Tax: Something you must do before 31 December 2017
It shouldn't be news by now that additional stamp duty on acquisitions of land by foreign person and additional land tax in relation to foreigners are imposed by State Revenue Offices. However, Australian investors, in particular those has purchased or intend to purchase/settle real estate using companies and trusts need to be aware of the implications to them, too. Unaware purchasers can potentially be hit by this extra foreigner levies at the time of transaction and going forward.
What is the surcharge impact?
Purchaser surcharge duty is the additional stamp duty applied to residential land transactions entered into on or after 21 June 2016 in favor of a 'foreign person'.
For a property worth $1 million, the Purchaser surcharge duty amounts to:
Surcharge of land tax is additional land tax applied to and held by a 'foreign person' from 2017 land tax year. Land tax year starts from 1st January.
Foreign Person
For the purpose of NSW surcharge purchaser duty and land tax, 'foreign person' has the same definition as the Foreign Acquisitions and Takeovers Act 1975 as amended by Duties Act (NSW) 1997. This includes:
an individual not ordinarily resident in Australia; and
companies and trusts in which a foreign individual, a foreign corporation or a foreign government holds a substantial interest, which means a beneficial interest of 20% or more of the income/assets of the entity / trust. For example, this could be a shareholder with 20% or more shareholdings in a company, or unit holders with 20% or more holdings in a fixed trust.
Basically, Australian citizens are considered resident regardless where they live in the world.
For Permanent Residents, they need to pass a 200 day test to be considered "ordinarily resident of Australia" for that 'test time'. This means, for the purpose of surcharge duty and land tax, a PR is considered 'ordinarily resident in Australia' if they have
been in Australia for 200 or more days in the 12 months preceding the 'test time' and
at that time their continued presence in Australia not subject to an legal limitation.
'Test time' for the purpose of stamp duty is the contract date, and for the purpose of land tax is 31 December of previous year.
What is the implication for trusts and companies?
Many discretionary trusts deeds stipulate that the beneficiaries are a class of people revolving around key persons. For example, it may contain Jo Bloke, his children, siblings and their children and grand children. If any of this class of people are foreign citizens that do not satisfy the 'ordinary resident' condition, then the whole discretionary trust owing any residential property is potentially subject to additional land tax and/or stamp duty, regardless whether the beneficiary received any distribution from the trust, or even know about the trust!
This is because where the trustee has a power or discretion to distribute income or property of the trust to one of more beneficiaries, each beneficiary is taken to hold a beneficial interest in the maximum percentage of income or property of that trust that the trustee may distribute to that beneficiary.
For companies and unit trusts, the selection of who becomes a shareholder or unit holder should require careful consideration, as substantial interest are traced through interposed entities, potentially bring more complication. For example, if a foreign person / company holds 30% (substantial) shareholding in an Australian company A, which in turn holds 30% (substantial) units in a unit trust to acquire NSW residential land, company A may be deemed to be a foreign person, hence the unit trust is deemed a foreign person and is required to pay surcharge on the acquisition.
What to do?
To avoid falling into the trap of unintended surcharge, it is necessary to consider and review existing beneficiaries of discretionary trusts, current unit holders or shareholders of companies to ensure that these entities are not classified as 'foreign'. so before amendments to the trust deed and shareholder register, seek advice from lawyers and professional advisers. As land tax year starts on 1 January each year, it is advisable to do so as soon as possible.
If the trust or the company does not own or intend to acquire residential property then this is not a relevant consideration.
For additional information, you can also refer to NSW State Revenue Office
Disclaimer:
This article does not create an advisor-client relationship. The comments, opinions and information included in this article and expressed by its author is general information only, and has not taken into account of anyone’s personal situation. You should always consult with your adviser.
