By John Storey, Partner, and Andrea Bunn, Law Graduate, Mills Oakley Lawyers
On 29 June 2015, the Victorian Government introduced two new tax surcharges specifically targeting foreign owners of land in Victoria.
A “foreign purchaser” of land or an “absentee owner” of land could be subject to higher stamp duty and land tax rates. Owners need to be wary of the new surcharges. In particular land owners who use discretionary trusts need to be cautious, as the new surcharges could inadvertently apply unless the trust deed is varied.
Land transfer surcharge
There is now a 3% stamp duty surcharge imposed on foreign purchasers who acquire residential property in Victoria. The 3% surcharge is payable in addition to standard stamp duty rates and applies to all contracts, transactions and agreements entered into on or after 1 July 2015.
In this context, a foreign purchaser includes:
• a “foreign natural person” who is not an Australian or New Zealand citizen or permanent visa holder
• a “foreign corporation”:
– incorporated outside Australia, or
– in which a foreign natural person, corporation or trust holds a controlling interest, ie the foreign natural person, corporation or trust:
a. is in a position to control, either directly or indirectly, more than 50% of the voting power in the corporation
b. is in a position to control, either directly or indirectly, more than 50% of the potential voting power in the corporation
c. has an interest in more than 50% of the issued shares in the corporation, or
d. is a person in respect of whom the Commissioner has made a determination that, in the Commissioner’s opinion, the foreign person has the capacity to determine or influence, directly or indirectly, the outcome of decisions about the corporation’s financial and operating policies.
• a “foreign trust” in which a foreign natural person, corporation or trust holds a substantial interest in the trust estate, ie the foreign natural person, corporation or trust:
– has a beneficial interest of more than 50% of the capital of the estate of the foreign trust, or
– is a person in respect of whom the Commissioner has made a determination that, in the Commissioner’s opinion, the person has the capacity to determine or influence the outcome of decisions about the administration and conduct of the trust.
In the case of discretionary trusts, a beneficiary will have a beneficial interest in the capital of the trust estate to the extent that the trustee of the discretionary trust is empowered to distribute trust capital to that beneficiary. This means if a trustee of a discretionary trust is empowered to distribute up to 100% of the capital of the trust estate to a beneficiary, then that beneficiary will have a beneficial interest of 100%.
Most discretionary trusts allow the trustee to distribute trust capital to any beneficiary at the trustee’s complete discretion.
Change of intention
Where a foreign purchaser buys vacant land or commercial property on or after 1 July 2015 and then subsequently forms the intention to use the land for residential purposes, the foreign purchaser will have to lodge a statement of intention with the State Revenue Office (“SRO”) within 14 days of forming that intention. The 3% duty surcharge will be payable, within 30 days of the change of intention, on the dutiable value of the property at the time of transfer.
Potential exemption for developers
The State Treasurer is empowered with a general discretion to exempt certain owners from the stamp duty surcharge. It is intended that this discretion will largely apply to property developers whose activities add to the supply of housing stock in Victoria (either through new developments or through re-development, where such development is primarily residential).
The Treasurer delegates this decision-making power to the SRO Commissioner. Property developers who may otherwise be affected by the stamp duty surcharge should consider making such an application to the SRO Commissioner.
It may not be immediately obvious when a purchaser is liable to pay the stamp duty surcharge. Here are a few examples of when a purchaser may be caught by the new stamp duty surcharge:
Foreign trust – Mr Chan, his wife and parents are beneficiaries of the Chan Family Trust (“Trust”) which is a discretionary trust. On 30 July 2015, the trustee buys residential property in Victoria. Although Mr Chan and his wife are Australian residents, Mr Chan’s parents are Chinese citizens living in China and are therefore foreign natural persons. As Mr Chan’s parents are potentially entitled to 100% of the capital of the Trust, they will be considered to have a substantial interest in the Trust. This means that the Trust will be deemed a foreign trust. Where a foreign trust buys a residential property on or after 1 July 2015, the trustee will be liable to pay the 3% stamp duty surcharge, in addition to the usual stamp duty owed.
Buying off-the-plan – Ms Smith is a UK citizen looking to buy a Melbourne apartment. She soon finds an off-the-plan studio apartment for sale and signs the sale contract on 8 August 2015. Ms Smith will be eligible to apply the stamp duty concessional rate that applies to off-the-plan purchases. However, as Ms Smith is a foreign natural person and because she signed the contract after 1 July 2015, she will now also have to pay a 3% stamp duty surcharge in addition to the usual stamp duty payable. Importantly, the surcharge will be calculated on the full purchase price of the property and not at the concessional “off-the-plan” rate.
Nominations – Mrs Harrison signs a contract to buy a residential property in Victoria on 1 June 2015. Mrs Harrison then nominates Mr Hartono, an Indonesian citizen and resident, to purchase the property in July 2015. As Mr Hartono is a foreign natural person he will have to pay the 3% stamp duty surcharge in addition to the usual stamp duty owed. The surcharge is triggered because the nomination occurred after 1 July 2015.
Change of use of land – Returning to the Chan Family Trust (“Trust”) on 15 August 2015, the trustee purchases a block of land in Victoria with plans to build a retail complex. In January 2016, well before construction is to commence, Mr Chan (as director of the trustee of the Trust) changes his mind and decides to build an apartment block on the land instead. As the Trust is a foreign trust, Mr Chan must notify the SRO Commissioner within 30 days of his decision to build residential property on the land. Mr Chan will then have to pay the 3% stamp duty surcharge in addition to the usual stamp duty owed. The Trust may apply to the SRO Commissioner for a stamp duty surcharge exemption, which the Commissioner may grant, on the basis that construction of the apartment block may arguably contribute to housing stock in Victoria.
Land tax surcharge
There is now also a 0.5% land tax surcharge to be paid by “absentee persons” who own land in Victoria. The land tax surcharge will apply, from 1 January 2016, to all types of land including commercial, industrial and residential property. The surcharge is payable in addition to normal land tax.
In this context, an “absentee person” means:
• a “natural person absentee” who is not an Australian or New Zealand citizen, permanent resident or person who does not ordinarily reside in Australia and who:
– was absent from Australia on 31 December of the year prior to the tax year, or
– was absent from Australia for a period of six months in total in the year prior to the tax year, or
• an absentee corporation:
– incorporated outside Australia, or
– in which an absentee person, or absentee persons together, hold a controlling interest, ie the absentee person(s):
a. can control the composition of the board of the corporation
b. is in a position to cast or control the casting of more than 50% of the maximum number of votes that might be cast at a general meeting of the corporation, or
c. hold more than 50% of the issued share capital of a corporation.
• a trustee of an absentee trust.
An absentee trust means a trust which has at least one absentee beneficiary. In the case of discretionary trusts an absentee beneficiary means:
• an absentee natural person who, or an absentee corporation that is a specified beneficiary, or
• a person who in their capacity as a trustee of an absentee trust is a specified beneficiary of a discretionary trust.
A “specified beneficiary” is defined as a beneficiary who is specifically named in the trust deed or specifically declared in writing pursuant to the trust deed as a beneficiary to or in whom, by the term of the trust, the whole or any part of the trust income or property may be distributed or vested:
• in the event of the exercise of a power or discretion in favour of the beneficiary (whether or not that power is presently exercisable), or
• in the event that a discretion conferred under the trust is not exercised.
This means that if any of the beneficiaries specifically named in the trust deed are “absentee persons”, then they will be classified as an “absentee beneficiary” and the trust will be deemed an “absentee trust”. It is irrelevant whether or not the trustee actually makes distributions to the absentee beneficiary from the capital of the trust estate — it is enough that the trustee may potentially make distributions to them.
Below are a few examples of when a land owner may be caught by the new surcharge:
Absentee trust – Mr George owns many properties in Victoria on trust for the discretionary George Family Trust (“Trust”). Mr George, his son Steve and Steve’s wife Marie are specified beneficiaries of the Trust. Marie is a French citizen, who lives in Australia. In 2016, Steve and Marie move to France to live. Consequently, Marie (who is not an Australian citizen) is no longer a person who ordinarily resides in Australia. Therefore, Marie is now classified as an absentee beneficiary and the Trust is considered an absentee trust. The Trust will now have to pay a 0.5% land tax surcharge on the Victorian land owned by the George Family Trust.
Absentee person – Mr Koh is a Singaporean citizen and resident who owns a house in Melbourne, Victoria. Mr Koh travels between Singapore and Australia for work and spends around four months of the year in Melbourne. Mr Koh may not be considered to “ordinarily reside” in Australia and therefore may have to pay a 0.5% land tax surcharge on his Melbourne property in addition to normal land tax.
Absentee corporation – Widget Pty Ltd owns industrial land in Victoria. Mr Konis, an Australian citizen, owns 100% of the shares in Widget Pty Ltd. Mr Konis dies and leaves 60% of his company’s shares to his cousin, Spiro, a Greek citizen and resident. Because Spiro is an absentee person who owns more than 50% of the shares in Widget Pty Ltd, for tax purposes, the company is considered an absentee corporation. Widget Pty Ltd will now have to pay the 0.5% land tax surcharge on the industrial land it owns in Victoria.
The new tax surcharges can be triggered in various situations. It is important that trusts, companies and individuals who buy and own property in Victoria understand their tax liabilities.
Discretionary trusts are particularly vulnerable as you may only need one foreign or absentee beneficiary to taint the whole trust. Trust deed variations or revisions may be necessary to deal with these surcharge pitfalls.