Many states in Australia impose a surcharge rate for land tax and transfer duty on foreign persons, including discretionary trusts where foreign persons are beneficiaries.
In an unexpected development, New South Wales has now concluded that its surcharge rates breach international Double Tax Agreements (DTAs) with several foreign countries. As a consequence, it has announced that surcharge payments made since 1 July 2021 will be refundable.
How did we get here?
The Federal Government is a party to various DTAs with other countries. These agreements often include non-discrimination clauses that prohibit signatory countries from imposing higher rates of duty on the basis of nationality. These clauses do not always have the same scope and application, meaning that NSW’s surcharge regime seems to breach only some DTAs. NSW has concluded that Australia’s DTAs with New Zealand, Finland, Germany and South Africa (but not other countries) prohibit its surcharge rates on foreign nationals from those countries.
Victoria following its own path
Because DTAs have the effect of federal law, seemingly each state’s revenue office should come to the same conclusion as NSW.
But no one ever said that the law had to be logical. In March, Victoria’s State Revenue Office noted that it is aware of the approach adopted in NSW, but that it will not be following suit. Foreign purchaser surcharge rates will therefore continue to apply in Victoria for the foreseeable future.
Now what do we do?
Affected purchasers of NSW land should seek refunds.
Foreign purchasers in other states should watch this space, as each state should in theory now respond to this issue.
What about new trusts?
In order to avoid foreign purchaser surcharge rates, many discretionary trust deeds specifically exclude foreign persons as beneficiaries. This is really only a concern where the trust might purchase property in the future.
Whether it is still a good idea to exclude foreign beneficiaries in the deed has now become a vexed question. All the factors of each matter will need to be considered on a case-by-case basis before making a decision on this point.
For more information or assistance with foreign purchaser surcharges, contact us here!