Foreign property transactions

Foreign property transactions to be hit with additional expenses

19 June 2016

A number of recent changes affecting foreign purchasers of property in Victoria have either come into, or are soon to come into effect. These changes are already impacting on the sale of property.

Foreign Investment Review Board

One change that is already in effect is the foreign investment laws.

3 May 2016: no objection decisions

The Foreign Investment Review Board (FIRB) released revised ‘taxation conditions of certain no objection decisions’. These conditions are aimed at targeting foreign investments which pose a risk to Australia’s taxation revenue. Some of these conditions also impose obligations to notify the FIRB of certain events and transactions. Further clarifications will be provided in FIRB’s guidance notes. These revised conditions are not expected to apply to investors who have already obtained approval.

1 December 2015: FIRB introduced new off-the-plan expenses

Developers can continue to apply for a residential development new dwelling exemption certificate for the sale of new dwellings to foreign persons. The development must consist of at least 50 dwellings, have development approval and must be marketed in Australia.

Obtaining a pre-approved exemption certificate is still possible but it now attracts significant application fees, including:

  1. initial application fee of $25,000 per development application
  2. An additional $5,000 for every dwelling acquired by a foreign person for $1m or less
  3. incremental fee of $10,000 per $1m incremental value of every dwelling acquired for over $1m by a foreign person. For example, there will be a fee of $10,000 for a dwelling over $1m but less than $2m, and a fee of $20,000 for a dwelling over $2m but less than $3m

Additional stamp duty on residential property

On top of ordinary stamp duty, foreign purchasers currently pay an additional stamp duty surcharge.

This rate of additional stamp duty surcharge payable by foreign purchasers of residential property will increase from the current 3% surcharge to a 7% surcharge. This is separate to any other stamp duty payable by a non-foreign purchaser, which is still effective.

The additional duty is collectible for contracts entered into on or after 1 July 2016. This includes nominations executed on or after this date, even if the original sales contract was entered into before 1 July 2016.

Residential property includes land where there is an intention to construct residential buildings.

Announced recently, ‘short-term accommodation’ will not be brought within the definition of residential property. This means that foreign purchasers of hotels, motels, serviced apartments, retirement villages or student accommodation will not be liable for the 7% surcharge.

Absentee owner land tax surcharge

There is an additional surcharge to be paid by absentee foreign owners. The surcharge land tax is chargeable on all land held by a foreign owner unless an exemption applies.

Absentee owner land tax surcharge will increase from 0.5% to 1.5% from 1 January 2017. This is an annual surcharge in addition to any other land tax payable by a taxpayer. This will bring the highest marginal land tax for absentee owners to 3.75%.

Broadly speaking, the surcharge will be payable by anyone who is not an Australian citizen or resident, who does not ordinarily reside in Australia, and who will be either absent on 31 December 2016 or will have been absent from Australia for at least six months in 2016. The surcharge is also payable by absentee corporations and absentee trusts.

Discretionary exemptions

The discretionary exemptions from foreign purchaser additional stamp duty and absentee owner land tax are expected to remain in place. These exemptions may assist some companies and trusts based in Australia whose commercial activities add to Victoria’s housing stock or contribute to the Victorian economy and community.

New foreign resident capital gains withholding regime

At the federal level, any purchaser who acquires an Australian property from 1 July 2016 with a value of $2 million or more from a foreign resident vendor will be required to pay an amount equal to 10% of the purchase price of the property to the Australian Taxation Office (ATO).

It is imperative as a purchaser that your contract provides you with the right to withhold these funds from the sales proceeds.

All vendors will be automatically treated as a foreign resident when selling an Australian property with market value of $2 million or more, unless they can provide a clearance certificate from the ATO to the purchaser before settlement.

Please find further details in our previous alert here.

If you think you may be affected by any of these changes, please contact Rigby Cooke Lawyers to understand and manage your exposure.

Disclaimer: This publication contains comments of a general nature only and is provided as an information service. It is not intended to be relied upon as, nor is it a substitute for specific professional advice. No responsibility can be accepted by Rigby Cooke Lawyers or the authors for loss occasioned to any person doing anything as a result of any material in this publication.

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