NSW Duty/Land Tax Alert: foreign surcharges do not apply in relation to some countries

By Jinny Chaimungkalanont, Nick Heggart and Jonathan Wu

Update: As of 29 May 2023, Revenue NSW has added India, Japan, Norway and Switzerland to the list of nations that have international tax treaties with the Federal Government which may affect surcharge purchaser duty and surcharge land tax. Further, Revenue NSW has extended the refund period such that refunds may be available in respect of Surcharge (defined below) payments made on or after 1 January 2021 (previously 1 July 2021).

Update: Interestingly, on 15 March 2023, the State Revenue Office of Victoria (SRO) announced that the position in Victoria has not changed, and the SRO will continue to apply the Victorian provisions to all foreign purchasers and absentee owners.

Currently, duty is payable in NSW on the purchase of residential land at rates of up to 7%. Where a foreign person acquires residential land, surcharge purchaser duty will also be payable at 8%. Similarly, surcharge land tax of 4% is payable on top of regular land tax for foreign persons who own residential land in NSW.

Revenue NSW has published a media release stating that it has been determined that NSW surcharge provisions are inconsistent with international tax treaties entered into by the Federal Government with New Zealand, Finland, Germany and South Africa (Exempt Nations). In this article, we set out the implications of this determination to:

• individuals who are citizens of the Exempt Nations (Exempt Individuals); and
• non-individuals (eg corporations, trusts or partnerships), including individuals acting as trustees of a trust, and individuals that are general partners of a limited partnership (Non-individuals).

Exempt Individuals

Effective immediately, Exempt Individuals who purchase or own residential-related property or land in their own capacity will not be subject to surcharge purchaser duty or surcharge land tax (together, the Surcharges).

Non-individuals

The position in relation to Non-individual purchasers and transferees is more complex and uncertain. In its media release, Revenue NSW states that:

Surcharge purchaser duty or surcharge land tax liability for non-individuals, such as corporations, trusts or partnerships that arises because of an entity’s affiliation with these nations, may also be affected by the international tax treaties.

Revenue NSW’s examples of “affiliation” include (but are not limited to):

…country of incorporation, shareholders, unitholders, or beneficiaries of a trust, who are citizens of the affected nation or trustees of a trust established in one of those countries.

Despite the ambiguous wording used in its media release, Revenue NSW has specified certain circumstances where Non-individuals will and will not be subject to the Surcharges regarding “substantial interests” or “aggregate substantial interests”:

Individuals acting as trustees of a trust, individuals that are general partners of a limited partnership and non-individual purchasers/transferees are not subject to surcharge purchaser duty if they are foreign persons solely by reason of a substantial interest (or an aggregate substantial interest) being held by a person from New Zealand, Finland, Germany or South Africa.

For the avoidance of doubt, the non-individual purchaser will be liable to surcharge purchaser duty if a foreign person that is not from one of these nations directly or indirectly holds a substantial interest (or aggregate substantial interest) in the purchaser/transferee.

The terms “substantial interests” and “aggregate substantial interests” are defined in the Foreign Acquisitions and Takeovers Act 1975 (Cth). Generally:

• a person will hold a “substantial interest” if the person holds (together with associates) an interest of at least 20%; and
• two or more persons hold an “aggregate substantial interest” if the persons hold (together with associates) an interest of at least 40%.

In light of this uncertainty, Non-individual taxpayers who believe they may not be required to pay the Surcharges should seek advice specific to their circumstances.

Refunds

Refunds in respect of Surcharge payments made on or after 1 July 2021 may be available for Individuals and Non-individuals identified as not being subject to the surcharge. Revenue NSW states that it will proactively identify taxpayers and transactions that may be eligible for the removal of the Surcharges and will contact the relevant purchaser or transferees via phone or email. We encourage taxpayers that believe they may be eligible for a refund to seek advice specific to their circumstances and proactively engage with Revenue NSW.

Conclusion

Revenue NSW’s revised administration of the Surcharges will have wide-reaching implications, particularly as it relates to Non-individuals. Of particular interest will be whether other Australian States will follow NSW and its interpretation of how the various international tax treaties interact with the surcharge regimes in those States. Other countries may also be added to the list of Exempt Nations in due course.