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’ (i.e. 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.
Amend your discretionary trust deeds now to save unexpected duty
Changes to duties and land tax legislation by state governments keen to be seen to be doing something about affordable housing might catch lots of unsuspecting family trust deeds. Act now before it becomes a costly problem!
Affordable housing has become a major political football over the last couple of years with house prices in Sydney, Melbourne and Brisbane skyrocketing. Reasons for the lack of affordability differ depending on the agenda of the speaker. One reason that is often given (whether accurate or not) is the high number of foreign persons and companies that invest in housing in those capital cities.
To combat that perceived cause NSW, VIC and QLD have introduced additional purchaser duty and or land tax payable by those foreign persons and companies. The revenue obligation is drafted widely so that it captures trusts where a foreign person or company could theoretically benefit from the real estate purchased by the trust.
So, if you purchase a property using a trust, you may have to pay more duty and more land tax regardless whether any beneficiary is actually a foreign person or company. The theoretical possibility is enough.
The solution is to amend your deed to say that such a foreign person or company cannot benefit from the trust.
We can review your existing discretionary trust deed and draft amendments to exclude foreign persons and companies from being beneficiaries of the trust. This means that in the event that residential property is acquired by the trust in NSW, VIC or QLD a foreign person or company will not be included in the wide categories of beneficiaries.
This amendment could potentially save a trust from paying tens of thousands of dollars in additional duty (particularly with high residential property prices in Australia). For example, in NSW the additional foreign purchaser duty is currently 4% of the value of the foreign person’s interest in the property.
The stamp duty payable on the acquisition of a $1.5 million dollar residential property is $67,990.00. If the whole property is acquired by a trust with a potential foreign beneficiary, an additional $60,000 would be payable (total stamp duty of $127,990 payable on the acquisition – yikes!).
Be careful! Excluding foreign persons and companies as potential beneficiaries for purchaser duty and land tax purposes means that those foreign persons and companies will not be able to benefit or receive income from any assets or investments of the trust. So before any amendments to the trust deed are made the activities of the trust should be considered and appropriate advice should be sought from an adviser.
Background information:
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
Natasha Ng
Solicitor
Townsends Business & Corporate Lawyers
t: (02) 8296 6209
natasha@townsendslaw.com.au
www.townsendslaw.com.au
Peter Townsend
Principal
Townsends Business & Corporate Lawyers
t: (02) 8296 6266
m: 0419 44 88 44
Twitter: @TownsendsLaw
peter@townsendslaw.com.au
townsendslaw.com.au