What is the surcharge land tax?
Commencing the 2017 land tax year (that is ownership of land at midnight, 31 December 2016) surcharge land tax applies to foreign persons including foreign corporations, trusts and government who own residential land in NSW.
From 21 June 2016, there was also a (stamp) duty surcharge that applies to acquisitions of NSW residential land by foreign persons, including individuals, corporations trusts and governments. The rules to define a foreign person are the same as the land tax surcharge. This article looks at the land tax surcharge only.
What is the extra land tax charge?
The surcharge land tax rate was 0.75% (for the 2017 tax year) and increased to 2% for the 2018 and onward tax years. This is on top of existing land tax liability.
The taxable value of residential land for land tax purposes is used to calculate the surcharge and there is no threshold. The taxable value is based on unimproved land value.
Section 5A Land Tax Act 1956
Who is a foreign person?
An Australian citizen CANNOT be a foreign person. Evidence of Australian citizenship includes a birth certificate, an Australian Passport or an Australian citizenship certificate.
An Australian citizen also includes a person who holds dual citizenship, one of which is Australian.
If you are a non Australian citizen but ordinarily resident you are also deemed not to be a foreign person. You are considered ordinarily resident if you have been in Australia for 200 or more days in the previous calender year.”
A carve out also applies to New Zealand citizens who hold a special category visa within the meaning of Section 32 of the Migration Act 1958 (Cth) under certain conditions.
Revenue Ruling G9 explains the definition in detail. A person is a foreign person within the meaning of the Foreign Acquisitions and Takeovers Act 1975 (Cth) as modified by section 104J of the Duties Act 1997.
What is the issue with discretionary trusts that own land?
Usually trustees have wide powers to distribute income and capital to numerous family members, related entities and charities. Revenue Ruling No. G009 deems each such beneficiary to have 100% interest in the land owned by the trust. As a result, if any beneficiary is potentially a foreign person the trustee will be liable to the surcharge whether or not the foreign person actually receives a distribution.
What happens if the trust has been assessed with surcharge land tax and there are no foreign beneficiaries?
The Revenue NSW website says a trustee has six months to amend the trust deed from the date surcharge land tax is assessed (on the notice of assessment). If the amendment is done correctly, the Chief Commissioner will reassess the surcharge land tax to nil.
How can the trust deed be amended to avoid the surcharge?
The Chief Commissioner must be satisfied:
1. That the trustee is not involved in a scheme or arrangement for the evasion or avoidance of these taxes – This will be satisfied where the amendment to the trust deed to remove the trustees power to make a distribution to a foreign person is irrevocable.
2. In addition any foreign persons named as beneficiaries must be removed from the trust deed as beneficiaries. It is not sufficient that named beneficiaries are merely prevented from receiving distributions.
Paragraphs 7 to 9 Ruling No G010 Version 2
What is the cost to amend a discretionary trust deed??
Our fee to review the existing deed, amending deeds, change of trustee deeds and to ensure the deed has an amendment power is $385 (incl. GST) and to prepare a short Deed of Amendment to remove foreign beneficiaries is $550 (incl GST) plus approximately $40 for disbursements. Please do not hesitate to contact us if you would like to discuss further.
NB: reference for this article is Revenue Ruling No G010 Version 2 Surcharge Land Tax and Duty – Discretionary Trusts