Since 1 January 2017, owners of residential land in NSW might be exposed to Land Tax Surcharge, payable to the OSR (Office of State Revenue).
While the law is mainly intended to target ownership by foreigners, the actual construction of the legislation affects a number of our clients that would not consider themselves or their entities to be ‘foreign’.
The main surprise is that those holding property directly or indirectly through a discretionary trust are at high risk of being taxed, particularly if any trust beneficiary is considered a ‘foreign person’. The definition of ‘foreign person’ is quite broad and is outlined below.
What is Land Tax Surcharge?
Land Tax Surcharge is a tax on ownership of land by ‘foreign persons’, regardless of whether they are exposed to land tax.
Who or what is a ‘foreign person’?
An individual will be a foreign person unless they are either:
- An Australian citizen
- A New-Zealander citizen holding a 444 visa (only from 1 January 2018) and planning to stay 200 full days or
- The holder of a Permanent Residency visa that has been in Australia at least 200 full days in the previous calendar year.
A company will be a foreign person if:
- 1 foreign person controls 20% or more of the company or
- 2 or more foreign persons control together 40% or more of the company.
Fixed trusts are trusts where the beneficiaries (e.g. unit holders) are presently entitled to all of the income and capital of the trust. As such:
- there is no discretion for the trustee not to distribute income in accordance to the fixed interests
- the beneficiaries may require that the trust be wound up and the capital be distributed in accordance to the fixed interests
- the trust deed protects the beneficiaries against any variation of the deed or the powers of the trustee that could threaten any such interests or entitlements
- all interests are of equal nature (e.g. there is only one class of units).
This means that not all unit trusts are fixed trusts – many dated unit trust deeds do not prevent variations of the deed effectively and this gives rise to non-fixed trusts.
Fixed trusts are generally not subject to Land Tax Surcharge, as foreign person beneficiaries are instead assessed in their proportion of indirect ownership. However, the trustee will be responsible for settling the Surcharge if the beneficiaries default on payment.
Special trusts are trusts where the trustee is treated as the owner of the land. Most non-fixed trusts (e.g. discretionary trusts) are special trusts.
The trustee of a special trust will be a foreign person if:
- 1 beneficiary is a foreign person that holds, together with any one or more associates, a beneficial interest in 20% or more of the income or property of the Trust; or
- 2 beneficiaries or more are foreign persons that hold together, and together with any one or more of their associates, a beneficial interest in 40% or more of the income or property of the Trust.
The issue of holding beneficial interest is of course harder to determine for discretionary trusts, as the trustee can change the beneficiaries and their entitlements.
The OSR’s position is that a discretionary trust will be a foreign trust if any of its beneficiaries is a foreign person.
Most discretionary trust deeds define the category of beneficiaries as something to the effect of “Mr X; his spouse; their parents, children and grand-children; spouses of the latter; entities of any of the preceding; and Australian registered charities”.Unfortunately this means that, if Mrs X’s father is a Chinese citizen living in Germany, or if Mr X’s grandson lives in the US and marries a local with no ties to Australia, the family trust will be considered a foreign person.
How much is the Surcharge?
Based on holdings of residential land at 31 December of the prior calendar year:
- 2017 calendar year – 0.75% of the value of the land;
- 2018 calendar year – 2.00% of the value of the land.
Are there exceptions?
There is no exemption for principal places of residence or any de minimis threshold on the value of the land.
An Australian-based developer that is a foreign person may be entitled to a refund of surcharge land tax if:
- it is an Australian corporation;
- it or a related body corporate of the corporation has constructed a new home on the residential land after the taxing date; and
- it sold the new home to a person other than an associated person of the corporation.
What should you do?
If you or your entities are foreign persons holding residential land, you will need to advise the OSR that you are subject to Land Tax Surcharge to start receiving Notices of Assessment.
If your discretionary trust holds interest (directly or indirectly) in residential property and non-citizens are involved, you should ensure that your deed is properly drafted to exclude foreign persons from the class of beneficiaries.
Please contact us if you would like to discuss your exposure and recommend legal advisers who can assist you to update your deed if necessary.