Australia: Certain state governments move to introduce tax surcharges on foreign property investment

What you need to know

• The New South Wales Government is introducing surcharges on property acquired by foreign investors.
• In taking this approach, New South Wales is following similar practices that have already been in place for some time in Victoria, and have recently been announced in Queensland for implementation later this year.
• Foreign purchasers and developers, as well as those involved in funding foreign purchasers and developers with an eye on property in New South Wales and Queensland, should be aware of the additional costs that will arise as a result of these changes.

Before purchasing property in Australia, foreign non-resident persons generally need to apply for and receive foreign investment approval. However, developers can apply for and receive an exemption certificate that allows them to sell new dwellings in a development without the foreign person requiring separate approval for the purchase.

This position has led to an influx of foreign investment in residential property in Australia, which has in turn prompted various governments in Australia to impose duty and land tax surcharges on foreign persons acquiring property.

The New South Wales Government is the latest to take this approach. In line with similar measures that are already in place in Victoria and have recently been flagged for Queensland, the New South Wales Treasurer, Gladys Berejiklian, announced this week that transfer duty and land tax surcharges will be levied against foreign persons who invest in real property in New South Wales.

It is not just foreign investors themselves who should be mindful of the impending changes; those who have a role in funding those foreign investors should also understand what is to change, and when.

What is happening in New South Wales?

Transfer duty

From 21 June 2016, foreign purchasers of property in New South Wales will be levied with a transfer duty surcharge of 4% over and above the standard transfer duty rates.

Further, foreign purchasers will no longer be entitled to a 12 month deferral of transfer duty for off-the-plan purchases of residential property.

Since 1 June 2004, premium property duty of 7% has also applied and will continue to apply to purchase prices over $3,000,000.

Land tax

From 1 January 2017, foreign investors will be levied with a land tax surcharge of 0.75% over and above the standard rate of 1.6% and will not get the benefit of the tax-free threshold (currently $482,000). For land values of $2,947,000 or higher, a premium rate of 2% will also apply, in addition to the surcharge.

Land tax in New South Wales is calculated on the unimproved capital value of the land owned at midnight on 31 December in each year. As it is calculated on the value of the land, off-the-plan purchases will be less affected as the land value is apportioned between the units based on their unit entitlement in the relevant scheme.

What will this look like in practice?

Example A

A foreign investor has purchased a property in New South Wales, which will settle on 1 July 2016. The property is purchased for $750,000 and will have an unimproved capital value of $400,000 on 31 December 2016.

Based on the current rates referred to above:

• transfer duty will be payable in the amount of $59,240 (increased from $29,240), and
• annual land tax, commencing 1 January 2017, will be payable in the amount of $9,500 (increased from no amount payable).

Example B

A foreign developer has purchased a development site in New South Wales, which will settle on 1 July 2016. The site is purchased for $10,000,000 and will have an unimproved capital value of $3,000,000 on 31 December 2016.

Based on the current rates referred to above:

• transfer duty will be payable in the amount of $1,040,900 (increased from $640,490), and
• annual land tax, commencing 1 January 2017, will be payable in the amount of $63,100 (increased from $40,600).

What about the position in Queensland and Victoria?

The Queensland Government will introduce a 3% transfer duty surcharge to be applied to foreign purchasers who acquire residential property in Queensland from 1 October 2016. The Queensland budget papers framed the rationale for this change by reference to ensuring that "foreign acquirers of residential property, who benefit from governments services and infrastructure, make a contribution to their delivery."

In Victoria, since 1 July 2015 there has been a 3% surcharge on transfer duty and a 0.5% surcharge on land tax. From 1 July 2016, the transfer duty surcharge will increase to 7% while the land tax surcharge will increase to 1.5%.

Key takeaway

Whilst the RBA might welcome these moves, developers and their financiers will likely be more cautious about the impact the changes will have on the demand for new property.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories