By Jennifer Yeo, Special Counsel, and Isobel Feben, Lawyer.
The NSW Budget 2016-17 handed down on 21 June 2016 introduces new measures affecting foreign persons who own or purchase residential property in NSW on and after that day. The amending Bill was introduced on Budget Day. Victoria introduced similar rules in April 2016 and Queensland passed a similar law earlier this month.
The amending Bill, if passed in its current form, introduces a surcharge on the purchase by foreign persons of residential property in NSW.
A flat transfer duty surcharge of 4.0 per cent will apply to all acquisitions of NSW residential real estate by foreign persons made on and after 21 June 2016. ‘Foreign persons’ includes foreign individuals, corporations, trusts and governments. This surcharge applies in addition to normal duty payments on purchases of NSW property.
Who is a foreign person?
“Foreign person” has the meaning given to it in the Foreign Acquisitions and Takeovers Act 1975 (with the exception that Australian citizens wherever they reside, and certain New Zealand citizens are not foreign persons). This means that “foreign persons” generally includes an individual not ordinarily resident in Australia, a corporation or trustee of a trust in which such an individual has a substantial interest (generally 20% or more direct or indirect and associate inclusive) or a foreign government. The foreign person test is applied as at the date the liability for duty arises (generally, the date of the contract).
How will the Surcharge Purchaser Duty apply?
As a simple example, if a foreign person purchases a residential property for $10 million prior to 21 June 2016, duty payable would have been $640,490.00 (including premium property duty). For contracts entered into from 21 June 2016, additional duty of $400,000.00 would be payable. This is an effective rate of duty of approximately 10%.
Surcharge Purchaser Duty applies to direct dealings in residential property (e.g. transfers, declarations of trust, agreements for sale) and also to indirect dealings in land such as acquiring an interest in a landholder which holds residential property (e.g. acquisition of shares or units in a landholding entity).
Residential property that is caught includes land (including land under construction) on which there are dwellings, strata lots occupied as dwellings, company title interests in dwellings and vacant land zoned or designated as residential.
The duty concession for residential off-the-plan purchases (which allows buyers to defer payment of stamp duty up to the earlier of 12 months or completion) will no longer be available to foreign persons, meaning that foreign purchasers will be liable for duty plus the foreign investor surcharge at the time of purchase.
The Bill also introduces, from 1 January 2017, a land tax surcharge of 0.75 per cent which will apply to holdings of NSW residential land by foreign persons (in addition to ordinary land tax). No tax-free threshold and no principal place of residence exemption is available for foreign persons in respect of the land tax surcharge. Recovery mechanisms have also been proposed where if the foreign person defaults on its land tax payment, the Office of State Revenue (OSR) can pursue any joint owners or trustees.
The Budget also confirmed the abolition from 1 July 2016 of the following heads of duty:
Whilst this was legislated in prior years, this is welcome confirmation given the Government’s deferred of the abolition of these duties for several prior years. It now brings NSW in line with most other Australian States.
Foreign investors, and taxpayers generally, should also be aware of the OSR’s information collection and reporting obligations to the Australian Taxation Office (ATO) effective from 1 July 2016.
As of 1 July 2016, the OSR will be required to collect and report transfers of freehold or leasehold interests in real property situated in New South Wales to the ATO for the purposes of ensuring compliance with Australian taxation laws.
For each transaction, the OSR will report the following information to the ATO:
The new reporting regime will give the ATO another window into the tax affairs of foreign investors. This, together with the recently introduced foreign resident CGT withholding regime and the ATO’s ability to access tax records of individuals/entities from other jurisdictions pursuant to Australia’s Tax Information Exchange Agreements, further enhances the ATO’s information gathering and tax collection powers meaning it is even more critical for all taxpayers to ensure they are compliant.