On 27 May 2019, the Victorian government announced (via the 2019-20 State Budget) that it would be increasing foreign purchaser duty from 1 July 2019. A&A Tax Legal Consulting’s Simon Dorevitch, Manager – Corporate & International Tax, outlines when foreign purchaser duty is (and isn’t) payable as well as highlighting changes that came into effect on 14 June 2018 ahead of his upcoming presentation at 2nd Annual Property Taxation and Advisory Conference, where it will focus on advising foreign investors.
When a purchaser acquires property in Victoria, they may have to pay land transfer duty (AKA stamp duty). A foreign purchaser of residential property may also have to pay foreign purchaser additional duty (additional duty) on their share of the property they acquire. Additional duty may also apply where the foreign purchaser acquires a relevant interest in a landholder that holds residential property.
When is additional duty payable?
Additional duty may be payable when a foreign person acquires an interest in residential property in Victoria. This includes situations where the foreign person:
- Buys a residential property;
- Buys a non-residential property with the intention of converting it to residential property;
- Is given residential property as a gift; or
- Enters into certain leasing arrangements in respect of residential property
A foreign person can be a foreign natural person, a foreign corporation or a foreign trust.
A foreign natural person, i.e. someone who is not:
- A citizen or permanent resident of Australia; or
- A New Zealand citizen with a Special Category Visa (Subclass 444)
A foreign corporation is a corporation incorporated:
- Outside Australia; or
- In Australia, if a foreign natural person, another foreign corporation or a trustee of a foreign trust has a controlling interest
A foreign trust is a trust where a foreign natural person, a foreign corporation or trustee of another foreign trust has a substantial interest
Residential property refers to:
- Land that is capable of being used solely or primarily for residential purposes and that may be lawfully used in that way.
- Land which includes a building, or a part of a building, that a person intends to refurbish or extend so that the land is capable of being used solely or primarily for residential purposes and that may be lawfully used in that way.
- On which a person intends to construct a building so the land is capable of being used solely or primarily for residential purposes and may be lawfully used in that way.
- In respect of which a person has undertaken or intends to undertake land development for the purposes of:
- Constructing a building so the land is capable of being used solely or primarily for residential purposes and may be lawfully used in that way, or
- Enabling another person to construct a building so the land is capable of being used solely or primarily for residential purposes and may be lawfully used in that way.
However, land does not include commercial residential premises (e.g. a hotel or caravan park), a residential care facility, a supported residential service or a retirement village.
How is additional duty calculated?
Foreign purchasers who acquire residential property are subject to additional duty:
- For properties acquired before 1 July 2015, additional duty is not payable
- For properties acquired on or after 1 July 2015 but before 1 July 2016, the additional duty rate is 3% of the foreign person’s share of the dutiable value of the property (GST inclusive)
- From 1 July 2016, the rate was increased to 7%
- From 1 July 2019, the rate was increased again to 8%
Therefore, a foreign person who acquires a residential property in Victoria with a dutiable value of $960,001 or more may be subject to stamp duty of 13.5% (5.5% + 8%).
When calculating additional duty, the foreign purchaser ignores any concessions that may otherwise be applicable when calculating regular duty. For example, where a foreign person acquires a residential property ‘off the plan’ they may be entitled to a concession for the purposes of calculating regular duty. However, any additional duty is still calculated based on the full contract price.
When may an exemption be available?
If the residential property that is acquired is exempt from duty, the additional surcharge will not apply. An exemption could be available where, for example:
- Residential property is bequeathed to a foreign person under a will;
- Residential property passes between spouses, including transfers after relationship breakdowns
- The acquisition qualifies for the first home buyer exemption
For transfers occurring from 14 June 2018, foreign purchasers acquiring a principal place of residence with their spouse or partner may also be eligible for an exemption from additional duty.
To qualify, the foreign purchaser must:
- Acquire a principal place of residence with their spouse or domestic partner who must be an Australian or permanent resident or a New Zealand citizen holding a special category visa;
- Live in the property as their principal place of residence for a continuous period of 12 months beginning within 12 months of becoming entitled to possession of the property (though the SRO Commissioner may agree to vary this requirement); and
- The property must be transferred to both parties on or after 14 June 2018 (even if the contract was entered into prior to this date)
Finally, the Commissioner of State Revenue has the power to grant an exemption from additional duty to foreign corporations and foreign trusts. The exemption is intended to be applied to foreign corporations and trusts that are Australian-based and whose activities in developing (or redeveloping) property add to the supply of housing stock in Victoria. The Commissioner has published guidelines that set out the criteria to be considered when assessing an application. The foreign purchaser should submit an application before completing the transaction.
Simon Dorevitch is a Manager in the Corporate and International Tax division of A&A Tax Legal Consulting. He is a Chartered Accountant and Chartered Tax Adviser and holds a Master of Applied Taxation from UNSW and Bachelors of Commerce and Arts (with Honours) from Monash University. Simon has made numerous appearances on the ‘Tax Wrap’ and ‘Tax Talks’ podcasts and has had articles published by the Tax Institute and Tax & Super Australia. His ability to communicate complex concepts in a clear and succinct manner is highly regarded. You may connect with Simon via email Simon.Dorevitch@aa.tax or LinkedIn