If your home is the only property you own, land tax will never trouble you – mostly!
Sometimes, however, it goes wrong. It did for our clients Ben and Teresa, as you will see below.
What is the Foreign Owner Surcharge Land Tax?
The foreign owner surcharge land tax was introduced in the 2016 NSW Budget. It is a “surcharge” land tax on residential property owned by “foreign persons”. In simplified terms, these are individuals who are neither citizens of Australia, nor entitled to live here permanently. Other states and territories of Australia have also introduced similiar land tax surcharges on foreign owners.
The reasons for introducing this surcharge have never been comprehensively explained, however it can be speculated that it was a response to the zeitgeist of the time which was represented by perceived anxiety that foreign buyers were driving up housing prices and consequently pushing local buyers out of the market.
It might also be thought that the State Treasuries are always looking for ways to extract more money from the populace, and foreigners, who by definition are not voters, are a soft target.
The rate of the NSW surcharge tax started, from the 2017 year, at a relatively modest 0.75% of the land value. However, it has risen steadily since, and for the 2023 year forward the rate is 4%. The surcharge applies from the first dollar of value (as no tax-free threshold applies) and is additional to any other land tax payable. The surcharge is charged on residential land owned by the foreign person as at midnight on 31 December in each year.
What is Residential Land?
The types of properties that are subject to the duty surcharge in NSW include:
established homes and residential apartments, a parcel of land on which there is a home or a residential apartment block under construction and vacant land (including property development site) that is zoned or designated for residential purposes.
Who is a Foreign Person?
For the purposes of the surcharge land tax, an individual is a “foreign person” unless he or she:
- is already an Australian citizen; or
- is a permanent resident of Australia and has lived in Australia for 200 days or more in the 12 months prior to the taxing date of 31 December.
As of June 2020 29.8% of the Australian population was born outside Australia, 7.6 million migrants. A substantial number of those people will not have yet commenced, let alone completed, the processes necessary to gain citizenship, or even permanent residence.
Foreign Owner Surcharge Exemptions
Individuals from New Zealand, Finland, Germany and South Africa are exempt from the requirement to pay surcharge land tax due to international tax treaties.
To put things in in perspective, if a foreign person owns an average Sydney property with a land value of $500,000 – which is not unusual – they will pay $20,000 per year under the surcharge land tax.
Companies and Trusts
The foreign owner surcharge also catches residential land owned by foreign companies and trusts.
A company will be classified as “foreign” if a single foreign person holds a substantial interest of 20%, or several foreign persons hold between them 40%.
Discretionary trusts are particularly harshly treated. If there is even a theoretical possibility that income could be distributed to a foreign person it will be classified as a “foreign trust”. Unless the Trust Deed explicitly excludes foreign persons from being beneficiaries, the Trust will be deemed to be foreign and will pay the surcharge land tax on any residential property that it owns.
Example: Ben and Teresa
The land tax surcharge can have major consequences, and not always as expected. This is where we go back to Ben and Teresa.
Ben and Teresa moved to Sydney with their children from the UK in 2011, and bought a house jointly in Sydney’s Upper North Shore. Ben is a New Zealand citizen, and is entitled to live permanently in Australia under Trans-Tasman arrangements that have applied since before Federation – so he is not a “foreign person”. Teresa is British. As the spouse of a New Zealander, she was granted a particular category of 10 year visa that entitled her to stay here until 2021 – but not permanent residence.
The foreign land tax, introduced in 2016, took effect from the 2017 year. It was not widely publicised, so Ben and Teresa were not aware of it, and Revenue NSW did not make any effort to notify potentially affected property-owners.
However, Revenue NSW, through its data-matching arrangements with the Commonwealth government, finally caught up. In March 2021 they issued a land tax assessment to Teresa, on her half share of the property, for the period from 2017-2021.
The amount of the assessment was more than $60,000! Since then Teresa has received further assessments for the 2022 and 2023 years, so her total liability is approaching $100,000 – just for being English.
As soon as they received the initial assessment Ben and Teresa started their application for permanent residence, which they lodged in April 2021. However, two years later, with the severe and well-known backlogs in the Commonwealth Immigration Department, they are still waiting, and as of now they have no idea when their application will be dealt with. In the meantime, the land tax obligation continues to climb, at 4% per year – that is a lot of money!
Ben and Teresa have applied through Revenue NSW’s objection processes for some relief on discretionary grounds from the crippling financial burden that the surcharge has imposed on them. However, the response is that the law allows no discretion.
This sad example raises some substantial and troubling issues:
- When Ben and Teresa bought their home there was no suggestion that a land tax might be applied in the future. The tax was imposed subsequently – the very essence of a retrospective tax.
- Revenue NSW sat on its hands for almost 5 years while the tax liability mounted up, unbeknownst to Ben and Teresa, to its current level of almost $100,000. If Ben and Teresa had been told promptly when the tax was imposed, they could have applied for permanent residence at least 4 years earlier than they did – at a time when immigration waiting lists were short, before the disruption caused by the Covid-19 pandemic.
- If Revenue NSW was incapable of identifying the affected property-owners at the time the surcharge was introduced, it should have, at a minimum, mounted an effective public education campaign – however it did not.
- The Commonwealth’s delay in processing immigration application (under governments from both sides of politics) is a monumental failure in public administration.
What to do?
So, what are the lessons to be learned?
- If you are thinking of buying a property, and you are not a citizen or a permanent resident (and that is not always straightforward), get good and clear advice first.
- If you are a residential property-owner on a temporary visa, and have not yet started your application for permanent residence, do so now!
- Again, if you are in that position, and you have not yet come onto the Revenue authority’s radar (in NSW or elsewhere in Australia), look seriously at your options to restructure the property ownership in such a way as to eliminate or reduce the impact of the surcharge.
- If you own property with other people through a company, even though you are not yourself a foreign person, the company could be liable for the surcharge land tax if one or more other shareholders are foreign persons – so check your fellow-shareholders’ status.
- If you hold residential property in a trust, or are thinking about doing so, make sure the trust deed is amended to exclude foreign persons as beneficiaries.
Regardless of your situation or structure, the time to review is now, because when it comes to land tax, as the old adage says, “time is money”.
If you have any questions, feel free to contact us at Antcliffe Scott, we’d be more than happy to help.