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NSW Land Tax & Stamp Duty Surcharge
As a result of recent changes to Stamp Duty and Land Tax, if you own or are considering purchasing residential property in NSW, please consider the below carefully. Despite the changes only applying to "foreign persons", many will be treated as foreign and caught by these changes, especially trusts. Action may be needed before 31 December 2016 to avoid the extra Land Tax Surcharge.
If you believe you are subject to these changes please contact our office.
Introduction
Foreign persons acquiring residential property in NSW on or after 21 June 2016 are liable to pay a 4% surcharge duty in addition to the usual duty payable on purchase and an annual land tax surcharge of 0.75% will also apply from 31 December 2016.
Similar provisions also apply in Victoria and Queensland but each have different rates and definitions of those subject to the surcharges.
Foreign Person
A 'Foreign Person' is generally defined as that under the Foreign Acquisitions and Takeovers Act 1975 to include:
1) an individual not ordinarily resident in Australia; or
2) a corporation in which;
a) an individual not ordinarily resident in Australia or a foreign corporation holds a substantial interest; or
b) 2 or more persons, each of whom is an individual not ordinarily resident in Australia or a foreign corporation, hold an aggregate substantial interest, or
3) the trustee of a trust in which;
a) an individual not ordinarily resident in Australia or a foreign corporation holds a substantial interest; or
b) 2 or more persons, each of whom is an individual not ordinarily resident in Australia or a foreign corporation, hold an aggregate substantial interest; or
There are exceptions for Australian citizens or a New Zealand citizen holding a special category visa under the Migration Act 1958.
A "substantial interest" is typically 20% however note that where a discretionary trust is concerned a beneficiary is deemed to have a 100% interest. Whilst we are waiting for further clarification from the Office of State Revenue via way of a Ruling, we are not expecting any change to their current stance hence many trusts will be exposed. Any potential beneficiary of a trust not 'ordinarily resident' in Australia will therefore cause the trust to be a foreign person under the Act and liable to these surcharges.
An individual is 'ordinarily resident' in Australia where;
a) the individual has actually been in Australia during 200 or more days in the last 12 months; and
b) is not subject to any legal limitation as to time for continued presence in Australia.
Residential Land
Residential land includes the following and does not include any land used for primary production:
a) a parcel of land on which there are one or more dwellings, or a parcel of land on which there is a building or buildings under construction that, when completed, will constitute one or more dwellings, or
b) a strata lot, if it is lawfully occupied as a separate dwelling, or suitable for lawful occupation as a separate dwelling, or
c) a parcel of vacant land that is zoned or otherwise designated for use under an environmental planning instrument for residential or principally for residential purposes
Stamp Duty Surcharge
Great care is needed when acquiring property to determine whether the purchaser is a foreign person and if so consider the implications of the Surcharge. This may be particularly difficult with unit trusts where the particulars of each unit holder with a substantial interest will need to be known and a review of trust deeds may be needed. This becomes even more difficult where a string of trusts is involved.
The purchaser has an obligation to determine the status and advise the Office of State Revenue of the percentage of foreign ownership when completing the "Purchaser Declaration".
Note that for entities where foreign persons or corporations have a substantial interest, the 4% Surcharge will apply to the extent of that foreign interest.
Land Tax Surcharge
Note that there is no $482,000 tax free threshold for the Surcharge and the exemptions, other than primary production, are generally not available.
Foreign persons who own a principal place of residence in NSW will also be subject to land tax of 0.75% on the taxable value of their land despite Land Tax not otherwise applying.
The surcharge will apply based on the extent of the foreign interest in the land.
Note that when selling a property in NSW, from 1 July 2016 it is a requirement that a Section 47 Clearance Certificate be obtained which requires the disclosure of any foreign ownership.
Examples - Stamp Duty Surcharge
Example 1 - Foreign Person
A foreign person purchaser proposes to buy a residential property for $1,000,000.
The duty payable is: $40,490
Duty surcharge at 4% $40,000
Total duty payable $80,490
Example 2 - Unit Trust owned 50% by a Foreign Person
A unit trust proposes to buy a residential property for $1,000,000.
The duty payable is: $40,490
Duty surcharge at 4% on 50% $20,000
Total duty payable $60,490
Consideration may need to be given to how this extra cost can be attributed to the foreign unit holder.
Examples – Land Tax Surcharge
Example 3 - Foreign person
A foreign person owns a residential property at 31 December 2016 with an unimproved land value of $500,000.
Land Tax payable $388
Surcharge at 0.75% $3,750
Total duty payable $4,138
Example 4 - Discretionary trust
A discretionary trust with a broad range of beneficiaries that could include a foreign person owns a residential property at 31 December 2016 with an unimproved land value of $500,000.
Land Tax payable (no tax free threshold) $8,000
Surcharge at 0.75% $3,750
Total duty payable $11,750