RSM Australia

Non-resident? Understand the new NSW property taxes that could affect you

Tax Insights

If you are a ‘foreign person’, you may now find yourself subject to two additional surcharges recently introduced in NSW regarding residential land and real estate purchased and owned. The two new surcharges include:

  1. An additional 4% surcharge purchaser duty on the purchase of residential real estate in NSW by foreign persons effective from 21 June 2016; and
  2. A further 0.75% land tax surcharge on the taxable value of residential land owned by foreign persons on 31 December each year commencing from 31 December 2016.

What does THIS NSW property taxes apply to?

Two key criteria must be met for the above surcharges to apply:

  1. The property acquired or held must be residential land, and
  2. The purchaser or landholder must be a foreign person

As detailed below the application of these surcharges may be far broader than otherwise thought, particularly in relation to the definition of a “foreign person” in the context of discretionary trusts.

Residential land: A definition

‘Residential land’ generally includes a parcel of land on which there are one or more dwellings or homes, or vacant land that is zoned or otherwise designated for residential purposes.

Importantly, excluded from the definition is any land used for primary production (farming).

Foreign person: A definition

The ‘foreign person’ definition is quite expansive and will apply to a variety of entities including individuals, companies and trustees of trusts. However, it is important to note that it does not apply to an Australian Citizen no matter where they reside.

The application of the definition can become quite complex particularly with respect to the tracing and aggregation rules. However, broadly it applies to:

  • Individuals not ordinarily resident in Australia;
  • Companies with a foreign person (including associates) holding at least 20% of the interests in the company, or multiple foreign persons holding at least 40%;
  • Trusts with a foreign person (including associates) holding a beneficial interest in the income or property of the trust of at least 20%, or multiple foreign persons holding at least 40%;

The application for trusts is extended further when considering discretionary trusts.

The implications of Discretionary Trusts

In a discretionary trust no beneficiary has a beneficial interest in the income or property of the trust. As the name implies, such an allocation is at the trustee’s ‘discretion’. To address this, the legislation states that if a trustee has a power or discretion to distribute the income or property of the trust to one or more beneficiaries, each beneficiary is taken to hold a beneficial interest of 100%.

The complexity arises where a trusts deed contains a broad class of beneficiaries that is defined by reference to their relationship to a named beneficiary (e.g.. parent, grandparent, brother, sister, child, grandchild etc.).

In this circumstance, if any of the trusts beneficiaries (including those included under a broad class) are a foreign person, the trust will also be considered a foreign person. Importantly, it is irrelevant whether the foreign person actually receives a benefit from the trust, all that is required is the possibility that the foreign person may benefit (i.e.. they are a potential beneficiary).

NSW property taxes - A Conclusion 

In considering the above factors, it’s important that clients intending to buy or those holding residential property in NSW seek advice on proposed and existing structures, be it for development, investment or private use.

Where applicable, legal advice should also be sought in the drafting or amendment of deeds for discretionary trusts to potentially limit the application of the “foreign person” definition.

If you have any questions about the new changes, get in touch with your local RSM Business Advisory Team.

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