INCREASED STATE AND FEDERAL TAXES ON NON-RESIDENT PROPERTY INVESTORS
The June 2016 New South Wales State Budget contains two tax increases that only apply to non-resident investors in residential real estate. These and most other Australian landholders will also potentially be subject to the 10% Federal withholding tax targeted at non-resident property vendors. All three measures are discussed below.
4% Stamp Duty Surcharge on NSW Residential Property Purchases by non-Residents
An extra 4% stamp duty on the purchase of residential real estate by a “foreign person” has applied from 21 June 2016.
A foreign person will include any individual other than:
- An Australian citizen; or
- Any other individual who is ordinarily resident in Australia i.e. has legally been in Australia during 200 or more days in the preceding 12 months and continue to remain here indefinitely.
- A company or unit trust will generally be a foreign person if foreign individuals or governments hold a substantial interest of at least 20%.
- A discretionary trust will be a foreign person if foreign individuals and other foreign persons can receive 20% or more of the income or capital distributions either now or in the future. It is irrelevant that actual distributions are, in practice, limited to Australian citizens.
Property type:Sydney HouseSydney Unit
Median Price (March 2016) $996,000 $656,000
Normal duty (most purchasers) $40,310 $25,010
New duty (foreign investors) 39,840 26,240
Total duty $80,150 $51,250
Foreign investors will cease to be eligible for the 12 month deferral on the payment of stamp duty on off the plan purchases.
Interstate Comparison: Victoria has already introduced a 7% foreign investor stamp duty surcharge on residential real estate applying from 1 July 2016. Queensland has announced a similar 3% transfer duty surcharge to apply from 1 October 2016.
0.75% Residential Land Tax Surcharge for Foreign Owned Land from 31/12/2016
The NSW Budget also introduced a 0.75% land tax surcharge on the taxable value of residential land owned by a foreign person at midnight on 31 December commencing from the end of this calendar year.
This tax is in addition to any land tax that might currently apply. There will be no tax free threshold and the principal place of residence exemption will not apply.
10% Federal Withholding Tax to Apply to Real Property Sales Over $2 million from 1 July 2016
Purchasers of Australian real property worth $2 million or more who exchange contracts after 30 June 2016 will need to withhold 10% of the sales proceeds before final settlement unless either:
- The vendor provides them with an Australian Taxation Office clearance certificate that the vendor is an Australian tax resident; or
- The vendor provides them with a Tax Office variation certificate in which case the reduced withholding rate specified in the certificate applies.
The relevant forms are now available on the Tax Office website. These can be lodged electronically from 27 June. The Tax Office has developed an automated process to issue most clearance certificates quickly.
These certificates need to be in place before settlement when the final purchase price is paid. They do not need to be in place when the property is sold, for example, at auction.
Variation certificates should generally be considered by non-resident vendors where the taxable profit or capital gain is less than 30% of the final sales price.
Where there are two or more vendors you look to the total value of the property and not to the value of the individual interests. For example, if a $3 million property is owned 50:50 by a resident and a non resident the new rules will apply to both parties. The resident vendor should apply for a clearance certificate. 10% withholding applies to the payment to the non-resident unless they obtain a variation certificate. The Tax Office has promised to grant variations down to 0% in appropriate cases.
Vendors who are subject to the non-resident withholding tax will still need to lodge an Australian income tax return for the year in which the property is sold. Any tax withheld will be available as a credit against the final Australian income tax or capital gains tax liability.
Procedures for Significant Indirect Interests in Australian Real Property
A related measure applies to sales of significant interests (total holding together with associates of 10% or more) in:
- Shares in a “land rich” company; or
- Units in a land rich unit trust.
A company or trust is land rich if it derives 50% or more of its value from Australian real estate and similar assets.
The withholding requirement will not apply if the purchaser does not know or have reasonable grounds to believe that the vendor is a non-resident. The purchaser’s suspicions should be aroused where either:
- The vendor has an address outside Australia; or
- The sales proceeds are to be paid to a place outside Australia.
Vendors can avoid withholding by providing one of the following self prepared declarations:
- An Australian residency declaration; or
- A declaration that the asset sold is not an indirect Australian real property interest.
New Identification Requirements for Purchasers and Sellers of NSW Real Property
From 1 July 2016 the NSW Office of State Revenue has a new form to collect and report transfers of real property in New South Wales. This is part of the Australian Taxation Office (“ATO”) program to establish a National Register of Foreign Ownership of Land Titles.
For each transaction, the information collected and reported will include:
- Property details including land title information, property address and other descriptors
- Transactional information including transfer price, contract date and settlement date
- Identity information of the purchaser/transferee and vendor/transferor including name, address, date of birth for individuals, name, address and Australian Company Number/Australian Business Number for non-individuals
- Foreign identity details.
Increased NSW Jobs Action Plan Rebate for “Small” Employers
NSW employers with less than 50 full time equivalent employees will be entitled to the following increased Payroll Tax rebates for each new full time employment position created after 31 July 2016:
- On the first anniversary of employment$2,000
- On the second anniversary of employment (additional)$4,000