Changes For Foreign Investors: Stamp Duty Surcharge & Withholding Tax Requirements

Group of Foreign Flags with Sky Background

Both the Federal and Queensland Governments have recently announced major changes affecting property transactions involving foreign investors. These changes relate to both foreign investors who buy and sell property in Queensland. When a foreign investor buys property in Queensland, they will be charged an additional amount of transfer duty and when they eventually sell that property, part of the sale proceeds may be withheld by the Federal Government.

Additional foreign acquirer duty (‘AFAD’)

Queensland Parliament passed the Duties and Other Legislation Bill 2016 (Qld) (‘Bill’) on 17 June 2016. While the Bill is still waiting assent, it is expected to commence from 1 October 2016. Amongst other things, the Bill amends the Duties Act 2001 (Qld) so that an additional amount of transfer duty (commonly known as ‘stamp duty’) is imposed on certain transactions. This additional amount is called AFAD.

To what transactions will AFAD apply?

Relevant to conveyancing, under sections 240 and 241 of the Act, AFAD will apply when a foreign person is the acquirer of AFAD residential land. As such, the following definitions are critical:

  • AFAD residential land’ is defined by section 232 of the Act to mean land in Queensland that is, or will be, solely or primarily used for residential purposes and there is (or will be) a building constructed on the land approved for human habitation by a single family unit;
  • Acquirer’ is defined by section 233 of the Act to include the transferee of the property or the person who acquires the property (this will encompass both home buyers and recipients of gifts); and
  • Foreign person’ is defined by section 234 of the Act to mean:
    • a foreign individual, which is defined by section 235 of the Act to mean an individual other than an Australian citizen or permanent resident;
    • a foreign corporation, which is defined by section 236 of the Act to mean either a company incorporated overseas or in which a foreign person has a controlling interest;[1] or
    • the trustee of a foreign trust, which is defined by section 237 of the Act to mean a trust where at least 50% of its interests belong to a foreign person or related persons (e.g. Australian family members).

How is AFAD calculated?

Under section 244 of the Act, AFAD is imposed at the rate of 3% on the dutiable value of the transaction (usually the purchase price) to the extent of the foreign person’s interest in the AFAD residential land. For example, if a foreign person acquires a residential home for $1 million, they would need to pay an additional $30,000 in AFAD on top of their usual transfer duty liability.

Within 30 days of a transaction to which AFAD applies, the foreign acquirer must lodge an AFAD statement in the approved form with the Queensland Office of State Revenue (‘OSR’). A failure to lodge this statement is an offence.

What if a company or trust later becomes a foreign person?

Under section 246A of the Act, the OSR has the power to reassess a transaction for AFAD if a company or trust becomes a foreign person within three years after the relevant transaction. Within 28 days of the company of trust becoming a foreign person, the company or trustee must notify the OSR of this fact and failure to give this notice is an offence.

What if AFAD is not paid by the due date?

Section 246B of the Act charges the foreign acquirer’s interest in the AFAD residential land for payment of any unpaid AFAD. This charge ranks in priority to all other encumbrances over the foreign acquirer’s interest including mortgages. If the AFAD is still not paid within 18 months of the OSR registering the charge, the OSR can apply to the Supreme Court of Queensland for an order to sell the property.

10% foreign withholding tax requirements

Earlier this year, the Australian Government introduced a new withholding tax scheme in order to capture potential capital gains tax payable by foreign resident. From 1 July 2016, purchasers of Australian land will need to pay the Australian Taxation Office (‘ATO’) part of the purchase price on or before settlement if the seller has not sufficiently proved that they are not a foreign resident. A failure by the buyer to pay the ATO this amount may result in penalties for the amount that should have been paid plus interest.

How is the withholding amount calculated?

A buyer must pay the ATO an amount equivalent to 10% of the purchase price for the property (provided the transaction involves unrelated parties). For the purpose of calculating this withholding amount, any GST payable on the purchase price is disregarded provided the buyer is registered for GST. Multiple buyers will share liability for paying the 10% withholding amount in the same proportions that they will own the property.

To what transactions will the new withholding tax scheme apply?

A buyer will only be obligated to pay the ATO 10% of the purchase price if:

  • the purchase price is $2 million or more;
  • the contract became unconditional or the option was exercised before 1 July 2016;
  • the seller is not bankrupt in Australia;
  • the seller does not provide the purchaser with a valid ATO clearance certificate[2] prior to settlement; and
  • neither the seller, the buyer or a secured creditor have applied to the ATO to have the withholding amount varied. While such a variation is at the ATO’s discretion, it may be appropriate to apply for a variation where only one of multiple sellers are foreign residents or the sale will give rise to a capital loss.

If the seller does not provide the purchaser with a valid ATO clearance certificate prior to completion, then the purchaser will need to pay the ATO 10% of the purchase price regardless of whether the seller is in fact an Australian resident for tax purposes. This means that providing a valid clearance certificate is crucial to all property transactions to which this scheme applies.

Changes to the REIQ contracts

In light of these requirements, the REIQ residential contracts have been amended so that if the contract is a transaction to which the withholding tax regime applies, then:

  • the seller irrevocably authorises the buyer to draw a bank cheque for the withholding amount in favour of the Deputy Commissioner of Taxation or the buyer’s solicitor’s trust account, which must be returned to the buyer at settlement;
  • the buyer must lodge a ‘Foreign Resident Capital Gains Withholding Purchaser Notification Form’ with the ATO for each buyer, copies of which must be given to the seller with the payment reference numbers on or before settlement;
  • the buyer must pay the ATO the withholding amount at settlement and, within two business days after settlement, give the seller evidence that the payment has been made;
  • for the purpose of calculating the withholding amount, the purchase price will be used unless the seller can give the buyer no later than two business days prior to settlement a valuation of the property by a registered valuer in which case the valuation will be used; and
  • for an electronic settlement, the buyer’s obligation to pay the withholding amount is satisfied only if the PEXA financial settlement schedule shows the amount has been paid to the ATO’s nominated bank account.

Implications for buyers and sellers

These changes affect not only foreign investors, but also Australian home buyers. While the AFAD may even the playing field, the withholding tax requirements will mean that Australian home buyers will need to ensure they withhold 10% of the purchase price for the ATO or else face penalties.

If you would like further advice about buying or selling property in Queensland, please contact us and one of our experienced property lawyers will be able to assist.

[1] Foreign persons will have a controlling interest if one or more foreign persons or related persons of foreign persons are in a position to control at least 50% of the (potential) voting power of the company or have an interest in at least 50% of the issued shares in the company.
[2] ATO clearance certificates are valid for 12 months.

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