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Changes to duty and land tax surcharges


Victoria, NSW and Queensland have all recently introduced foreign investor duty and land tax surcharges which will have significant implication on accountants’ foreign investor clients.

By Julie Dolan, Now Infinity 15 minute read

The Victorian government’s 2015 state budget saw the first round of foreign investor duty and land tax surcharges. This was introduced as the ‘foreign purchaser additional duty’.

Since that date, both NSW and Queensland have followed suit and issued their own foreign investor surcharges.

At the outset, for all states the surcharge is imposed on a ‘foreign person’. This generally includes a foreign natural person, corporation or trustee of a foreign trust. In relation to a natural ‘foreign person’ all states are consistent by applying to persons other than Australian citizens and holders of certain types of permanent visas.


For foreign corporations and trusts variations exist, with NSW referring directly to the definitions in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA), and Victoria and Queensland providing their own tests.

One important difference between the states is that the substantial interest test in a corporation or trustee of a foreign trust is only 20 per cent (40 per cent aggregation) for NSW, whilst in Victoria it is greater than 50 per cent and Queensland it is 50 per cent or more.


From 21 June 2016, foreign persons purchasing residential real estate in NSW will have to pay a duty surcharge of 4 per cent. This surcharge will apply to residential-related property. This type of property is to include residential land in NSW as well as an option to purchase residential land in NSW (including nominations or assignment of the option). Residential land is further defined to include:
• a parcel of land on which there are one or more dwellings;
• a strata lot;
• a utility lot;
• a parcel of vacant (or substantially vacant) land that is zoned for residential purposes, but does not include any land used for primary production.

In relation to the land tax surcharge, a 1.5 per cent surcharge will apply from the 2017 land tax year. Foreign persons will also not be provided with a tax-free threshold for the land tax surcharge, nor will there be an exemption for the principal place of residence. It is also still payable should there be a nil land tax assessment under the other provisions.


From 1 July 2016, foreign persons purchasing residential real estate in Victoria will have to pay an increased duty surcharge of 7 per cent (increase from the previous rate of 3 per cent). For contracts entered into on or after 1 July 2016, residential property includes:
• land;
• land which includes a building, or part of a building, that a person intends to refurbish or extend;
• land on which a person intends to construct a building;
• land in respect of which a person has undertaken or intends to undertake land development for the purposes of constructing a building, to be used solely or primarily for residential purposes and which may lawfully be used in that way. There are exceptions in relation commercial residential premises, residential care facilities, supported residential services and retirement villages.

The current land tax surcharge of 0.5 per cent is expected to increase to 1.5 per cent from 1 January 2017 and applies to all land subject to land tax.


Effective, 1 October 2016, Queensland also now has a 3 per cent duty surcharge on the foreign acquisition of residential property. This surcharge is referred to as AFAD (Additional Foreign Acquirer Duty). The definition of residential land is defined as land that is or will be solely or primarily used for residential purposes, and on the land:
• there is or will be a building designed or approved by a Council as a single family residence;
• there is or will be a number of lots in a strata title building;
• an existing building will be renovated to be a house or apartment complex, or development land in respect of any of the above.

No land tax surcharge at this stage will apply in Queensland.

Additional Points

It is important to note that these charges are in addition to the transfer duty payable on the transfer of land and the standard Foreign Investment Review Board (FIRB) application fees which can be in excess of 1 per cent of the purchase price.

Indirect acquisitions are also caught within these new rules. For all states, an acquisition by a foreign person of an interest in a landholder which has an interest in residential land will be subject to the surcharge where the acquisition is otherwise dutiable.

In Queensland a three-year test applies. This test requires the foreign person definition to continue to be applied for three years after the liability arose. Therefore, if the purchaser becomes a foreign person within this three-year period, the provisions require the corporation or trustee to give notice to the Commissioner within 28 days of becoming a foreign person and for the Commissioner to issue a reassessment of duty, imposing the surcharge retrospectively. This means that an Australian-owned company that owns residential land is acquired by a foreign person, the surcharge could become payable on both the acquisition itself and retrospectively on acquisitions of residential property made directly or indirectly by that company in the last three years.

Where residential land is purchased by multiple parties in which includes foreign person(s), the surcharge can be applied on a proportionate basis. However, care needs to be taken if the purchaser is an entity and is partly owned. For instance, an Australian company, owned 55 per cent by foreigners and 45 per cent by Australians, may be subject to the surcharge on the entire amount for a purchase of residential land or acquisition of a residential landholder. This would unintentionally subject Australians to the surcharge. The situation is even worse in NSW where a mere 20 per cent interest is enough to deem a company to be foreign.

In Victoria and Queensland, a discretionary exemption from the Commissioner may apply. For example, in Victoria, the Treasurer and Commissioner have discretion to exempt persons where the activities of the entities they control or have a substantial interest are involved in the development or re-development of property that adds to the supply of housing stock in Victoria.

To add weight to the collection process, the Victorian and Queensland Commissioners are empowered to impose a first charge on the land for any unpaid duty. This can cause significant issues and impediment to future sales and financing covenants.

Discretionary and hybrid trust deeds

As the definition of a ‘foreign person’ is drafted widely, many existing discretionary and hybrid trust deeds will be affected by the surcharge. The issue arises from the rules that determine whether a foreign beneficiary holds a ‘substantial interest’ in the trust.

As an example in relation to NSW, section 18(3) FATA provides that in working out the extent of a beneficiary’s interest in a discretionary trust, each beneficiary is taken to hold the maximum percentage of income or property of the trust which the trustee may distribute to them.

Effectively this means that each discretionary beneficiary is deemed to hold 100 per cent of the beneficial interest in the trust and hence hold a substantial interest for the purposes of the ‘foreign person’ definition. Even more concerning is then the ‘associates’ test that exasperates the inclusion of a ‘foreign person’.

Therefore, depending on the beneficiary classes in your clients trust deeds, it may be prudent to review the deed and where necessary amend the deed so as to confine the discretionary beneficiary class to persons who would not cause the trust to be a foreign person for surcharge purposes. Not doing so could be a very expensive exercise for your client.

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