Contributed by TaxCounsel Pty Ltd
The Treasury Laws Amendment (Housing Tax Integrity) Act 2017, which was passed by parliament late last year, made some significant amendments that give effect to several housing affordability measures that had their genesis in the 2017/18 Budget.
One of these measures was the introduction of an annual charge (called a vacancy fee) of at least $5,000 on foreign owners of Australian residential real estate where the property is not occupied or genuinely available on the rental market for at least six months of a year.
This article briefly considers the new provisions of the FATA 1975 that relate to the vacancy fee. It is beyond the scope of the article to consider the operation of the FATA 1975 more generally or the general definitions in the Act of terms, such as of “foreign person”, “dwelling”, “residential land” and “notifiable action”.
Who is potentially liable?
For the vacancy fee rules to apply in relation to a person:
- (a) the person must be a foreign person
- (b) the person must have acquired an interest in residential land on which one or more dwellings are, or are to be, situated, and
- (c) the acquisition is a notifiable action (or would be a notifiable action were it not for s 49 FATA 1975 (actions that are not notifiable actions — exemption certificates)) (s 115B(1) FATA 1975).
Vacancy fee: the primary rule
The primary rule is that a person who is potentially liable for the vacancy fee in relation to a dwelling must pay the fee if the dwelling is “residentially occupied” for fewer than 183 days during a “vacancy year” for the dwelling (s 115C(1) FATA 1975).
What is a vacancy year?
For the purpose of applying the vacancy fee rules, it must first be determined what the vacancy year for the particular dwelling is. The vacancy year for a dwelling is the first 12 months, and each successive period since the “occupation day” (see below) for the dwelling during which the person has continuously held the interest in the relevant land (s 115C(2) FATA 1975). It will be appreciated that each dwelling has its own unique vacancy year.
Angus (who is a foreign person) acquires two dwellings in Australia, Dwelling 1 which has an occupation day of 10 September 2017 and Dwelling 2 which has an occupation day of 17 February 2018. The first vacancy year for Dwelling 1 will commence on 10 September 2017 and the first vacancy year for Dwelling 2 will commence on 17 February 2018.
It follows from the terms of the definition of vacancy year that if a dwelling is disposed of during what would otherwise be a vacancy year for the dwelling, no vacancy fee could arise in respect of the dwelling for that “vacancy year”. Thus, to take the above example, if Dwelling 1 was disposed of by Angus on 8 July 2018, there would be no vacancy year for the dwelling.
What is the “occupation day”?
As seen above, the occupation day of a dwelling determines the commencement of the vacancy year for the dwelling. The occupation day for a dwelling on land depends on whether the dwelling is an established dwelling or is a new dwelling (s 115C(3) FATA 1975).
In the case of an established dwelling, for example, the occupation day is the first day the person “acquires the right to occupy” the dwelling. The explanatory memorandum states that, in the ordinary kind of case where a dwelling is acquired under a contract, the right to occupy the dwelling would be when the contract is settled. The fact that the acquisition is subject to a subsisting lease should not alter the position.2
When will a dwelling be “residentially occupied”?
A crucial concept in the vacancy fee regime is the circumstances in which it can be said that a dwelling is “residentially occupied”. A dwelling will be so occupied on a day if:
- • the person (ie the person potentially liable for the vacancy fee), or a relative3 of the person, genuinely occupies the dwelling as a residence on that day (with or without any other persons)
- • the dwelling is genuinely occupied on that day as a residence under a lease or licence with a term of 30 or more days, or
- • the dwelling is genuinely available on that day for occupation as a residence under a lease or licence with a term or 30 or more days (s 115C(4) FATA 1975).
In addition, the effect of regulations that have been made is that, in the case of an interest in residential land on which a dwelling is situated, there will be no liability to the vacancy fee if, during the vacancy year, the dwelling was residentially occupied for fewer than 183 days for either or both of the following reasons:
- • the dwelling was incapable of being occupied as a residence (eg because the dwelling is damaged, unsafe or is otherwise unsuitable to be occupied as a residence or is undergoing substantial repairs or renovations)
- • a person ordinarily occupying the dwelling as a residence was absent from the dwelling to receive medical care, or residential care (as defined), that is supported by evidence (see s 43A of the Foreign Acquisitions and Takeovers Regulation 2015).4
Where a lease (or licence) of a dwelling that has a term of at least 30 days provides for a holding over on (say) a weekly basis, it would seem to be clear that, during any holding over period, the dwelling would be occupied under a lease (or licence) with a term of 30 or more days. The actual lease (or licence) was for a term of 30 days or more and it is that lease (or licence) which governs the occupation of the dwelling during the holding over period.
Explanatory memorandum examples
The explanatory memorandum gives two examples of how the residentially occupied requirement operates.
One example illustrates how the vacancy fee applies to foreign persons who own a dwelling and either use it themselves, or enable a relative to use it, as a residence for a total of 183 days or more in a vacancy year.
The other example illustrates a difference in how the property is made available by the foreign person who owns it and, as a result, where the vacancy fee will be applied. This example is as follows.
Nick purchases a new apartment on the Gold Coast. He intends to spend significant time there as he has business interests on the Gold Coast and his family enjoys coming to Australia to holiday from Hong Kong.
Nick finds that his work in Hong Kong takes up more and more time so he decides to place his apartment on Airbnb. He feels that this will provide the flexibility he requires to be able to use the property through the year as a holiday residence as the apartment is rented via Airbnb for generally less than one week at a time. Nick ends up spending only two weeks in Australia in the relevant vacancy year.
Because Nick’s apartment is not genuinely available as a rental property for a continuous period of 30 days or more, it will not be considered to be residentially occupied for the purposes of the vacancy fee and Nick will be liable to pay the vacancy fee for this apartment.
Each limb of the definition of “residentially occupied” uses the adjective “genuinely”: “genuinely occupies”; “genuinely occupied”; and “genuinely available”.
For a decision of the Full Federal Court in which the expression “genuinely seeking to engage in remunerative work” in s 24(2)(b) of the Veterans’ Entitlements Act 1986 (Cth) was considered, see Leane v Repatriation Commission  FCAFC 83.
Genuinely available for occupation
The explanatory memorandum states that a dwelling will be considered genuinely available for occupation as a residence (with a term of 30 days or more) if the dwelling is:
- • made available on the rental market
- • advertised publicly, and
- • available at a market rent.
Example 3 (from explanatory memorandum)
Max and Christine purchase a house in Perth which they use as a holiday home when visiting Australia from London. They understand that if their house is not genuinely available for occupation as a residence for a minimum of 30 days, they will be subject to the vacancy fee.
Max and Christine are not excited by the prospect of renting their new home so they ask the real estate agent to place it on the rental market with an advertised per week rental cost of $3,000. Similar homes in the area are available for rent at a rate of $1,500 per week.
While the dwelling is available to rent with a term of 30 days or more, the inflated rental price means it is very unlikely any tenants for the dwelling can be found. In the relevant vacancy year, their dwelling remains vacant even though it was technically available for lease. As a result, Max and Christine will be subject to the vacancy fee as they have not made their property genuinely available. The inflated rental price, when compared with similar homes in the area, means the dwelling cannot be considered to have been made genuinely available.
The mechanics: vacancy fee return
Where a person satisfies the tests set out above under “Who is liable” and the commencement rules are also met, the person must give a vacancy fee return to the Commissioner of Taxation in the approved form within 30 days after the end of the vacancy year (s 115D(1) and (2) FATA 1975). The first day of the 30-day period would be the day following the last day of the vacancy year.
Important point: a vacancy fee return must be duly given to the Commissioner even if there is no liability for the vacancy fee.
A failure by a person to duly give a vacancy fee return has these two consequences:
- • a civil penalty of 250 penalty units is attracted, and
- • the person is taken to be liable to pay a vacancy fee in relation to the dwelling on the basis that it was not residentially occupied for any period during the vacancy year (s 115D(1) and (3) FATA 1975).
Notice of liability
Where a person is liable to pay a vacancy fee for a dwelling, the Treasurer or the Commissioner must give written notice of the fee payable and the reasons why the person is liable for the fee (s 115E(1) FATA 1975). A vacancy fee for a dwelling becomes due and payable on the date specified in the notice, which must be at least 21 days after the notice is given (s 115F FATA 1975).
The amount of the vacancy fee
The level of vacancy fee payable is set by the Foreign Acquisitions and Takeovers Fees Imposition Act 2015(as amended).
In very broad terms, the amount of the vacancy fee is the same amount as the fee that was payable at the time a notice was submitted to acquire the land or the application for the exemption certificate which covered the acquisition was submitted.
Where the person acquired their interest under an exemption certificate held by a developer, for example, a new dwelling exemption certificate or a near-new dwelling exemption certificate, the fee payable is the amount of the fee that would have been payable if a notice of a notifiable action under s 81 FATA 1975 had been given for the action covered by the certificate, at the time of the action.
Status of a vacancy fee notice
Treasurer’s power to waive or remit
The Treasurer may, on behalf of the Commonwealth, waive or remit the whole or a part of a vacancy fee if the Treasurer is satisfied that it is not contrary to the national interest to waive or remit the fee (s 115H FATA 1975).
There are record-keeping requirements that an affected foreign person must comply with (s 115G FATA 1975). These requirements could in some circumstances be quite onerous. The way in which some of the evidentiary requirements may be met is set out in a guidance note issued by the Foreign Investment Review Board (GN 48).
Unpaid vacancy fees for a dwelling may be recovered as a debt, or by the creation of a charge over Australian land in which an interest is held by the foreign person. The charge also secures any unpaid penalties for contraventions of civil penalty provisions relating to giving annual vacancy fee returns and keeping records.5
Administration of the vacancy fee
That means that the vacancy fee provisions are a taxation law for the purposes of the Taxation Administration Act 1953 (TAA 1953).6 There are, however, a number of provisions of Sch 1 of the TAA 1953 that do not apply for the purposes of the FATA 1975 (s 138(2) FATA 1975). These non-applicable provisions include the provisions governing the issue by the Commissioner of binding public and private rulings.
Because the vacancy fee provisions are a taxation law, the giving of advice in relation to the operation of the provisions and the preparation of a vacancy fee return would be within the scope of the Tax Agent Services Act 2009.