On 21 June 2016 the New South Wales Government introduced a stamp duty surcharge of 4% for acquisitions of residential land by foreign purchasers. With effect from 1 October 2016, the Queensland Government will also impose a stamp duty surcharge of 3% on similar acquisitions in that State. The changes have brought Queensland and New South Wales in line with Victoria, which introduced the 3% foreign purchaser additional duty (“FPAD”) last year. The FPAD rate has increased to 7% for contracts entered into on or after 1 July 2016.
Who is liable to pay the duty surcharge?
A foreign purchaser is liable to pay the duty surcharge in addition to the standard rate of duty. A foreign purchaser includes a foreign individual, foreign corporation or foreign trust. The control tests that determine whether corporations or trusts are controlled by foreign persons are different in each State.
Foreign purchasers should be aware that an entity treated as a foreign corporation or trust in NSW may not be treated the same way in Queensland or Victoria, which have higher threshold tests for control. Accordingly, the manner in which international developers and investors structure their landholding entities in Australia could impact their exposure to the duty surcharges in different States.
Which transactions does the duty surcharge apply to?
In Victoria the 7% FPAD is payable on transfers of residential property to foreign persons or entities under any contract signed on or after 1 July 2016. The FPAD also applies to acquisitions of significant interests in landholding companies and unit trusts by foreign persons or entities. For example, on the acquisition of a property valued at $5 million, the duty payable for a domestic purchaser is $275,000. By way of comparison, the duty payable on the same property by a foreign purchaser is $625,000. The difference in the amount of duty payable is even greater in respect of apartments purchased off-the-plan. Following the increase in the FPAD rate to 7%, the stamp duty cost for some foreign apartment buyers is now more than 10 times greater than for a domestic purchaser.
What is residential property/land?
From 1 July 2016 the definition of ‘residential property’ in Victoria has been expanded to capture refurbishments and extensions of existing buildings such that the land is capable of being used for residential purposes. An intention to refurbish, extend or construct a building, or to undertake land development for the purposes of constructing a building will be sufficient for land to be captured under the definition of ‘residential property.’ The definition of ‘land development’ has also been expanded to include a request to a planning authority to prepare an amendment to the planning scheme that would affect the land.
However, the definition of ‘residential property’ in Victoria now specifically excludes land used or intended to be used solely or primarily as commercial residential premises such as hotels, motels and serviced apartments, as well as residential care facilities, supported residential services or retirement villages.
In NSW and Queensland there is much more uncertainty around the definition of residential land and whether the legislation captures short-term accommodation, retirement villages or aged care facilities. This will create uncertainty for developers around the duty liability for transactions concerning commercial residential property.
In Victoria, certain foreign purchasers can apply for an exemption from the additional duty under the Treasurer’s exemption regime. The Treasurer has issued exemption guidelines and exemption applications are reviewed by the State Revenue Office (“SRO”). The guidelines include a number of factors, including whether the foreign purchaser is Australian- based and whether their commercial activities add to the supply of housing stock in Victoria, either through new developments or re-developments that are primarily residential.
At this stage neither NSW nor Queensland has introduced an exemption regime similar to the one in Victoria.
Land tax surcharge
The Victorian Government has increased the land tax surcharge rate for absentee owners of land from 0.5% to 1.5%, with effect from the 2017 land tax year. The NSW government has also introduced a 0.75% land tax surcharge for foreign persons effective from the 2017 land tax year. However, the NSW land tax surcharge only applies to foreign owners of residential land, whereas the Victorian surcharge applies to foreign owners of all taxable land whether it is residential, commercial or otherwise.
The surcharge regimes in Victoria, NSW and Queensland contain important differences in their application to both foreign developers and investors as well as local developers in joint venture arrangements with offshore entities. We recommend that careful consideration be given to the structure of landholding entities to try and minimise the impact of the surcharges as far as possible, both at the time of acquiring the land and on an ongoing basis. Developers and investors in the Victorian property market should also consider whether there is an opportunity to seek an exemption from the surcharges.