11December

Introduction

Most property developers and advisers are aware of the recent changes regarding NSW duty and land tax surcharges for ‘foreign persons’.

The broad definition of ‘foreign person’ means that many Australian domestic entities with foreign ownership (deemed or actual) of 20% or more (directly or indirectly) are subject to the surcharges.

The aim of the surcharge measures was to curb foreign investment in NSW property given its perceived role in pushing up house prices. However, in providing a one-size-fits-all approach, capturing both foreign investors and developers alike, the NSW government was both:

  1. limiting demand – as foreign investors faced increased acquisition and ongoing holding costs; and
  1. limiting supply – as foreign-owned Australian corporations could be forced to withdraw from the market given the increased costs involved.

In recognition of these issues, legislative amendments were introduced earlier this year to make the surcharge more targeted, however, they were yet to commence before the passage of superseding legislation.

Question 1 – What is the amending legislation?

 The amending legislation is the State Revenue Legislation Amendment (Surcharge) Act 2017 (“Act”) and it amends both the Duties Act 1997 (“Duties Act”) and the Land Tax Act 1956.

Question 2 – What are the changes?

Duty Surcharge Land Tax Surcharge
  • Australian corporation transferee of residential-related property entitled to refund if Chief Commissioner satisfied:
    • new home constructed on land by transferee (or related body corporate) and sold to 3rd party purchaser without first being used or occupied (other than as display home); or
    • land subdivided by transferee for new home construction and sold after issue of subdivision certificate;
  • amount of refund is determined by Treasurer as published in the Gazette;
  • Chief Commissioner may exempt a transferee if satisfied that they are likely to be entitled to a full refund;
  • exemption may be subject to conditions;
  • surcharge duty only refunded if:
    • application for refund within 12 months after completion of sale of new home or issue of subdivision certificate; and
    • no later than 10 years after completion of transfer to Australian corporation.
  • Australian corporation entitled to refund of surcharge land tax re: residential land owned by corporation at midnight on 31 December if Chief Commissioner satisfied that:
    • new home constructed on land by the corporation/related body corporate (before or after taxing date) and sold after taxing date to 3rd party purchaser without first being used or occupied (other than as a display home); or
    • land subdivided by corporation (before or after taxing date) for new home construction after taxing date and issue of subdivision certificate;
  • amount of refund is that determined by Treasurer as published in the Gazette;
  • Chief Commissioner may approve a person as exempt transferee for a particular transfer if satisfied corporation likely to be entitled to full refund;
  • exemption may be subject to conditions;
  • surcharge land tax only refunded if application for refund within 12 months of completion of sale of new home or issue of subdivision certificate and:
    • if completion of transfer to Australian corporation occurred before 21 June 2016 – not later than 21 June 2021; or
    • otherwise – 10 years after completion of the transfer to Australian corporation.

Question 3 – What is residential-related property?

Residential-related property includes residential land in NSW, an option to purchase residential land in NSW, certain other interests in land and a partnership interest (where the partnership has residential-related property).           

Question 4 – What is an ‘Australian corporation’?

An Australian corporation means a corporation that is incorporated or taken to be incorporated under the Corporations Act 2001. Therefore, unlike the definition of a corporation elsewhere under the Duties Act (such as the corporate consolidation transaction rules), a corporation does not include a unit trust for present purposes.

Question 5 – What should you do?

Property developers and their advisors should:

  1. confirm whether or not the surcharge rules affect them; and
  1. if so:
    1. confirm whether they are entitled to a refund or exemption under the new rules and, where applicable, apply for same;
    2. re-work their feasibility studies to remove these additional costs where it is reasonably anticipated that they will qualify;
    3. going forward, apply for exemption upfront so as to improve cash flow and provide certainty from the outset.

If you or your clients need any assistance in relation to the above, or tax structuring and feasibility analysis more broadly, let’s talk!

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Director – Taxation Advisory Services

James Meli

P. (02) 9266 2209