Foreign purchaser and land tax surcharge – how the changes impact your investment decisions

Foreign purchaser surcharge

Recent changes to duty legislation in New South Wales (NSW), Victoria (VIC) and Queensland (QLD) has meant that “foreign persons” who own certain types of land in each of these states (namely “residential” land) will attract a foreign stamp duty surcharge.

Broadly, a foreign person includes (but is not limited to) an individual or company not ordinarily a resident in Australia, a foreign corporation or foreign government (depending on the specific circumstances). Importantly, Australian family (discretionary) trusts can fall within this definition depending on the drafting of the trust deed.

Using NSW as an example, this means that a family trust with foreign person beneficiaries could be required to pay stamp duty of up to 9.5% on residential land acquisitions less than $3m and up to 11% on residential land acquisitions greater than $3m. This is a significant uplift when compared to domestic buyers and represents a substantial cost of acquisition.

Land tax foreign person surcharge

Both NSW and VIC have also introduced a new land tax surcharge of an additional 0.75% and 1.5% respectively. QLD already has a higher rate of land tax for absentee owners. In NSW, the land tax surcharge relies upon the same definition of a foreign person as the foreign purchaser surcharge.

How this may impact your current and future investment decisions

Most family trusts have a wide range of beneficiaries that may extend beyond Australian tax residents. As a result, it is likely that many family trusts will have a foreign person beneficiary as defined in the new foreign stamp duty surcharge rules. An issue arises in this instance due to the far reaching definition of a foreign person.

A family trust is generally established such that a beneficiary does not have a defined interest in the trust. However, for the purposes of applying the foreign purchaser and land tax surcharge, the rules deem each beneficiary in a discretionary trust to have a 100% beneficial interest (noting each state is slightly different).

This means that if a foreign person is a beneficiary of the trust, then the trust should be subjected to the higher duty and land tax rates. This is irrespective of whether distributions have in the past been made to the foreign person or will in the future be made to the foreign person.

How to manage this risk

If you think you may have foreign person beneficiaries of your family trust, we recommend the trust deed is reviewed to confirm whether the foreign purchaser and land tax surcharge may apply to current or future investments.

The NSW Office of State Revenue has issued guidance which explains that the Chief Commissioner can apply his discretion to exempt from foreign purchaser and land tax surcharge, a taxpayer who is captured by the definition of a foreign person.

In order to be eligible for the exemption, the family trust deed will require amendment so the trustee no longer has the power to make distributions to foreign persons. The amendment to the trust deed must be made within six months of the exemption being granted.

Exercise caution

It is important to note that each Australian state and territory has its own duty regime and the above comments cannot be applied to all scenarios. As a result, we strongly recommend that appropriate tax advice is sought for your specific circumstances.

In addition, care should always be taken when amending a trust deed in order to consider whether the amendment could give rise to adverse tax consequences such as a resettlement of the trust. We also strongly recommend that appropriate tax and legal advice is sought before your trust deed is amended.

 

These duty changes are complex and fact specific. As a result, both pre and post investment tax planning is encouraged to prevent adverse tax consequences arising.

If you have any questions, please contact Joe Galea or Robert Nguyen.


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