Purchaser surcharge duty: risk management tips for solicitors
BY TONY REYNOLDS AND LUCY WILLIAMS – DEC 01, 2020 3:35 PM AEDT
Snapshot
- Increased auditing by Revenue NSW requires solicitors to exercise extra care when acting for ‘foreign persons’ in transactions involving real property.
- To avoid clients incurring unexpected additional liabilities, solicitors should provide advice on whether or not the client is a foreign person as defined by the legislation and if so, the additional liability and/or any options to mitigate it.
In recent years, auditing by Revenue NSW has resulted in increased enforcement of the Purchaser Surcharge Duty and Surcharge Land Tax, along with interest and penalties, on foreign buyers of residential property in NSW. As a result, some buyers who did not appreciate that they were ‘foreign persons’ under the relevant legislation, have been required to pay outstanding duty and land tax, together with interest and penalties.
This trend highlights the need for solicitors to exercise particular care when acting for foreign purchasers in order to avoid clients incurring unexpected liabilities. It is important that solicitors understand the legislative requirements and recognise when a client will be deemed to be a foreign person so that full and proper advice can be given in relation to any likely additional liability and whether it is open to take steps to reduce or mitigate that potential liability.
What is the Purchaser Surcharge Duty?
The Purchaser Surcharge Duty is an 8 per cent surcharge payable on the taxable value of any residential land that is purchased by a person who is classified as a ‘foreign person’. The Purchaser Surcharge Duty applies in addition to stamp duty. The relevant date for incurring liability for the Purchaser Surcharge Duty is the date of the transaction, generally being the date of purchase or auction of the residential property.
What is the Surcharge Land Tax?
A ‘foreign person’ is also liable to pay a land tax surcharge of 2 per cent on the taxable value of all residential land owned by the person as at midnight 31 December in any year.
Who does the Purchaser Surcharge Duty and Surcharge Land Tax apply to?
According to the Duties Act 1997 (NSW) (s 104J) and the Foreign Acquisitions and Takeovers Act 1975 (NSW) (ss 4, 5), a ‘foreign person’ will be anyone who is not:
- an Australian citizen; or
- a permanent resident of Australia who is ordinarily resident in Australia, meaning they have ‘actually been in’ Australia for more than 200 days in the 12 months immediately preceding the purchase date (‘the 200 days requirement’); or
- a New Zealand citizen who holds a subclass 444 visa, and meets the 200 days requirement.
More specifically, under the Duties Act, (s 104J) and the Foreign Acquisitions and Takeovers Act (s 4), a ‘foreign person’ is defined to include:
- an individual;
- a corporation in which an individual (or two or more persons) is not ordinarily resident in Australia, a foreign corporation or a foreign government holding a substantial interest (or an aggregate substantial interest);
- the trustee of a trust in which an individual (or two or more persons) is not ordinarily resident in Australia, a foreign corporation or a foreign government holding a substantial interest (or an aggregate substantial interest) (‘foreign trustee’); or
- a foreign government.
Moreover, there is a special provision for discretionary trusts (Duties Act, s 104JA). Generally, a trustee of a discretionary trust will be taken to be a foreign person unless the trust prevents a foreign person from being a beneficiary of the trust. This will be the case if:
- no potential beneficiary of the trust is a foreign person; and
- the terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person.
Section 104T of the Duties Act 1997 covers ‘apparent purchasers’. Where a non-foreign person is the ‘apparent purchaser’, but the person providing the money for the purchase is a foreign person, the person providing the money will be considered the ‘real purchaser’. In such a case, the apparent purchaser will be taken to be acquiring the property in a trustee capacity for the real purchaser. If the real purchaser is a foreign person, the apparent purchaser will be taken to be a foreign trustee in respect of the trust.
Risk management tips for solicitors
- Citizenship status: Ask clients who are individuals to confirm their citizenship and/or visa status.
- 200 days requirement: In claims involving recoupment of the Purchaser Surcharge Duty, it is not safe to assume that it is enough that a purchaser is a permanent resident or a subclass 444 visa holder. The person must also have lived in Australia for more than 200 days in the 12 months before the purchase date.
- Exceptions: If a permanent resident does not satisfy the 200 days requirement, they may still be able to gain exemption from the Purchaser Surcharge Duty if they reside in the purchase property as their principal place of residence continuously for 200 days in the 12 months following the liability date (Duties Act, s 104ZKA). Moreover, if a person is no longer considered a foreign person on transfer, then they may be entitled to a refund (Duties Act, s 104ZF).
- Characterisation may change: Clients should be reminded that the 200 day requirement necessarily means that a person’s characterisation as a foreign person may change over time. If they leave Australia following a purchase, they may become liable for the Purchaser Surcharge Duty and/or Surcharge Land Tax.
- Discretionary trusts: Solicitors should be careful to draft deeds in a way that prevents the trustee from being considered a foreign person. In addition, existing deeds may need
to be reviewed and amended before transitional arrangements, which may currently be protecting existing trusts, end on 31 December 2020. Particular care will be required where potential beneficiaries are permanent residents or subclass 444 visa holders who may at any stage not meet the 200 days requirement. Failure to meet this requirement in the future will result in the trustee being classified as a foreign trustee. - Surcharge Land Tax: Non-citizen clients should be reminded that if they live overseas for extended periods at any time in the future, they may become liable to pay the surcharge land tax.
- Corporations and trusts: There is a need for substantial diligence and care when dealing with purchases by corporations and trusts. Significant tracing is required to determine whether a foreign person holds a substantial interest or aggregate substantial interest.
- Apparent purchasers: The apparent purchaser provision highlights the need to carefully confirm and check how the purchaser is funding the purchase. If the funding is being provided by a foreign person, clients should be advised of the consequent liability for the Purchaser Surcharge Duty and associated risks.
This article originally appeared on lsj.com.au