Thinking | 12 March 2019
Foreign State tax surcharges on Australian property: what can you do about it?
Have you been assessed or think you might be assessed with a surcharge rate of duty or land tax as a foreign person?
This article provides a background to the State tax surcharges, a summary of each State’s application of the surcharges and what you can do about it.
Australia has proved to be an attractive proposition for foreign investment in the past few decades, largely due to its economic stability, well-regulated systems and long-term growth in many asset classes.
Australian property is no exception. In fact, according to Knight Frank’s 2018 Wealth Report, Sydney is ranked as the 11th most desirable city in the world to live and invest in for high net worth individuals and ultra-high net worth individuals, with Melbourne not far behind in 20th position.
With this rise in popularity amongst foreign investors in Australian property, various State Governments in Australia have since 2015 introduced tax surcharges for foreign persons who acquire or hold interests in property in that State’s jurisdiction. Six of the eight States and Territories now have a foreign purchaser surcharge duty on certain acquisitions of property and/or a higher rate of land tax for property that is subject to absentee owner surcharge land tax.
Comparison of the States and Territories
According to The Tax Institute’s “Snapshot Series”, New South Wales has the greatest reliance on stamp duty, payroll tax and land tax collected from taxpayers; in the 2018 financial year, over 31 per cent of its total revenue came from these three sources.1 It is no surprise, therefore, that New South Wales also has the highest rates of land tax and duty for foreign persons with property interests in New South Wales.
We note, however, that Victoria is the only state to impose a land tax absentee owner surcharge (AOS) on foreign companies and trusts that own commercial property. This is different to the other jurisdictions which currently either impose an AOS on residential property only or, in the case of Queensland, impose AOS to individuals only.
By way of comparison, a summary of the foreign surcharges is provided below.*
Land Tax Absentee Owner Surcharge (AOS)
|State||AOS||Property Subject to Surcharge||Types of absentee owners||Introduced||AOS Rate (2019)||Max rate (inc. AOS)|
|VIC||✓||All types of land||Individuals, co’s and trustees||1-Jan-16||1.50%||3.75%|
|NSW||✓||Residential land||Individuals, co’s and trustees||1-Jan-17||2.00%||4.00%|
|QLD||✓||All types of land||Individuals only||1-Jan-17||1.50%||3.50%|
|ACT||✓||Residential land||Individuals, co’s and trustees||1-Jan-18||0.75%||1.85%|
Foreign Purchaser Duty Surcharge (FPDS)
|tate||FPDS||Property Subject to FPDS||Types of Foreign Persons||Introduced||FPDS Rate (2019)||Max Rate (inc. FPDS)|
|VIC||✓||Residential property||Individuals, co’s and trustees||1-Jul-15||7.00%||12.50%|
|NSW||✓||Residential property||Individuals, co’s and trustees||21-June-16||8.00%||15.00%|
|QLD||✓||Residential property||Individuals, co’s and trustees||1-Oct-16||7.00%||12.75%|
|SA||✓||Residential property||Individuals, co’s and trustees||1-Jan-18||7.00%||12.50%|
|WA||✓||Residential property||Individuals, co’s and trustees||1-Jan-19||7.00%||12.15%|
|TAS||✓||Residential & Primary Production||Individuals, co’s and trustees||1-Jul-18||3.00% / 3.50%2||8.00%|
* The above tables are for general information only and should not be relied upon for any purpose.
As an example, for the 2019 land tax year, residential property wholly owned by a foreign person with a land value of $2 million and capital improved value (CIV) of $3 million (including the property on the land) will incur duty and land tax liabilities as shown in the table below (subject to an exemption applying).3 The last column of the table shows the land tax liability that would apply if the land is held on trust (which results in a higher rate of land tax in New South Wales and Victoria but a lower rate of land tax in Queensland, where the AOS only applies to individuals).
We note that the term “residential property” is broadly defined in stamp duty legislation and can include land that is currently not suitable for residential purposes, but which the owner intends to rezone or develop into residential property. Equally, “residential property” can include land that an owner does not intend to use for residential purposes but that is capable of being used solely or primarily for residential purposes.
Residential property with a land value of $2 million and CIV of $3 million
|State||FPDS||Total Duty (inc. FPDS if applicable)||AOS||Land Tax (inc. AOS if applicable)||Land Tax for a Trust (inc. AOS if applicable)|
Any potential action that could be taken with respect to foreign surcharges depends on the type of entity acquiring or holding the relevant land, and the use of that land.
For example, for discretionary trusts (like family trusts) that intend to acquire residential property, we strongly recommend reviewing your trust deed and the residency of its beneficiaries to determine whether it may attract the application of the duty surcharge. For instance, in Victoria, the duty surcharge can apply on a dutiable transaction when the trustee has the ability to distribute over 50% of the trust capital to foreign persons (on an associate-inclusive basis) that fall within the pool of beneficiaries referred to in the deed. This means that the surcharge can be applied despite the trustee having no history of distributing to a foreign person and no intention to do so in the future.
If there is a risk that a discretionary trust deed will satisfy the requirements of the duty surcharge, the trust deed can generally be amended to manage this risk (subject to the trustee having the authority to amend the deed and there being no excessive duty or capital gains tax implications of doing so).
For any other type of entity, an exemption from the duty or land tax foreign surcharge may be sought, based on the type of entity, the type of property, or the discretion allowed to the revenue office to grant an exemption.
Discretionary exemptions allowed to revenue offices generally apply to companies or trusts that are partially or wholly owned by foreign persons but where day-to-day management is undertaken in Australia and the taxpayer is making a significant contribution to the local economy through property development or business activities.
We recommend that anyone potentially impacted by these surcharges should seek advice to determine if they are a foreign purchaser, or an entity owned or controlled by a foreign person, and whether there is a possibility of managing exposure to the surcharge.
We also note that foreign investors have a duty to notify the revenue office of the State in which their property is located of their status, as a notification default could incur penalty charges.
If you have any questions or queries, please contact us.
1Snapshot Series 3, The Australian Tax System
23.00% for residential property or 3.50% for primary production property.
3Where the property is not grouped with any other properties.
4For individuals who are “absentees” as defined in Land Tax Act 2010 (QLD).
5Trusts and corporations cannot be absentees in Queensland but are generally subject to a surcharge rate (which is lower than the absentee rates but higher than the rate applied to individual non-absentees).
6Northern Territory does not have a Land Tax for residents or foreign persons, unless for vacant residential land.