Queensland foreign stamp duty surcharge - relief guidelines issued

In brief

As we noted previously, an additional 3 per cent stamp duty surcharge (known as Additional Foreign Acquirer Duty or 'AFAD') applies from 1 October when a foreign person acquires residential land in Queensland. The Commissioner has now released important guidelines on the requirements to obtain ex gratia relief from AFAD when there is a 'significant development'. She has also published rulings explaining her views on the circumstances in which a foreign person with no interest or a minority interest in a purchaser might cause that purchaser to be a 'foreign person' potentially subject to AFAD; and what categories of land or buildings in Queensland will be subject to AFAD as 'AFAD residential land'. Partner Adrian Chek and Senior Tax Counsel Marc Johnston report. 

Interests of foreign persons and related persons

AFAD is only payable if residential land in Queensland is acquired by a 'foreign individual', 'foreign corporation' or the trustee of a 'foreign trust'⁴. Relevantly for these purposes, a foreign corporation is defined to include a corporation in which foreign persons have a controlling interest on the basis that foreign persons or 'related persons'⁵ of foreign persons together either:

• are in a position to control at least 50 per cent of the voting power or potential voting power in a corporation; or
• have an interest of at least 50 per cent of the issued shares in the corporation⁶.

Including the control or interest of related persons, makes the potential scope of AFAD very broad. In particular it created a potential interpretation that a corporation could be a foreign person even where none of its shareholders were foreign persons, but a majority shareholder was related to a foreign person. Fortunately, the Commissioner has confirmed that, in determining whether foreign persons have a controlling interest in a corporation, it is necessary for both the foreign person and the related non-foreign person to be able to control the voting power or potential voting power or to have an interest in the issued shares in the corporation.

Therefore, it will not be relevant that a non-foreign person, who has voting control or an interest in the issued shares in a corporation, is related to a foreign person who has no such control or interest, in determining whether the corporation is a foreign corporation. Similarly, the mere fact that a person who has a trust interest in a trust is related to a foreign person who has no trust interest, would not result in the trust becoming a foreign trust.

On the other hand, the ruling confirms that a corporation could be a foreign corporation if the related foreign person does have an interest in issued shares in a corporation or can control some voting power in the corporation, regardless of how minor that control or interest might be. For example, if 99 per cent of the shares in a corporation are held by an Australian citizen, but the other 1 per cent of the shares are held by a foreign person that is related to the Australian shareholder, the corporation will be a foreign person for the purposes of the AFAD. Accordingly, before acquiring AFAD residential land, a purchaser should consider whether there is any good commercial reason for a related foreign person to maintain a minority shareholding or unitholding in the relevant corporation or trust.

The ruling also confirms that the interests of all foreign persons will be aggregated regardless of whether the foreign persons themselves are related persons of each other. However, the ruling does suggest that a discretionary trust will not necessarily be a foreign trust merely because one of its default beneficiaries is a foreign person. The Commissioner will take into account all the relevant facts and circumstances in determining whether that discretionary trust is a foreign person.

AFAD residential land

AFAD is only payable where 'AFAD residential land'⁷ is acquired directly or indirectly by a foreign person. Broadly, this means land in Queensland that is or will be used solely or primarily for residential purposes, where the building or part of the building that is or will be used for the residential purposes is designed or approved by a local government for human habitation by a single family unit⁸. In the relevant ruling, the Commissioner seeks to clarify when these requirements will be satisfied and makes the following points:

• whether the land is AFAD residential land will be considered on a per lot basis, that is, each piece of land the subject of the transaction will be tested separately;
• use for residential purposes involves considering the use or intended use of the land for 'normal home living' in contrast to other uses such as business or commercial purposes – regard is to be had to relevant factors such as the zoning of the land; whether any buildings are designed or approved by a local government for human habitation by a single family unit; the degree of permanence of the use; and whether the use is self-contained;
• the words 'solely' and 'primarily' have their ordinary meaning – land will be used solely for residential purposes if it is used exclusively or only for those purposes while land will be primarily used for residential purposes if it is mainly or principally so used;
• whether a building or part of a building is designed or approved by a local government for human habitation by a single family unit refers to self-contained dwellings that are designed or approved for human habitation by a single family unit; and
• the term 'single family unit' has its ordinary meaning based on the range of arrangements that would fall under that term in the reasonable expectations of the general public.

The Commissioner lists examples where the definition of AFAD residential land will and will not apply. Importantly, the Commissioner has confirmed that land used for short-term accommodation (such as a hotel or motel) and dormitory-style student accommodation will not fall within the definition of AFAD residential land (presumably on the basis that the lack of permanence of use prevents the building from being used for normal home living).

Unfortunately, the ruling notes that whether the test will be met in relation to other types of residential properties such as retirement villages, manufactured home parks and student accommodation (other than dormitory-style student accommodation), will turn on the facts of the matter and will be considered on a case-by-case basis. However, we suggest that land would not fall into the definition of AFAD residential land if it comprises a single lot that will developed in such a way that the land (and the lot) will be used and intended to be used by multiple family or other units. That is, if the land is not sub-divided into individual lots or strata-titled units, there would not be a lot on which there is or will be a building or part of a building that is designed or approved by a local government for human habitation by a single family unit.

On the other hand, the ruling indicates that AFAD residential land will include:

• established homes and apartments;
• vacant land upon which one or more homes or apartments will be built;
• land for development for residential use; and
• land with buildings to be refurbished, renovated or extended for residential use (such as a disused warehouse that the developer intends to refurbish to create residential apartments).

Whether the definition of AFAD residential land is satisfied will be tested at the time of the potentially liable transaction. However, it is not limited to the present use of the land but also applies on a prospective basis based on the objectively ascertainable future use of the land in the hands of the acquirer⁹. In other words, if at the time the land is acquired there is evidence that the acquirer plans to develop the land at a future date so that it will become AFAD residential land, the transaction may still be liable for duty.

The Commissioner notes that the timeframe within which that status eventuates is not limited. Therefore, developers need to take care if there is a change in planned use of land. If there is any evidence to suggest that the developer had plans contemplating the use of the land for residential purposes or took any steps towards progressing the land for residential development, the Commissioner may (with hindsight) focus on that evidence as suggesting that the necessary intended use existed at the time of acquisition.

Ex gratia relief for significant developments

The Commissioner has now confirmed that ex gratia relief from AFAD will be available in exceptional circumstances. The factors that will be taken into account and the five conditions that must be satisfied are outlined in the relevant ruling.

1. The foreign entity undertaking the transaction must be 'Australian-based'. The Commissioner lists a number of non-exhaustive factors relevant to this issue including whether:

• the foreign entity has a head office or principal place of business, or a significant management staff and office presence, in Australia;
• the foreign entity employs Australian citizens or permanent residents or carries on business in Australia;
• there is a considerable level of Australian participation in the foreign entity that conducts its activities in Australia; and
• the foreign entity primarily contracts for services and materials of Australian building contractors and suppliers to engage in the development activities in Australia. The Commissioner considers that 'primarily' requires more than 50 per cent of the value paid by the entity for goods and services to go to Australian contractors and suppliers.

2. The foreign entity must have complied with any Foreign Investment Review Board (FIRB) requirements in relation to the acquisition of the land.

3. The foreign entity must have met any other regulatory requirements, including complying with the Corporations Act 2001 (Cth) and any Queensland taxation laws.

4. The development must be significant either because the development itself is significant or the developer has that status. Significant development status requires that the land that is the subject of the transaction is either:

• acquired by a foreign entity for the purposes of undertaking a development or redevelopment of 50 or more residential lots (the 'transaction lot test') – the 50 residential lot requirement focuses on the lots produced, not the lots acquired, by the developer; or
• to be developed or redeveloped into less than 50 residential lots but where it will make a significant contribution to the region in which it is occurring¹⁰ (this 'regional significance test' is not targeted at metropolitan areas or urban in-fill developments).

Significant developer status will be satisfied if the developer will undertake development or redevelopment of 50 or more residential lots in a 12-month period that includes the date of the relevant transaction or, alternatively, the developer averages 50 or more residential lots per year taken on average over a period of up to five years. If a foreign entity is wholly owned by a parent entity, developments by the parent entity and any other wholly owned companies, in addition to the foreign entity, can be counted for significant developer status.

5. The foreign entity must primarily employ or contract for services, materials from Australian building contractors and suppliers to engage in the development of land under the relevant transaction. This requires that either more than 50 per cent of the value paid by the entity for goods and services is paid to Australian contractors and suppliers, or more than 50 per cent of the foreign acquirer's employees for the development are Australian (in total wage value or total number of employees).

In addition to the normal documentation required to be provided to the Commissioner when directly or indirectly acquiring land in Queensland, in order to obtain ex gratia relief, a developer must provide the Commissioner with a statutory declaration containing details of the basis on which it satisfies the guidelines. That statutory declaration must also acknowledge an obligation both to inform the Commissioner in writing within 28 days of the developer no longer satisfying the conditions for ex gratia relief and to repay or refund to the government the ex gratia payment where the conditions for relief are not met. Foreign developers must therefore be confident that they will not cease to satisfy those requirements because of the risk that they might be forced to repay the Queensland Government an amount equal to the relief provided if, for example, they decide to reduce the number of lots to be developed to less than 50.

We understand that the Commissioner has a service standard to provide in-principle pre-approval within 5-10 business (with the final ex gratia relief approval process expected to take between 10-30 business days)¹¹. The Commissioner also notes that an administrative process will be implemented to streamline the ex gratia relief process where a foreign developer undertakes ongoing or multiple developments.

Allens' tax team can help you with all aspects of AFAD, including advising on whether it will apply to land in Queensland you propose acquiring, and applying for ex gratia relief from duty if you are a significant developer or the land being acquired will be a significant residential development.