Additional Property Taxes for Foreign Persons in Australia

This article provides a short summary of two new taxes to be imposed on foreign persons investing in Australian real estate, being:

• the foreign buyer duty surcharge  that is set to apply in Western Australia on and from 1 January 2019 (Duty Surcharge); and

• the annual vacancy fee (Vacancy Fee), introduced by the Federal Government in 2017 and administered by the Australian Tax Office (ATO).

Foreign Buyer Duty Surcharge

The Duties Amendment (Additional Duty for Foreign Persons) Bill 2018 (WA) (Bill) which introduces the Duty Surcharge has recently passed both houses of Parliament and is set to receive Royal Assent shortly.  As Royal Assent is a formality, the Bill in its current form is expected  to become law in the next few weeks.

The Bill proposes a Duty Surcharge which imposes an additional duty of 7% on direct and indirect acquisitions of residential property by a foreign person on and from 1 January 2019.

The Duty Surcharge is intended to apply in parallel with the standard transfer duty framework. 

The 7% additional Duty Surcharge is payable on top of the standard transfer duty (approximately 5%) payable on most acquisitions in Western Australia.  This brings the total duty payable by a foreign person on residential acquisitions up to approximately 12% of the consideration paid (or the unencumbered value of the residential property, whichever is the higher).  

The concept of a Duty Surcharge is not a new one.  Equivalent surcharges are currently in place in the other states (approximately 8% in New South Wales, 7% in Victoria, Queensland and South Australia and 3% in Tasmania). 

Who is a Foreign Person?

The definition of foreign person under the Bill differs from the definition of foreign person under the Foreign Investment Review Board (FIRB) framework.  Under the Bill, a foreign person is defined as:¹

• a foreign individual, being a person who is not an Australian citizen, a holder of a permanent visa or a special category visa;
• a foreign corporation,² being a corporation incorporated outside Australia, or a corporation in which foreign persons have a controlling interest (i.e. if a foreign individual or the its associates control at least 50% of the voting power or hold at least 50% of the issued shares of the corporation); 
• a foreign trustee, being a person that is a trustee of a foreign trust.  A trust is foreign if:³
  • (discretionary trust) it is controlled by a foreign person, or if that foreign person, together with its associates, are takers in default and hold at least 50% interest in the discretionary trust; or
  • (trust other than a discretionary trust) a foreign person, together with its associates, hold beneficial interest in at least 50% of the income or property of the trust. 

This is in contrast with the position under the FIRB framework where an entity or trust is a foreign entity if foreign persons hold a substantial interest (20%) in the entity or trust or a group of foreign persons in aggregate hold a 40% interest in the entity or the trust. 

What is Residential Property?

Residential property includes Western Australian land that:⁴

• is, or is capable of being, or is intended to be, used solely or dominantly for residential purposes; or

• is vacant or substantially vacant land that is zoned solely for residential purposes.

The definition of residential land however explicitly excludes land to be used for aged care facilities, commercial residential premises (i.e. hotels), retirement villages, easements and security interests.⁵

Foreign landholder duty

A foreign landholder is a corporation or unit trust scheme when it, or its linked entity,⁶ is entitled to residential property worth a total $2 million in value.

Standard duty is already payable on significant acquisitions of interests in landholder entities.   For instance, the purchase of 50% or more of the units in a landholder trust or 50% or more of the shares in a landholder company.

It is proposed that the Duty Surcharge will now be payable when a foreign person obtains such an interest in a landholder entity in respect of residential property.

Exemptions and refunds

There are exemptions to the Duty Surcharge and circumstances in which a foreign person will be entitled to a refund of the Duty Surcharge.

Generally, these exemptions will apply to acquisitions of interests in residential property for which a development or subdivision of 10 or more lots is intended to be undertaken or is completed⁷. 

That is, a foreign developer who pays the Duty Surcharge on the acquisition of the development land can apply to have the surcharge refunded.

It is important to note that, contrary to popular belief, the exemptions do not apply to a person that is the end buyer acquiring a lot in a development with 10 or more lots.

Annual Vacancy Fee

The Vacancy Fee was introduced as a measure to encourage foreign owners to make available residential dwellings for rent, thereby increasing the pool of rental properties and increasing housing affordability.

The regime is administered by the ATO and it requires a foreign person⁸ to lodge a vacancy fee return with the ATO within 30 days of the anniversary of the settlement of their property (or the day an occupancy certificate is issued for the property, whichever the later) (Vacancy Year) if:

• they applied for FIRB approval after 9 May 2017 to purchase a residential dwelling; or
• they purchased a residential dwelling in a development for which the developer applied for a blanket FIRB preapproval after 9 May 2017. 

The Vacancy Fee will be charged if, for at least 183 days (6 months) in a Vacancy Year, the property was not:⁹

• residentially occupied either by the owner, the owner’s relatives ¹⁰ or by a tenant under a lease with a minimum term of 30 days; or
• made genuinely available on the rental market for lease of a minimum term of 30 days at market rent.  

A foreign person will not be able to avoid paying the Vacancy Fee by putting up their residential property for rent on a short term letting basis (i.e. Airbnb).

Failure to report on time results in the foreign person being liable for the Vacancy Fee regardless of the number of days that property was residentially occupied during the Vacancy Year.¹¹

The amount of Vacancy Fee will generally be the same as the amount paid by the foreign person for their FIRB application.  By way of example, the FIRB application fee on the purchase of a $750,000 apartment is $5,600 at the time of writing this article.  If the foreign person is liable to pay the Vacancy Fee, an additional $5,600 will be charged for every Vacancy Year in which the residential requirements are not met.

A notice must be provided by the ATO to the foreign person disclosing the Vacancy Fee payable and the due date for payment (which must be at least 21 days after the date of this notice).¹²

Conclusion

Figures published by the FIRB earlier in the year suggested that real estate sales to foreign buyers have declined significantly, with the number of FIRB approvals for foreign purchases falling from 40,149 in 2015/16 ($72.4 billion) to 13,198 ($25.2 billion) in 2016/17.¹³ The same report cites the imposition of fees for FIRB applications from 1 December 2015 as the most significant factor which contributed to this drop in approvals. 

The Duty Surcharge is estimated to bring in $123 million for Western Australia over the next four years.¹⁴ This Duty Surcharge however has been staunchly opposed by a number of industry bodies who fear that such surcharge will adversely affect what is seen as an already fragile market.

The Vacancy Fee is intended as a monetary incentive for foreign buyers to make their residential properties available for the local market if left vacant for most of the year.  Whether it will achieve what was intended is only being tested now as the first vacancy fee returns roll in 12 months after the introduction of this fee. 

If you are a foreign person acquiring an interest in residential property in Western Australia and require any advice in respect of the Vacancy Fee or the Duty Surcharge, we are available to assist.