The State of New South Wales (NSW) has announced the elimination of tax surcharges on the purchase and ownership of real estate for foreigners from New Zealand, Finland, Germany and South Africa.
The origin of tax surcharges
In 2016, the New South Wales Government introduced tax surcharges for foreign investors in residential real estate. The taxes were a buyer’s tax surcharge for buyers and a land tax surcharge for owners.
Tax surcharges were introduced to increase revenue:
“This aligns New South Wales with many other jurisdictions in Australia and around the world. …The surcharges are expected to generate about $1 billion in revenue over four years that will be invested in vital services such as health and education.”
(New South Wales Budget Speech, 21 June 2016).
Tax surcharges on foreigners
The buyer’s surcharge is payable when purchasing the property. Initially, the buyer’s surcharge fee was 4%. In 2018 it rose to 8%.
The land tax surcharge is paid annually on the property. Initially, the land tax surcharge was 0.75%. In 2018, it rose to 2%. It was raised again to 4% starting in territorial fiscal year 2023.
Note: Increasing the land tax surcharge to 4% was estimated to add $74 million in revenue in 2022-23, and $294 million over four years. (New South Wales Budget Statement 2022-23)
To put these rates in perspective:
- Buyer’s tax (stamp duty) on the purchase of a $1 million property is $40,090. When the buyer’s duty surcharge of $80,000 (8%) is added, the stamp duty payable is $120,090.
- The land tax on land valued at $1 million is $596 (if the owner is not a trust). When the $40,000 (4%) land tax surcharge is added, the land tax payable is $40,596 per year (for the 2023 land tax year).
- : The value of the land of the main residence is included in land tax if it is owned by a foreign person, but is not included if it is owned by an Australian citizen or permanent resident.
Who is a foreign person?
A foreign person is an individual:
- WHO it’s not an Australian citizen or a New Zealand citizen or a person who holds a special category visa and who has resided in Australia for more than 200 days in the previous 12 months;
- WHO it’s not habitually resident in Australia, i.e. not resident for more than 200 days in the previous 12 months on an open-ended visa (such as holders of a permanent resident visa or a partner (provisional) visa).
Special provisions apply to partnerships, corporations and trusts so that they are subject to tax surcharges if foreign persons have a substantial interest, which is defined as at least 20% for one person and 40% for several persons.
(NSW Revenue Resolution G 009)
Note: NSW Revenue asks four questions on the Buyer’s Declaration that must be completed for the purchase of a property, designed to find out if the buyer’s surcharge is payable. They are:
2.1 Is the buyer/transferee an Australian citizen?
2.2 Is the buyer/transferee a citizen of New Zealand, Finland, Germany or South Africa?
2.3 Is the buyer/transferee habitually resident in Australia?
2.4 Is the purchaser/transferee an exempt permanent resident or retirement visa holder who will use and occupy the property as his or her principal place of residence for a continuous period of 200 days within the first 12 months after the date of liability ( date of agreement)?
NSW Revenue issues land tax assessments whether or not a land tax registration form is completed. It uses data matching, information from the Buyer’s Declaration and title registration notices from the New South Wales Land Titles Office.
The following foreigners are exempt from the purchase right surcharge and the land tax surcharge:
- holders of subclass 410 (retirement) and 405 (investor retirement) visas
- Australian-based developers are subject to requirements relating to the construction and sale of new homes on the acquired land.
- developers of Build to Rent properties subject to compliance with requirements related to the construction of said properties, as of July 1, 2020
(New South Wales Budget Statement 2022-23)
NSW Revenue announces that foreigners from four countries will be exempt from tax surcharges
On 21 February 2023, NSW Revenue announced that foreign nationals New Zealand, Finland, Germany and South Africa You may no longer be required to pay the buyer tax surcharge or land tax surcharge. This is the full text of the announcement:
“NSW surcharge provisions have been found to be inconsistent with international tax treaties entered into by the Federal Government with New Zealand, Finland, Germany and South Africa. These international tax treaties relate to taxes and other matters and have been given the force of federal law.
With immediate effect, persons who are citizens of the nations concerned who purchase housing-related property or who own land in their own capacity will no longer be required to pay a buyer’s tax surcharge or a land tax surcharge.
The buyer’s tax surcharge or territorial tax liability surcharge for non-individuals, such as corporations, trusts or partnerships, that arises due to an entity’s affiliation with these nations, may also be affected by international tax treaties.
Refunds may be available if you are from one of the countries in question and paid the buyer tax surcharge or land tax surcharge on or after July 1, 2021.”
How do international tax treaties operate to exempt foreign persons?
NSW Revenue did not provide an explanatory note as to why it has “determined” that citizens of the four countries were no longer required to pay the buyer’s tax surcharge or land tax surcharge, and why citizens of other countries were required to pay the tax surcharges.
The explanation could lie in the decision of the High Court of Australia in Addy v. Commissioner of Taxes (2021) HCA 34.
In Addy’s case.The High Court of Australia examined the non-discrimination article of the Australia-UK Double Taxation Convention and how it applied to a UK national (Ms Addy) who was in Australia on a holiday visa and work and was an Australian resident for tax purposes.
Ms Addy objected to an income tax settlement, in which she was subject to a flat rate of tax applicable to people on a working holiday visa, while her co-workers were subject to the lowest tax rate applied to Australian nationals.
The High Court upheld Ms Addy’s objection, holding that the tax on working holiday visas contravened the non-discrimination article of the Convention because it imposed “more burdensome taxes” on her because of her nationality.
This spreads from Addy’s case. may have led to the NSW announcement, along with, we might infer, a rising tide of objections against tax surcharge assessments.
Is there room to extend the new exemption?
NSW Revenue has limited the new exemption to citizens of New Zealand, Finland, Germany and South Africa.
Is there scope to extend the exemption to other countries?
Both the High Court of Australia and the Australian Taxation Office suggest there could be.
In footnote 31 of Addy’s case.The Superior Court observes:
“Since signing the UK convention, Australia has entered into binding agreements containing non-discrimination clauses based on the OECD Model Convention with 11 countries, all of which have been incorporated into Australian domestic law. The countries are Norway, Finland, Japan, South Africa, New Zealand, Chile, Turkey, India, Switzerland, Germany and Israel: see International Tax Agreements Lawarticles 3AAA(1) and 5(1)”.
In its Decision Impact StatementThe Australian Taxation Office states that the decision in Addy’s case. is relevant for citizens of these countries: Chile, Finland, Germany (since July 1, 2017), Israel (since July 1, 2020), Japan, Norway, Turkey and the United Kingdom..
This is the link to me case note in Addy’s case. and the ATO Decision Impact Statement.
It is a welcome move to exempt citizens of four countries from the buyer’s tax and land tax surcharge. They are discriminatory and discourage foreign investment, especially in the favorite sector of foreign investors: new residential apartments.
The fact that anti-discrimination articles are not drafted consistently across international tax treaties, coupled with the desire to protect a substantial stream of tax revenue, could explain why the exemption has been limited to only four countries.
Citizens of countries whose treaties contain the non-discrimination article but have not been exempted might consider challenging their additional tax assessments and testing their position in court.
This comment applies not only in New South Wales, but throughout Australia, where buyer’s duty surcharges and land tax surcharges are payable.