Contributed by WK Legal and Tax Editors.
A large number of new federal and state tax rules and charges are having or will have a significant impact on foreign owners, developers and buyers of Australian real estate. This article lists some of the new measures.
Foreign resident withholding regime: federal
The new foreign resident capital gains withholding payment regime introduces a 10% non-final withholding tax on payments made to foreign residents under contracts entered into on or after 1 July 2016 to dispose of certain taxable Australian property.
All sales of Australian property interests valued at $2m or more are captured by the new regime, with some limited exceptions. The measures are very wide and will apply to all purchasers, whether Australian or foreign residents. Heavy administrative penalties apply for non-compliance.
All vendors of $2m-plus property interests are required to obtain a clearance certificate from the ATO to prove they pay tax in Australia. The seller must provide a clearance certificate to the buyer no later than the day of settlement to avoid the buyer withholding 10% of the sales price and paying it to the ATO. The ATO processed clearance certificates and variations in May and June 2016 with many certificates issued within seven business days.
In NSW, foreign buyers of residential property pay additional stamp duty of 4% on transactions from 21 June 2016. Foreign investors will no longer be entitled to the 12-month deferral for the payment of stamp duty for off-the-plan purchases of residential property.
A 0.75% land tax surcharge will apply on residential real estate, including on a principal place of residence, owned by foreign persons starts in the 2017 land tax year (from 1 January 2017). Foreign land owners will lose the tax-free threshold for the land tax surcharge.
From 1 July 2016, foreign buyers will pay 7% additional stamp duty on residential property purchases, increased from the 3% stamp duty surcharge for foreign investors introduced in Victoria from 1 July 2015.
Further, the land tax surcharge on absentee owners will rise from 0.5% to 1.5% from the 2017 land tax year.
Queensland has imposed a 3% duty surcharge on direct and indirect acquisitions of specified residential property in Queensland by foreign acquirers. This measure, also referred to as the additional foreign acquirer duty or AFAD, will apply from 1 October 2016.
Some practical impacts
Conveyancers and practitioners acting for foreign investors seeking to purchase residential property in NSW, Victoria and Queensland should carefully assess which additional state surcharges will now be levied on top of the new federal government charges. Contracts for sale should be carefully drafted so that the taxes are correctly calculated and paid, to avoid delays at settlement. Transitional provisions may apply for contracts entered into before the commencement dates but settled after those dates, and these need to be considered on an individual basis.
The NSW Law Society has just released a new standard form Contract for the Sale and Purchase of Land — 2016 Edition to incorporate the federal foreign resident withholding tax but it may be necessary to update it further for the foreign residential property stamp duty surcharge.
The following table provides an overview of the relevant foreign investor surcharges and other measures applying in each of the three states:
Foreign Investor surcharges and taxes (NSW, Vic and Qld)
|NSW||4% stamp duty surcharge applies on the purchase of residential real estate by foreign purchasers.||From 21 June 2016||Foreign investors will no longer be entitled to the 12-month deferral for the payment of stamp duty for off-the-plan purchases of residential property.|
|0.75% land tax surcharge on residential real estate, including on a principal place of residence, owned by foreign persons.||Commencing in the 2017 land tax year (from 1 January 2017)||Foreign persons will not be provided with a tax-free threshold for the land tax surcharge.|
|Vic||3% duty surcharge for foreign purchasers of residential property.||Effective 1 July 2015||The land tax surcharge on absentee owners will rise from 0.5% to 1.5% from the 2017 land tax year.|
|Duty surcharge increased to 7%.||From 1 July 2016|
|Qld||3% duty surcharge to direct and indirect acquisitions of specified residential property in Queensland by foreign acquirers.||Will apply from 1 October 2016||This measure is also referred to as additional foreign acquirer duty or AFAD.|