By James Price, Partner, Anthony Brearley, Partner and Tom Cantwell, Partner
2016-2017 Victorian State Budget Tax Increases
The State Budget was released on 27 April 2016 and confirmed the Government’s increase of land transfer surcharges and ‘absentee owner’ land tax surcharges on foreign purchasers and landowners.
The State Budget clearly targets international investment in its strategy to bolster revenue, with the Budget Papers projecting land transfer duty alone to generate $5.7 billion in 2016-17.
This increase, combined with the major Australian banks’ recent pull back in non-resident lending and the introduction of foreign acquisition application fees in the previous year, is expected to harshly impact foreign investor confidence in the Victorian property market.
Property industry experts warn that these new tax burdens will force foreign investors to withdraw from the Victorian property market at a time when many are predicting a general slowdown which may have broader implications for the Victorian economy.
Land Transfer Surcharge
The surcharge on foreign purchasers of residential property will be increased from 3 per cent to 7 per cent of the total contract value on top of the usual duty payable.
The surcharge will apply to contracts entered into on or after 1 July 2016, but also to contracts entered into prior to 1 July 2016 if a foreign person is nominated under the contract on or after 1 July 2016, provided additional consideration has been paid or land development has occurred. The State Revenue Office considers these events ‘sub-sales’ for the purposes of duty and this will capture all nominations after 1 July 2016 under off-the-plan contracts no matter when they were entered into.
Residential land includes land purchased for residential development, but importantly it also includes commercial property if the foreign purchaser later decides to undertake a residential development. Existing foreign owners of commercial property who may in future be considering redeveloping the property for residential use may wish to decide this now to take advantage of the lower duty rate prior to 1 July 2016.
Land Tax Surcharge
The absentee landowner surcharge will also rise from 0.5 per cent to 1.5 per cent from the 2017 land tax year. The surcharge applies to all types of land such as commercial, industrial and retail property holdings as well as residential.
This surcharge applies to all ‘absentee’ landowners, which includes a natural person absentee, an absentee corporation and a trustee of an absentee trust.
This surcharge will still apply to Australian resident corporations whose holding corporation or ultimate owner is deemed to be an ‘absentee’ and to many Australian resident trusts with a foreign beneficiary.
The Land Tax Act includes specific provisions requiring landowners to disclose all matters relevant to an assessment, which would include their status as an absentee owner. Investors should therefore carefully consider its impact and whether they are caught by the surcharge.
Property developers warn that these tax burdens will force foreign investors to withdraw from the Victorian property market and have worsening flow on implications for the Victorian economy.