The tide has turned for citizens from nations once spared from surcharge duties and taxes on land purchases in NSW. Thanks to the introduction of new federal legislation, the validity of the imposition of surcharge duties and taxes by all state and territory bodies has been confirmed.

The Australian Government has introduced and now passed the Treasury Laws Amendment (Foreign Investment) Act 2024 (Foreign Investment Act). The Foreign Investment Act ensures that laws (including state laws) imposing fees on land-related purchases by foreign individuals prevails to the extent of any inconsistency with the provisions of Australia’s double taxation agreements (DTAs).

HOW DID WE GET HERE?

In a response to the High Court’s decision in Addy v FCT [2021] HCA 34 (Addy), Revenue NSW published (and then broadened) a list of countries the citizens of which would be exempt from foreign surcharges on land acquisitions in NSW.

In Addy, the High Court considered whether the ‘backpacker tax’ was inconsistent with the non-discrimination clause in the Australian and UK international double tax treaty. The High Court deemed it so. Based on this decision, Revenue NSW then identified that foreign surcharges should not be applicable to persons from countries with non-discrimination clauses that included state-based taxes. Revenue NSW published a list of countries which it would no longer apply the surcharges to:

• New Zealand
• Finland
• Germany
• India
• Japan
• Norway
• Switzerland, and
• South Africa.

By contrast, the Victorian State Revenue Office refused to update its guidance on principle, and continued to collect surcharges from all foreign purchases.

WHAT DOES THE FOREIGN INVESTMENT ACT DO?

The Foreign Investment Act amends the International Tax Agreement Act 1953 (ITAA) to retrospectively address uncertainties regarding the relationship between taxes, like state and territory property taxes and the DTAs Australia has established with other countries.

The Foreign Investment Act does this by inserting new provisions that deem where a section of the ITAA is inconsistent with a law of the Commonwealth, state or territory, the provision of that agreement will not operate to the extent of the inconsistency. In simple terms, the state or territory may continue to impose the relevant surcharge, duty or tax.

This has a retrospective application from1 January 2018 to ensure that Commonwealth, state and territory taxes collected since that time are valid.

WHO IS AFFECTED?

Any “foreign purchaser of property” in Australia. The definition of foreign purchaser varies from state to state. In Victoria, you are a foreign purchaser if you are a foreign natural person, a foreign corporation or a trustee of a foreign trust.

You are a foreign natural person if you:

• are not an Australian citizen
• are not a New Zealand citizen with a Special Category Visa (Subclass 444). To hold this visa, the New Zealand citizen must be physically present in Australia, or
• do not hold an Australian permanent residence visa.

The purchaser will be a foreign corporation if:

• it is a corporation incorporated outside Australia, or
• it is incorporated in Australia and a foreign natural person, another foreign corporation, or a trustee of a foreign trust has a controlling interest in that corporation.

The purchaser will be a foreign trust where a foreign natural person, foreign corporation or trustee of another foreign trust has a substantial interest in the trust estate of that trust.

Careful consideration should be given to which definition (and jurisdiction) applies to your circumstances. We recommend seeking professional advice as inadvertently triggering a foreign surcharge on a property purchase may result in substantial unexpected costs.

DOES IT APPLY RETROSPECTIVELY?

The enacting legislation confirms that the provisions have a retrospective application of six years which generally aligns with statute of limitation periods under state and territory legislation.

The Senate Standing Committee for the Scrutiny of Bills noted that retrospective application challenges a basic principle of the rule of law – that laws should only operate prospectively. In the explanatory memorandum to the enacting legislation this has been addressed as follows:

The retrospective nature of this amendment provides certainty for affected taxpayers by preserving the status quo that these taxes have been validly imposed and collected…This ensures certainty for affected taxpayers throughout these statutory periods.

…  has justified the retrospective application by effectively stating that it is essential in order to reassure taxpayers that property taxes remain payable and foreign investment schemes can continue to be relied upon.

The Senate Committee accepted the policy justifying this retrospective application.

CONCLUDING COMMENTS

The operation of the Foreign Investment Act leaves it beyond doubt that the imposition of foreign purchaser surcharges in Australia are legal. The political impact between Australia and partnering countries to DTAs remains to be seen.

If you are considering purchasing property in Australia, ensure you:

• understand the appropriate ‘foreign purchaser’ definition and how it affects you
• if purchasing through a trust, ensure you review your deed to ensure that they have appropriate exclusionary clauses for foreign beneficiaries. Where no such exclusion exists then the foreign purchaser surcharges will likely be triggered, irrespective of your citizenship/residency status, and
• speak to an advisor in the event of any uncertainty regarding land tax surcharges and surcharge purchaser duty.

To discuss how this may affect your tax position, contact a member of our Tax & Structuring team.