Surcharge purchaser duty and surcharge land tax in New South
Wales (NSW Surcharges), introduced in 2016, seemed
settled law for foreign buyers and homeowners, or at least we
thought so. The Federal Government’s Treasury Laws
Amendment (Foreign Investment) Bill 2024
(Bill) caused uncertainty when it was first
introduced. However, the passing of the Bill and two recent cases
have clarified the position in the state tax landscape.
Update to Federal Legislation
On 27 March 2024, the Bill was passed in both houses without
amendment. The Bill will be enacted once it receives Royal Assent.
The amendments are retrospective, applying from 1 January 2018.
The Bill inserts section 5(1) to the International Tax
Agreements Act 1953 (Act). The new section
restricts the operation of Double Tax Agreements
(DTAs) so that they are:
‘subject to anything inconsistent with the provision
contained in a law of the Commonwealth, or of a State or Territory,
that imposes a tax other than Australian tax, unless expressly
provided otherwise in that law’.
The Bill was introduced to the Federal Parliament on 7 February
2024 causing a stir in the state taxes landscape on whether state
tax authorities would change their administrative practices.
Revenue NSW has previously taken the position (see announcements
on 21 February 2023 and 29 May 2023 and our previous article here) that NSW Surcharges were inconsistent
with Australia’s DTAs with eight countries which contain a
non-discrimination clause: New Zealand, Finland, Germany, India,
Japan, Switzerland, Norway and South Africa. Revenue NSW processed
refunds for NSW Surcharges paid by citizens of the eight nations on
or after 1 July 2021.
Other states and territories remained largely silent on the
issue, continuing to levy surcharge taxes as normal. State Revenue
Office (SRO) Victoria’s position did not
change, announcing in March 2023 that ‘the SRO will
continue to apply the Victorian provisions to all foreign
purchasers and absentee owners’.
The Bill provides state revenue authorities with the green light
to levy surcharge taxes on citizens of the eight nations. Whilst
Revenue NSW may have the power to go back and issue
reassessments,1 their administrative practices have been
consistent with announcements on their website, concerning the
eight DTAs. Revenue NSW’s website currently contains an alert
that ‘Upcoming changes to federal legislation will mean
that these citizens may now need to pay’ ‘surcharge duty
for future purchases of residential property in NSW’ and
‘surcharge land tax on future land tax assessments for
residential property they own in NSW’.
This seems to suggest that Revenue NSW may only levy NSW
Surcharges on these citizens for liabilities occurring after the
enactment of the Bill. Revenue NSW have not issued reassessments or
clawed back refunds from citizens of the eight nations for the
period 1 July 2021 to date. It is likely that NSW surcharges will
apply to citizens of the eight nations from the date the Bill
receives Royal Assent onwards.
Revenue NSW encourage foreign buyers and landowners to monitor
their website for updates. Revenue NSW will likely update their
website with ‘Frequently Asked Questions’ to address
concerns for those who entered into contracts between 1 July 2021
and the date the Bill receives Royal Assent.
Recent cases regarding surcharges for discretionary trusts
The recent decisions of Khalil & Associates Pty Ltd ATF The George
Khalil Family Trust v Chief Commissioner of State Revenue
[2024] NSWCATAD 23 (Khalil &
Associates) and Chloe Adolphi Pty Ltd as trustee for
The Chloe Adolphi Family Trust v Chief Commissioner of State
Revenue [2024] NSWCATAD 48
(Adolphi) show that Revenue NSW’s
strict requirements for discretionary trusts being ‘foreign
trusts’ are still proving onerous for taxpayers.
The default position in NSW is that trustees of discretionary
trusts are deemed to be foreign persons unless the trust deed
irrevocably excludes foreign persons. This requirement was
introduced on 24 June 2020, with trustees scrambling to amend their
trust deeds by 31 December 2020 in order for the past and future
NSW Surcharges not to apply (see our previous article here).
Khalil & Associates
In Khalil & Associates the trustee made the
following amendment to the trust deed via an Amending Deed:
Any foreign beneficiary that may exist in this trust is
irrevocably excluded from receiving any current, or future trust
distributions. For the avoidance of doubt this clause will
supersede any other clause under this deed.
The term ‘foreign beneficiary’ was not defined.
The issue was whether the Amending Deed had satisfied the
requirements of section 5D of the Land Tax Act 1956 (NSW) and avoided liability
for surcharge land tax. The Tribunal held that the amendment was
unsuccessful in precluding the trust from being a foreign trust.
The Tribunal accepted the Commissioner’s arguments that:
-
the term ‘foreign beneficiary’ does not have the same
meaning as ‘foreign person’ because the words are
different; and -
the Amending Deed did not prevent the trustee from making
amendments in the future to make a foreign person a potential
beneficiary of the trust.
This case serves as a reminder that any amendments to a trust
deed require careful drafting.
Adolphi
In Adolphi a discretionary trust was established in
April 2021 and acquired a residential property in NSW in May 2021.
In December 2022, after Commissioner had determined the trustee was
liable to surcharge land tax for the 2021 land tax year, the
trustee and the settlor executed a Deed of Rectification. The Deed
purported to give effect to their original intention that no
foreign persons were entitled to benefit from the trust.
The Tribunal upheld the assessment of surcharge land tax as
contemporary documentary evidence indicated that there was no
intention to exclude foreign beneficiaries at the time of the
Trust’s establishment. This case serves as a reminder that a
Deeds of Rectification may only be effective where it can be
objectively determined that it actually reflects the parties’
original intentions.
If you are a foreign buyer or landowner holding property in your
personal name(s), by a trustee of a trust or company, please
contact the authors.
Footnote
1 Refer to section 9 (2) of the Taxation Administration Act 1996
(NSW).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
#cases #Bill #NSW #duty #land #tax #surcharges #impacting #foreign #buyers #landowners #Property #Taxes
