 2017 (inclusive): the concession applies to purchases of off-the-plan apartments anywhere in South Australia.
- Contracts entered into between 28 October 2013 and 19 June 2016 (inclusive): the concession applies to purchases of off-the-plan apartments located within a defined area and areas which are contiguous to the defined area.
- Contracts entered into between 31 May 2012 and 27 October 2013 (inclusive): the concession applies only to purchases of off-the-plan apartments located: (i) within the area of the Corporation of the City of Adelaide; (ii) on any land within the area of the Bowden Redevelopment project (Bowden Village); or (iii) on any land located within the area known as 45 Park, Gilberton.
The eastern states of Australia are intent on ensuring foreign investors contribute to state revenues by increasing stamp duties and land taxes. These measures are also widely considered as a means of cooling a robust property market, particularly in residential off-the-plan apartment sales along the eastern seaboard.
Given the imminently expected Royal Assent for the above changes, foreign investors should, where possible, execute contracts for the purchase of real property prior to the dates on which the increase in stamp duties is anticipated to come into effect for each respective state. As the increased rate of land taxes and the new Capital Gains Tax Withholding Tax regime became effective on 1 July 2016, investors should review their future liabilities. Foreign investors should also be aware that all states have differing tax rates and thresholds and be conscious of these differences when considering buying in the Australian property market. They should also seek professional advice before committing to their investments in Australian property.