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The State of New South Wales (NSW) has announced the removal of tax surcharges on the purchase and ownership of real estate for foreign nationals from New Zealand, Finland, Germany and South Africa.
The origin of the tax surcharges
In 2016, the NSW Government introduced tax surcharges for foreign investors in residential real estate. The taxes were a surcharge purchaser duty for purchasers and a land tax surcharge for owners.
The tax surcharges were introduced to raise revenue:
“This brings NSW in line with many other jurisdictions across Australia and around the world. … The surcharges are expected to generate around $1 billion in revenue over four years that will be invested into vital services such as health and education.”
[NSW Budget Speech 21 June 2016].
The tax surcharges on foreign persons
The surcharge purchaser duty is payable when acquiring property. Initially, the surcharge purchaser duty was 4%. In 2018 it was raised to 8%.
The land tax surcharge is payable annually on property owned. Initially, the land tax surcharge was 0.75%. In 2018, it was raised to 2%. It was raised again to 4% on and from the 2023 land tax year.
Note: The land tax surcharge increase to 4% was estimated to add $74 million in revenue in 2022-23, and $294 million over four years. [NSW Budget Statement 2022-23]
To put these rates into perspective:
Who is a foreign person?
A foreign person is individual:
or
Special provisions apply to partnerships, corporations and trusts to make them subject to tax surcharges if foreign persons hold a substantial interest, which is defined as at least 20% for one person and 40% for multiple persons.
[NSW Revenue Ruling G 009]
Note: NSW Revenue asks four questions in the Purchaser Declaration that must be completed for the purchase of a property, designed to find out if surcharge purchaser duty is payable. They are:
2.1 Is the purchaser/transferee an Australian citizen?
2.2 Is the purchaser/transferee a citizen of New Zealand, Finland, Germany or South Africa?
2.3 Is the purchaser/transferee ordinarily resident in Australia?
2.4 Is the purchaser/transferee an exempt permanent resident or retirement visa holder who will use and occupy the property as their principal place of residence for a continuous period of 200 days within the first 12 months after the liability date (date of agreement)?
NSW Revenue issues land tax assessments whether or not a Land Tax Registration Form is completed. It uses data matching, information from the Purchaser Declaration and title registration notifications from the NSW Land Titles Office.
The exemptions
The following foreign persons are exempt from the surcharge purchaser duty and the land tax surcharge:
[NSW Budget Statement 2022-23]
NSW Revenue announces foreign persons from four countries will be exempt from tax surcharges
On 21 February 2023, NSW Revenue announced that foreign persons from New Zealand, Finland, Germany and South Africa may no longer be required to pay surcharge purchaser duty or the land tax surcharge. This is the full text of the announcement:
“It has been determined that NSW surcharge provisions are inconsistent with international tax treaties entered into by the Federal Government with New Zealand, Finland, Germany and South Africa. These international tax treaties are related to taxation and other matters and have been given the force of federal law.
Effective immediately, individuals that are citizens of the nations concerned purchasing residential-related property or who own land in their own capacity will no longer be required to pay surcharge purchaser duty and surcharge land tax.
Surcharge purchaser duty or surcharge land tax liability for non-individuals, such as corporations, trusts or partnerships that arises because of an entity’s affiliation with these nations may also be affected by the international tax treaties.
Refunds may be available if you are from one of the nations concerned, and paid surcharge purchaser duty or surcharge land tax on or after 1 July 2021.”
[see this link https://www.revenue.nsw.gov.au/news-media-releases/international-tax-treaties]
How do international tax treaties operate to exempt foreign persons?
NSW Revenue did not provide an explanatory note as why it has ‘determined’ that citizens of the four countries were no longer required to pay surcharge purchaser duty or the land tax surcharge, and why citizens of other countries were required to pay the tax surcharges.
The explanation might lie in the decision of the High Court of Australia in Addy v Commissioner of Taxation [2021] HCA 34.
In Addy’s case, the High Court of Australia examined the Non-Discrimination Article of the Convention between Australia and the United Kingdom for Avoidance of Double Taxation and how it applied to a United Kingdom national (Ms Addy) who was in Australia on a working holiday visa and was an Australian resident for tax purposes.
Ms Addy objected to an income tax assessment, in which she was taxed at a flat rate of tax applicable to persons on a working holiday visa, while her co-workers were taxed at the lower rate which applied to Australian nationals.
The High Court upheld Ms Addy’s objection, holding that the working holiday visa tax contravened the Non-Discrimination Article of the Convention because it imposed ‘more burdensome taxation’ on her because of nationality.
This ripples from Addy’s case may have led to the NSW announcement, coupled with, we might infer, a rising tide of objections against tax surcharge assessments.
Is there scope to extend the new exemption?
NSW Revenue has limited the new exemption to citizens of New Zealand, Finland, Germany and South Africa.
Is there scope to extend the exemption to other countries?
Both the High Court of Australia and the Australian Taxation Office suggest that there might be.
In footnote 31 of Addy’s case, the High Court observes:
“Since entering into the United Kingdom convention, Australia has concluded binding agreements containing non-discrimination clauses based on the OECD Model Convention with 11 countries, all of which have been incorporated into Australian domestic law. The countries are Norway, Finland, Japan, South Africa, New Zealand, Chile, Turkey, India, Switzerland, Germany and Israel: see International Tax Agreements Act, ss 3AAA(1) and 5(1).”
In its Decision Impact Statement, the Australian Taxation Office states that the decision in Addy’s case is relevant to citizens of these countries: Chile, Finland, Germany (from 1 July 2017), Israel (from 1 July 2020), Japan, Norway, Turkey, and the UK.
This is the link to my case note on Addy’s case and the ATO Decision Impact Statement.
Conclusion
It is a welcome move to exempt citizens of four countries from surcharge purchaser duty and the land tax surcharge. They are discriminatory and discourage foreign investment particularly in the foreign investor favourite – new residential apartments.
The fact that the Non-Discrimination Articles are not drafted consistently between international tax treaties, coupled with a desire to protect a substantial tax revenue stream, might explain why the exemption has been limited to just four countries.
Citizens of countries whose treaties contain the Non-Discrimination Article but have not been exempted, might consider objecting to their surcharge tax assessments and test their position in the Courts.
This comment applies not only in NSW, but throughout Australia where surcharge purchaser duty and land tax surcharges are payable.
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