Introduction
Foreign persons that acquire residential property in NSW on or after 21 June 2016 are required to pay an 8% surcharge duty in addition to the usual transfer duty payable on the purchase price. Foreign owner land tax surcharge of 2% also applies to foreign persons who own residential property in NSW from the 2018 land tax year onwards. In this article, we will explain what surcharge purchaser duty and surcharge land tax are, additionally, who is classified as a foreign person and liable for paying surcharge purchaser duty and surcharge land tax.
The key considerations are:
- What is surcharge purchaser duty?
- What is surcharge land tax?
- Who is classified as a “foreign person”?
- Will the discretionary trust be classified as a “foreign person”?
I. Surcharge Purchaser Duty
Surcharge Purchaser Duty (currently 8%) is an additional duty payable by a foreign purchaser of residential land in NSW. If the purchaser is classified as a foreign person under Duties Act 1997, the purchaser must pay the surcharge on the value of any residential land.
II. Surcharge Land Tax
A foreign person who owns residential land in NSW must pay an additional surcharge tax (currently 2%) in addition to any land tax already being paid on December 31 in each year.
III. “Foreign person”
Under Duties Act 1997 (NSW) and the Land Tax Act 1956 (NSW), a “foreign person” includes the following main categories:
- an individual not ordinarily a resident in Australia; or
- a corporation or trustee of a trust in which an individual not ordinarily a resident in Australia, a foreign corporation or a foreign government holding a substantial interest (20%);
- a corporation or trustee of a trust in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest (40%).
i. Individual
An individual is considered to be a “foreign person” unless they:
- are an Australian citizen; or,
- are ‘ordinarily resident’ in Australia and either:
- are a New Zealand citizen who holds a subclass 444 Visa; or
- are a permanent resident of Australia.
An Australian citizen, including a person who holds dual citizenships (one of which is an Australian citizenship), is not a foreign person under any circumstances, whether or not the person is ordinarily resident in Australia.
An individual is considered ‘ordinarily resident’ in Australia if they have been in Australia for at least 200 days within 12 months before the date of the contract (the days that entering and exiting Australia count towards the 200 days in total). Alternatively, an individual is qualified for an exemption even where they don’t meet the ‘ordinarily resident’ requirement, so long they live in the property continuously for at least 200 days within 12 months from the date of the contract as a principal place of residence.
A temporary Australian visa holder is liable for the surcharge regardless of whether the residence requirements are met or not.
ii. Corporation or trustee of a trust
A corporation in which an interest of 20% or more is owned by a foreign individual, corporation or government, or a corporation in which 2 or more foreign individuals, corporations or governments own interest of 40% or more is considered to be a “foreign person”.
IV. Discretionary trust
In addition, for those who are not ‘foreign persons’ holding residential land in a discretionary trust, irrespective of who the named beneficiaries are, the discretionary trust may be considered a foreign person and therefore subject to surcharge purchaser duty, or surcharge land tax. To avoid the surcharge, the discretionary trust deed must clearly state that discretionary trust can never distribute to a foreign person.
Assemble a team who can help you get it right
If you wish to find out more about surcharge purchaser duty or surcharge land tax, the team you surround yourself with will make a big difference to your success. And that includes the professionals you enlist to help, such as lawyers, accountants, and financial advisors. Make sure that everyone is working together in together and aligned with your goals.
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