29/03/2017

The NSW Office of State Revenue levies additional stamp duty on acquisitions of land by foreign persons and additional land tax in relation to foreign landholders.  As trusts and companies can also be considered 'foreign persons', these entities could potentially be hit with an extra tax bill to pay.

What is surcharge purchaser duty and land tax?

Surcharge purchaser duty is additional stamp duty charged on transactions that involve the transfer of residential land to foreign persons.

Surcharge land tax is additional land tax payable in respect of residential land owned by a foreign person.

What is a foreign person?
 
A “foreign person” includes:
•         an individual not ordinarily resident in Australia; and
•         companies and trusts in which a foreign individual holds a substantial interest.
 
The good news is that the NSW Duties Act 1997 provides that an Australian citizen is considered to be ordinarily resident in Australia regardless of the fact that they live overseas.
 
For the purposes of surcharge duty and land tax a substantial interest is a beneficial interest in 20% or more of the income/property of the trust or a person who holds a 20% interest in the entity.  For example, this could be a shareholder owning 20 of a total of 100 shares in a private company or an individual owning 20 of a total of 100 units in the trust.
 
What does this mean for trusts and companies?
 
Discretionary trusts are generally drafted in a way in which the beneficiaries of the trust revolve around key persons.  For example the beneficiaries of a trust may have Homer Simpson and Marge Simpson as key persons with their children and grandchildren being beneficiaries.  If any of Homer or Marge’s grandchildren reside in the United Kingdom and are citizens of that country, then if the trust owns any residential property in NSW it may be subject to additional land tax.
 
For companies and unit trusts the selection of who becomes a unit holder in the trust or shareholder in a company will require careful consideration, particularly if the trust or company intends to acquire residential land in NSW.
 
It may also be necessary to consider existing beneficiaries of discretionary trusts, current unit holders, or shareholders of companies to ensure that these entities are not subject to additional tax.  If the trust or company does not own or intend to acquire NSW residential property then foreign purchaser duty and surcharge land tax will not be a relevant consideration.
 
Things start to get a bit complex where the Office of State Revenue traces a foreign person’s interest through a number of companies/trusts.  For example, Amanda is a foreign person and she owns 50% of shares in a private company.  That company has a 50% interest in a trust which acquires NSW property.  The company is considered a ‘foreign person’ (ie, the substantial interest threshold of 20% is met) which causes the trust to also be a foreign person.  On the acquisition of the property by the trust, it may have to pay surcharge purchaser duty.
 

 
Depending on the chain of individuals, companies and trusts which are all connected in some way, one foreign individual could change the game for an entity’s purchaser duty and land tax liability.
 
There are also similar provisions that apply to VIC and QLD (subject to some differences).
 
VIC
•         additional purchaser duty and land tax is payable by foreign persons (referred to as ‘absentee owners’); and
•         a person has a substantial interest in a company or trust if they own more than 50% of shares, control 50% or more of the votes, or have a beneficial interest in 50% of the capital.
 
QLD
•         additional purchaser duty is payable by foreign persons
•         similar to VIC the threshold for a substantial interest in a company or trust is 50%.
 
Whilst this article covers some of the main points and considerations, for more information in relation to additional duty, we have provided links to each state’s information below or, alternatively, it might be wise to consult a tax/land tax specialist.
 
NSW
Purchaser duty: http://www.osr.nsw.gov.au/taxes/spd
Land tax: http://www.osr.nsw.gov.au/taxes/land-tax-surcharge
 
VIC
Purchaser duty: http://www.sro.vic.gov.au/foreignpurchaser
Land tax: http://www.sro.vic.gov.au/land-tax
 
QLD
Purchaser duty: https://www.business.qld.gov.au/industries/service-industries-professionals/professional-financial-services/transfer-duty/investors/afad

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email our Help Desk with your inquiry.