Qld, NSW and Vic impose stamp duty surcharge on foreign purchasers of residential land

In brief

Queensland will impose a stamp duty surcharge of 3 per cent on direct and indirect acquisitions of residential land in Queensland by foreign purchasers, with effect from 1 October 2016. A similar stamp duty surcharge has been announced by the New South Wales Government with effect from 21 June 2016. This follows the introduction of a stamp duty surcharge on foreign purchasers by the Victorian Government last year which Victoria proposes to raise to 7 per cent from 1 July 2016. Partner Adrian Chek, Senior Tax Counsel Marc Johnston and Associate Jay Prasad report.

Additional Foreign Acquirer Duty

The Queensland Government has passed legislation imposing a stamp duty surcharge of 3 per cent on direct and indirect acquisitions of residential land in Queensland by foreign persons. Foreign persons will pay stamp duty at a rate of up to 8.75 per cent on certain direct dealings with residential land in Queensland and relevant acquisitions of an interest in a company (including a corporate trustee of a discretionary trust) that holds residential land in Queensland.

Definition of foreign person

A 'foreign person' is defined to mean:

• a 'foreign individual' – an individual other than an Australian citizen or a holder of an Australian permanent visa or a New Zealand citizen who is the holder of a special category visa;
• a 'foreign corporation' – a corporation incorporated outside Australia or a corporation in which a 'controlling interest' is held by one or more foreign persons or related persons of foreign persons. A person will be taken to have a controlling interest in a corporation if the person has an interest in at least 50 per cent of the issued shares, or is in a position to control at least 50 per cent of the voting power or potential voting power (as defined in the Foreign Acquisitions and Takeovers Act 1975 (Cth)) in the corporation; and
• the trustee of a 'foreign trust' – a trust in which at least 50 per cent of the trust interests in the trust are held by a foreign person or related persons of the foreign person.

The 'related persons' test found in the existing transfer duty provisions of the Duties Act 2001 (Qld) will be used to determine whether an individual or other entity is a related person of a foreign person.

If AFAD is not initially payable because the acquirer is not a foreign corporation or foreign trust, but within three years after the liability date the relevant entity becomes a foreign corporation or a foreign trust, the corporation or trustee (as the case may be) must notify the Commissioner, and the transaction will be reassessed and AFAD imposed. There is no corresponding specific reassessment provision for an individual that subsequently becomes a foreign individual.

Definition of AFAD Residential Land

'AFAD residential land' is land in Queensland that is (or will be) solely or primarily used for residential purposes, and any of the following apply:

(a) on the land there is (or will be) constructed a building, or an existing building will be refurbished, renovated or extended so that it becomes a building, designed or approved by a local government for human habitation by a single family unit; or

(b) the land is (or will be) a lot on which there is (or will be) a building or a part of a building that, for the separate area the lot comprises, is designed or approved by a local government for human habitation by a single family unit; or

(c) a person is undertaking, or will undertake, development of the land so it becomes land described in (a) or (b).

The definition of AFAD residential land is framed differently from the corresponding definition of 'residential property' in the Victorian provisions. Generally, the same type of properties would be captured by both provisions, for instance:

• established homes and apartments;
• vacant land upon which a home or apartment will be built;
• land for development for residential use; and
• refurbishment of a building for residential use.

It does not seem that commercial residential premises such as hotels, serviced apartments and student accommodation will be caught by the Queensland definition, except to the extent that there are separate strata-titled apartments.

The Commissioner has no specific power to make a reassessment to impose AFAD where a transaction is assessed on the basis that the relevant land is not AFAD residential land but subsequently becomes AFAD residential land. However, the Explanatory Memorandum accompanying the Bill notes that the Commissioner has a general power to reassess a transaction to include AFAD in these circumstances. Generally, the Commissioner would be required to make any reassessment within five years after the original assessment notice is provided to the taxpayer.

Scope of liability

Generally, AFAD will be imposed only to the extent of the foreign person's interest in AFAD residential land. AFAD will apply to all dutiable transactions involving a foreign person, provided that the subject of the transaction is AFAD residential land. Accordingly, AFAD could apply where transfer duty is payable on:

• a transfer or an agreement for the transfer of land;
• a declaration of trust over land;
• an option granted over land;
• a surrender of an interest in land; or
• a lease of land where a premium or other consideration is payable for the grant of the lease.

If the dutiable transaction is a partnership acquisition, trust acquisition or trust surrender, then AFAD will only apply to the extent that the acquisition or surrender relates to AFAD residential land and only to the extent of the foreign person's interest in the acquisition or surrender.

Similarly, AFAD will apply to landholder duty to the extent that the landholdings of the landholder are AFAD residential land and only to the extent of the foreign person's interest in the relevant acquisition. Apportioning AFAD in this way is intended to avoid the application of AFAD to persons who are not foreign persons.

Statutory charge

If any AFAD is unpaid, the Commissioner will have a first ranking statutory charge over the foreign acquirer's interest in the residential land.

However, the charge cannot be registered if the foreign acquirer is no longer the registered owner. Prospective purchasers will therefore only be bound by a statutory charge in respect of unpaid AFAD if the charge is registered at the time the foreign acquirer disposes of the residential land.

If AFAD is not paid within 18 months after the charge is registered, the Commissioner can apply to the Supreme Court for an order to sell the land so that it can recover the unpaid AFAD.

Victoria and New South Wales

The Victorian Government last year introduced a stamp duty surcharge for foreign purchasers of residential property in Victoria and a land tax surcharge on absentee owners of Victorian land. Refer to our previous Focus for further detail. From 1 July 2016, Victoria will increase the stamp duty surcharge to 7 per cent (from 3 per cent) and the land tax surcharge to 1.5 per cent (from 0.5 per cent).

The New South Wales Government has announced that as part of the 2016 State Budget it will impose a 4 per cent stamp duty surcharge on the purchase of residential real estate by foreign purchasers from 21 June 2016, and a 0.75 per cent land tax surcharge on residential real estate owned by foreign persons commencing in the 2017 land tax year. The NSW Treasurer also noted that:

• foreign purchasers will no longer be entitled to the 12 month deferral for the payment of stamp duty for off-the-plan purchases of residential property; and
• foreign persons will not be entitled to the current $482,000 tax-free threshold for the land tax surcharge.¹

Joint and Several Liability for Direct Acquisitions in Queensland

In Queensland, all parties to a transaction that gives rise to a liability for transfer duty will be jointly and severally liable for any AFAD that is payable – this includes any purchasers that are not foreign persons and, unlike the position in New South Wales and Victoria, will also include the vendor.

This risk to vendors will create uncertainty and additional compliance costs and will hinder the efficient sale and purchase of residential land in Queensland. Although the vendor will have both a contractual and statutory right to recover AFAD as a debt due from the foreign person, the vendor needs to consider the difficulty of enforcing these rights if that person has already sold the residential land in question and has no presence in Australia.

Purchasers need to take care when they acquire land jointly if there is a risk that their co-purchaser could be a foreign person. As the Commissioner has the power to register a charge over the land and obtain a court order for the sale of the land in order to recover the unpaid AFAD, they may be forced to pay the unpaid AFAD even if they are Australian citizens. The fact that local purchasers are likely to have a contractual right, and will have a statutory right, to recover the amount of AFAD from the foreign co-purchaser is unlikely to be totally satisfactory.

One small comfort is that subsequent purchasers can be certain that their title to the land will be unimpeachable, even if they acquire the property from a foreign person and the foreign vendor did not pay AFAD. This is provided that the Commissioner has not yet lodged a request to register a charge over the land in respect of the unpaid AFAD.

Transitional issues

The AFAD regime contains a transitional rule that ensures agreements for the sale of residential land entered into before 1 October 2016 will not be subject to AFAD, even where those agreements settle on or after that date. However, the same protection is not afforded to option agreements entered into before that time. If an option is exercised on or after 1 October, regardless of when the option agreement was entered into by the parties, AFAD will be payable by a foreign purchaser.

Care should also be taken where a foreign person acquires shares in a company and, at the date the agreement is signed, the company is not a landholder (because it does not directly or indirectly own land in Queensland with a value of $2 million or more), but it becomes a landholder before the agreement completes. In that situation, even if the agreement is signed before 1 October, if the company is a landholder at completion on or after 1 October, AFAD will be payable in addition to landholder duty.

The definition of AFAD residential land is not limited to land that is currently used for residential purposes, but also includes land that is acquired and which 'will be' used for such purposes. The Bill introducing AFAD and the accompanying Explanatory Memorandum provide no real guidance on when the Commissioner will treat land as land which will be used for residential purposes if, at the time it was acquired, it was not used for that purpose but is subsequently so used.

The fact that the Commissioner has a five year reassessment period means that purchasers need to take some care before changing the use of any relevant land within that five year timeframe. This includes vacant land as well as land which, when acquired, has non-residential buildings on the land. This is because the definition of AFAD residential land encompasses land on which a new building will be constructed for residential purposes as well as land on which there is an existing non-residential building that will either be refurbished or renovated, or demolished and re-developed, into a residential building.

Purchaser becomes foreign within three years

The three year reassessment period will need to be monitored in relation to changes in ownership of shares in companies and units in trusts. This is because the company or trust in question will be liable to pay AFAD if it has acquired residential land in Queensland during that three year re-assessment period and the company or trust subsequently becomes a foreign corporation or foreign trust.

The reassessment provision also imposes an onerous obligation on corporations and trusts to continually monitor changes in share and unit holdings because of the offence that the corporation or trustee will commit if they fail to give the Commissioner notice within 28 days of the corporation or trust becoming a foreign person.

Finally, the AFAD regime includes provisions that ensure the rules can apply where residential land is acquired by entities that are controlled by persons who are related to foreign persons. Unfortunately, in combination with the existing definition of 'related persons', this could have a variety of unintended outcomes. For example, if residential land in Queensland is acquired by a company which is incorporated in Australia and is wholly owned and controlled by an individual who is an Australian citizen, but the individual happens to have a 'family member' who is a foreign person, AFAD could be payable based upon the full value of the land. This is irrespective of the fact that the foreign family member might have no connection with the company. Similar issues arise when residential land is acquired by a trust where the trust interests in the trust are held by Australian citizens who have foreign family members.

It is to be hoped that some of these anomalies will be rectified before the legislation takes effect on 1 October 2016.