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built environment insights | global tax insight 05 Dec 2017 Residential housing: Increased taxes for foreigners

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  • Various Australian State governments have introduced, or are proposing to introduce, a range of new taxes on foreign investment in Australian property, both in the form of the transfer duty surcharge and the land tax surcharge.
  • While the rate and scope of the transfer duty surcharge varies between States, it is the transfer of residential property to a non-resident that will generally attract the surcharge. Similarly, residential land held by a non-resident (or in some cases, held by an absentee owner or left vacant) may attract a land tax or similar surcharge.
  • Exemptions may be available. However, these are largely discretionary and a myriad of guidelines and restrictions may apply.

In a booming residential property market, with strong foreign investment, Australian State Governments have followed the lead of other countries to introduce additional real estate transaction taxes in the form of foreign purchasers duty and land tax surcharges.  While aimed at assisting housing affordability and capturing greater contribution by foreigners to local infrastructure, the measures also have the potential to impact local development projects and investment where there is an element of foreign ownership.

A curb on rising prices?

Following the lead of other jurisdictions, such as Singapore, Hong Kong and British Columbia, five of the eight States and Territories of Australia have introduced, or announced the introduction, of additional transfer taxes aimed at foreign purchasers of residential land.

The rationale for these measures has variously been described as ensuring that foreign investors contribute appropriately to local infrastructure, or to ease the pressure on housing supplies for Australian residents, in particular first home buyers.

Measures announced in the recent New South Wales Budget, for example, are forecast to raise up to AUD$2 billion in additional tax revenue in the next four years, and will be directed to assisting first home buyers by way of stamp duty concessions.

At the same time, the Federal Government has announced generous concessions to encourage investment in affordable housing projects ("build to rent") through managed investment trusts and these trusts will be subject to the State surcharges where they are regarded as "foreign".

The jury is still out as to the likely combined impact of these measures on housing affordability.  However, the fact that the foreign surcharges extend to purchases by foreign controlled developers, as well as investments by foreign controlled funds and corporations, means that the measures may have a broader impact on the Australian residential development market than expected.

Key elements of the surcharges on land purchases

Each of the eight Australian States and Territories impose a real estate transfer duty payable on the purchase of land.  The rate and scope of the duty varies between States, but is generally about 5.5% of the GST inclusive purchase price.  

Whether known as "Surcharge Purchaser Duty" in New South Wales, "Additional Foreign Acquirer Duty" in Queensland, "Foreign Purchaser Additional Duty" in Victoria, "Foreign Purchaser Duty Surcharge" in South Australia (as proposed) or "Foreign Owner Duty Surcharge" in Western Australia (as announced), the surcharge imposes additional duty on the transfer of residential property to "foreign persons" on top of the existing duty.  The duty is not limited to the transfer of fee simple interests in land but extends also to other transactions affecting interests in land, such as the transfer of a lease at a premium if the transferee is a foreign person.  

A foreign person includes a foreign individual, a foreign corporation or the trustee of a foreign trust.  In New South Wales, a foreign person also includes a foreign government.  The tests are complex, and vary between States, but a corporation or a trust can be treated as "foreign" under the New South Wales rules, for example, if a "substantial interest" of at least 20% is held by a foreign person (or an aggregate substantial interest of 40% if there are two or more foreign persons) i.e. equivalent to the Foreign Investment Review Board requirements. In Queensland and South Australia the entity must be 50% or more foreign controlled (shares and voting rights).  Curiously, the Victorian provisions require a single foreign person to have a 50% (capital) interest and the interests of unrelated foreigners are not aggregated.  Due to tracing and deeming provisions the potential scope for an investor to be "foreign" is far reaching, and not always obvious.  

Combined with this, the concept of residential property varies between States and can be broad.  For example, the provisions in New South Wales apply to any land, not including primary production land, on which there are one or more dwellings and also includes vacant land zoned residential.  "Residential property" in Victoria is defined as land capable of being used solely or primarily for residential purposes and that may lawfully be used in that way.  The rules and their interpretation vary such that serviced apartments, retirement villages and student accommodation can be in or out of the provisions depending on the State, and the precise attributes of the facility.

To add to the complexity, some of the rules have a forward-looking test.  For example, in Victoria where a foreign purchaser acquires property that is not residential property, and that foreign purchaser forms the intention to use the land for residential purposes after the property is acquired, the foreign purchaser is required to notify the revenue authority and pay the foreign purchaser duty surcharge.  In Queensland and South Australia, the foreign purchaser duty surcharge attaches if the purchaser is a corporation or a trust which becomes foreign controlled within three years after the time the liability for transfer duty arose.  

Developer exemptions

The provisions in New South Wales, Victoria and Queensland do recognise, to varying degrees, that the surcharge should not operate to discourage foreign developers, or to create an unlevel playing field with local developers.  Each has introduced some measures to take certain activities outside the surcharge.  However, these measures are largely discretionary, and apply a myriad of guidelines and restrictions which can be cumbersome.  In each case, applications must be made for exemptions to apply and this can delay transactions.

For example, the Queensland provisions give the Commissioner of State Revenue a discretionary power to grant ex gratia relief if the foreign purchaser is, amongst other things, a "significant developer".  In Victoria, the Treasurer may grant an exemption for a company incorporated in Australia if its activities in the development or re-development of property adds to the supply of housing in Victoria.  However, a foreign company is not eligible for exemption.

Previously, there was no similar exemption in New South Wales for developers. However, the recent New South Wales State Budget announced the introduction of a refund system for companies incorporated in Australia, who are not otherwise exempted developers, that construct new homes on residential land where the developer is incorporated in Australia.  These measures have received assent and will commence on a day to be appointed by proclamation.  Again, incorporation in Australia is essential for these rules to operate, presumably to allow greater surveillance of the entity's activities.  The need to pay the surcharge and seek a refund (possibly several years later) adds complexity to the system.

Under the New South Wales developer exemption, a refund of the foreign purchaser duty surcharge paid will be available where the revenue authority is satisfied that:

  1. the Australian developer or a related body corporate constructed a new home on the residential land to which the residential-related property relates after completion of the transfer of the property to the Australian developer;
  2. the Australian developer has sold the new home to a person other than an associated person; and
  3. the home was not occupied or used as a place of residence or for any other purpose at any time between completion of construction of the home and completion of its sale.  

An application for refund must be made within 12 months after completion of the sale of the new home and no later than 5 years after completion of the transfer of the residential-related property to the Australian developer.

Ongoing tax surcharges 

In addition to stamp duty on purchases, all Australian States and Territories, other than the Northern Territory, impose a land tax on an annual basis on the unimproved value of land.  The rate of annual land tax varies but is typically between 1.5% and 2.25% of the unimproved land value.  Land tax applies in the same manner to all types of land (e.g. commercial, industrial and residential), subject to exemptions for principal place of residence and primary production land.

The measures aimed at foreign purchasers extend to foreign ownership in the form of a  land tax surcharge which applies on top of the normal land tax where a foreign person owns residential land in New South Wales or any land in Victoria.  The surcharge payable in New South Wales and Victoria on top of the general land tax rate for the 2017 land tax year is 0.75% and 1.5% respectively.  For the 2018 land tax year the foreign owner land tax surcharge is increased to 2% in New South Wales.  

Exemptions from the foreign owner land tax surcharge may be available.  

Vacant residential property tax

Finally, in a move to discourage residential land being left unrented, from 1 January 2018, Victoria will impose a Vacant Residential Property Tax of 1% of the capital improved value of property in certain areas of Melbourne which is left unoccupied for six months or more in a calendar year.  Based on the Minister's Second Reading Speech, this aims to "incentivis[e] Melbourne's current housing stock to be put to its most efficient use".  There is no concession for land held vacant pending redevelopment.

The Federal government also proposes to introduce a charge on foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months a year.  The charge will be levied annually and will be equivalent to the foreign investment application fee imposed at the time of acquisition of the property. 

Harmonisation

Probably the most striking feature of the new rules, is the lack of consistency between States and, due to the State/Federal system, the overlay of Commonwealth initiatives.  These don’t always work coherently together and may lead to distortions in the market.  It is hoped that if these measures are to become an enduring feature of local taxes, that they will be harmonised and simplified to reduce compliance cost.

Summary of current measures

State or Territory
Foreign purchaser duty surcharge
Foreign owner land tax surcharge
Vacant residential property tax Key Features
New South Wales
8%
2% N/A
The normal off-the-plan stamp duty concession is not available to foreign purchasers
Victoria
7%
1.5%
(up from 0.5% for the 2016 land tax year)

1% of the capital
improved value
(from 1 January 2018, applies to certain areas of Melbourne only)

Requirement to notify change in intention of use
Queensland
3%
1.5%
(does not apply to corporations or trusts)

N/A
Three year reassessment if purchaser becomes "foreign"
 South Australia 4%
(from 1 January 2018. However the South Australian government has proposed introducing a new Bill to raise this to 7%)
 Nil  N/A  In addition to three year reassessment if purchaser becomes foreign, there is a refund mechanism if the purchaser ceases to be foreign within one year
 Western Australia  4%
(as announced but not yet implemented)
 N/A  N/A  The surcharge applies to residential property but excludes residential developments of ten or more properties, commercial residential property and retirement villages, and mixed use properties that are used primarily for commercial purposes
 Northern Territory,
Australian Capital Territory and Tasmania
 N/A N/A   N/A  
Commonwealth (applies to land held in any State or Territory)  N/A N/A  An amount equal to the FIRB application fee imposed at the time of acquisition of the property   Represents an annual cost.  For example, currently approx. AUD$100,000 p.a. for residential property where the purchase price was more than AUD$9 million and less than AUD$10 million


Co-author:
Struan Davidson

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