30 March 2017
There has been a lot of discussion lately regarding the changes to the absentee owner surcharge under the Land Tax Act 2005 (Vic) and the stamp duty surcharge for foreign purchasers under the Duties Act 2000 (Vic). We have set out the position of each surcharge below as it applies in Victoria so you can advise your clients accordingly. Please note that the application of the surcharges differs in each State.
Surcharge for absentee owners of land
All property in Victoria is subject to land tax, unless an exemption applies or the property is below the threshold (which is currently $250,000). An assessment is made on the value of all your taxable property at midnight on 31 December each year to determine the amount of land tax payable for the following year.
As of 1 January 2016, absentee owners of all types of Victorian land have been required to pay a surcharge in addition to the land tax already payable. Between 1 January 2016 and 31 December 2016, the absentee owner surcharge was 0.5%. From 1 January 2017, the absentee owner surcharge has increased to 1.5%.
What is an absentee owner?
An absentee owner is an absentee individual, absentee corporation or a trustee of an absentee trust that owns land. There are different implications for each of the different trust types but for the purposes of this update, we will focus on discretionary trusts.
An absentee individual is any individual who:
- is not an Australian citizen or permanent resident;
- does not ordinarily reside in Australia, and
- was absent from Australia either:
a. on 31 December of the year prior to the tax year, or
b. for more than six months in total in the calendar year prior to the tax year.
An absentee corporation is a corporation that is incorporated outside of Australia or a corporation in which an absentee owner has a controlling interest.
An absentee owner has a controlling interest in a corporation if the absentee owner, or that owner acting together with another absentee owner:
- can control the composition of the board of the corporation; or
- is in a position to cast or control the casting of more than 50% of votes at a general meeting of the corporation; or
- hold more than 50% of the issued share capital of the corporation.
However, under the Land Tax Act 2005 (Vic) certain absentee owners may be exempt so that they are not deemed to have a controlling interest. The Treasurer has published guidelines advising that companies are not intended to be subject to the absentee owner surcharge regime if they conduct a commercial operation in Australia and their commercial activities make a strong and positive contribution to the Victorian economy and community by engaging local labour and utilising local materials and services.
An absentee trust is a trust under which at least one beneficiary is an absentee owner that:
- has a beneficial interest in land subject to a fixed trust; or
- is a unitholder in a unit trust scheme; or
- is a specified beneficiary of a discretionary trust.
An absentee trust is a discretionary trust under which at least one specified beneficiary is an absentee owner.
The State Revenue Office’s (SRO) position is that a specified beneficiary is a beneficiary who may receive income or property from the trust and is specifically named in the trust deed that establishes the discretionary trust. However, a specified beneficiary is not the same as a ‘taker in default’ or a nominated beneficiary.
This means that an absentee owner can be in the class of general beneficiaries without the discretionary trust being automatically classed as an absentee trust.
Obligation to notify the SRO
If you or your client are an absentee owner at 31 December, notification must be given to the SRO before 15 January of the following year using the SRO’s Absentee Owner Notification Portal. The SRO will assume that the absentee owner status is current until you or your client tell the SRO otherwise. Failing to tell the SRO that you or your client is an absentee owner is a notification default under the Taxation Administration Act 1997, and the absentee owner will be liable for penalty tax.
Surcharge for foreign purchasers of residential land
All transfers of land are subject to stamp duty, unless an exemption applies. Stamp duty is assessed on the greater of the market value or purchase price less any applicable deductions (e.g off-the-plan concessions).
As of 1 July 2015, a foreign purchaser of residential property is required to pay a surcharge in addition to the stamp duty already payable. Between 1 July 2015 and 30 June 2016, the stamp duty surcharge was 3%. From 1 July 2016, the stamp duty surcharge has increased to 7%.
The relevant date of the transaction is the date the contract of sale was entered into. If the contract of sale was entered into after 1 July 2015 a foreign purchaser will be subject to the stamp duty surcharge.
We also note that where a foreign purchaser acquires Victorian land (that was not residential property) on or after 1 July 2015 and subsequently forms an intention to use, refurbish, develop or enable another to develop that land (or land related interest) as residential property, the foreign purchaser must within 14 days of forming that intention notify the SRO. The foreign purchaser will be liable to pay the additional duty within 30 days of the change of intention.
What is a foreign purchaser?
A foreign purchaser means a transferee that is:
- a foreign individual; or
- a foreign corporation; or
- the trustee of a foreign trust.
A foreign individual is a person who is not an Australian citizen or the holder of a permanent visa.
A foreign corporation is a corporation incorporated outside Australia, or a corporation in which a foreign individual, another foreign corporation or a trustee of a foreign trust has a controlling interest. (However, please note the exemption below.)
A foreign individual, another foreign corporation or a trustee of a foreign trust has a controlling interest in the foreign corporation if:
- it is in a position to control, either directly or indirectly, more than 50% of the voting power in the corporation; or
- it is in a position to control, either directly or indirectly, more than 50% of the potential voting power in the corporation; or
- it has an interest in more than 50% of the issued shares in the corporation, or
- is a person in respect of whom the Commissioner has made a determination that, in the Commissioner’s opinion, the foreign person has the capacity to determine or influence, directly or indirectly, the outcome of decisions about the corporation’s financial and operating policies.
A foreign trust means a trust in which a foreign individual, a foreign corporation or another person that holds the substantial interest as trustee of another foreign trust, has a substantial interest in the trust estate.
A substantial interest in a trust estate is defined in the Duties Act 2005 (Vic) as:
- a beneficial interest of more than 50% of the capital of the estate of the foreign trust, or
- a person in respect of whom the Commissioner has made a determination that, in the Commissioner’s opinion, the person has the capacity to determine or influence the outcome of decisions about the administration and conduct of the trust.
In the case of discretionary trusts, if a trustee has the power or discretion to distribute the capital of the trust estate to any beneficiary, then any beneficiary, whether a specified beneficiary or class of beneficiaries, is usually taken to have a beneficial interest of 100% of the trust estate. Most discretionary trusts allow the trustee to distribute trust capital to any beneficiary at the trustee’s complete discretion. Many discretionary trust deeds define the class of beneficiaries extremely broadly. By virtue of this broad definition, those trusts may be deemed to be foreign trusts for stamp duty purposes.
The Treasurer may exempt a purchaser, who has a controlling interest in a foreign corporation or a substantial interest in the capital of a trust estate of a foreign trust, from being liable for the stamp duty surcharge. The Treasurer has published guidelines stating that corporations and trusts that are not intended to be captured under the stamp duty surcharge are those corporations and trusts that are Australian-based and whose commercial activities add to the supply of housing stock in Victoria (either through new developments or through re-development, where such development is primarily residential). In determining whether an exemption should be granted, the following circumstances will be considered:
- the nature and degree of interest or ownership and control;
- practical influence to determine, directly or indirectly, the outcome of decisions of the entity;
- the ability to influence the outcome of financial, operating and management decisions of the corporation or trust; and
- any other relevant circumstances including the impact on the economy and the community, competition in the marketplace, satisfaction of Foreign Investment Review Board requirements, character of the controlling or substantial interest and independence of management from the foreign purchaser.
What to do next?
Unless the above exemption would apply for a foreign trust, trustees should consider amending discretionary trust deeds to ensure:
- foreign individuals, foreign corporations or another person that holds the substantial interest as trustee of another foreign trust are excluded from receiving distributions of capital under the trust; and
- the trust deed (in relation to the exclusion) cannot be amended; and
- the trustee cannot nominate such persons as a beneficiary entitled to receive capital.
This is particularly important if the trustee intends to purchase property.
New South Wales (NSW) retrospective exemption
The equivalent legislation in NSW was introduced in mid-2016 and was interpreted to mean that discretionary trust deeds required amendment by 31 December 2016 to specifically exclude foreign persons as beneficiaries to ensure that the surcharges would not be imposed on those trusts. However, the NSW Office of State Revenue has recently announced that this is no longer the case. Trustees can seek an exemption from the surcharges to apply retrospectively on the condition they amend the trust deeds, to specifically exclude foreign persons as beneficiaries, within 6 months of the exemption being granted. This means the application for exemption can be made now in respect of land tax incurred on 31 December 2016.
As at the date of this memo, the Victorian SRO has not published anything along these lines. Partners Legal will continue to monitor the position in Victoria and will advise of any changes.
If you require any further clarification on these surcharges, require a trust deed amendment or would like advice in relation to amending your discretionary trust deed or creating a special purpose discretionary trust prior to purchasing residential property, please contact Partners Legal to arrange an obligation-free consultation.