Foreign owners are subject to a surcharge on the acquisition of residential property. Late last year, the Commissioner of State Taxation (“Commissioner”) released Revenue Ruling SDA012 (“Revenue Ruling”) setting out an ex gratia relief scheme for acquisitions of residential land for the purpose of undertaking significant developments of new residential homes. This article addresses this scheme.
What is the Foreign Ownership Surcharge?
Under section 72 of the Stamp Duties Act 1923 (SA) (“the Act”) “foreign persons” who acquire an interest in “residential land” are subject to and required to pay in addition to stamp duty an additional surcharge (“the Foreign Ownership Surcharge”).
The Foreign Ownership Surcharge is equal to 7% of the value of the interest in the residential land.
For the purposes of the Foreign Ownership Surcharge:
“Residential land” as defined under section 72(8) of the Act means:
- land that is predominantly used for residential purposes; or
- the improvements made to the land are residential in character even though it was not being used for any particular purpose at the relevant time; or
- the zoning of the land as established under planning and development laws envisages the use of the land as residential even though the land is vacant, or vacant with only minor improvements.
“Foreign Persons” as defined under section 2(14) of the Act means:
- a person who is not:
- an Australian citizen or
- permanent visa holder under s 30(1) of the Migration Act 1958 (Cth) or
- a New Zealand citizen who is a holder of a special category visa under s 32(1) of the Migration Act; or
- A corporation:
- that is not incorporated in an Australian jurisdiction,
- with an individual who is a foreign person (as above), or a trustee for a foreign trust, or a number of such persons who together hold 50% more of the corporation’s shares; or control 50% or more of the maximum number of votes at a general meeting of the corporation.
The new scheme enables certain foreign investors acquiring residential land to apply for ex gratia relief from the Foreign Ownership Surcharge. The Treasurer will consider each application on a case-by-case basis. Foreign investors will be eligible to apply for the relief if the following criteria is satisfied:
The acquisition is for the purposes of undertaking a “significant development”
A “significant development” occurs if:
- the land is developed/redeveloped into 20 or more allotments or lots to be used for residential purposes (“residential homes”) [Note: this relates to the number of homes to be developed, not the number of homes acquired]; or
- the development/redevelopment makes significant contribution to the region in which it is occurring (“regional significance test”).
The regional significance test will be assessed by considering a number of factors including:
- the nature of the development;
- contribution of the development to housing stock and infrastructure;
- economic and social impacts of the development; and
- whether such outcomes for the region would eventuate in absence of the development.
The regional significance test does not apply to the Metropolitan Adelaide area as defined in the Development Act 1993.
The foreign investor meets its regulatory requirements
This includes any requirements under the Corporations Act 2001 (Cth) or related legislation and the South Australian taxation laws.
The foreign investor meets FIRB requirements
The Commissioner may also take into consideration the nature of the approval given by the FIRB and whether the FIRB imposed any conditions on the investor and if so whether the foreign investor has complied with those conditions.
How to apply for relief from the Foreign Ownership Surcharge
Foreign investors seeking to obtain ex gratia relief may lodge an application with supporting documents with RevenueSA in two instances:
- Pre approval - In principle pre-approval with draft acquisition documents such as sale and purchase agreements and all other supporting information. Pre-approval might be sought with larger transactions and/or transactions in which the foreign investor wants to ensure ex gratia relief will be granted by the Commissioner in respect of any upcoming or future transactions; or
- Final approval - Final ex gratia approval with a copy of the in principle pre-approval (if applicable), executed acquisition documents and other documents required for assessment (e.g. copy of FIRB approvals, ASIC information on foreign purchaser).
Change of Circumstances
The ex gratia relief from the Foreign Ownership Surcharge is based on the future intended use of residential property. Accordingly it is therefore possible that the ultimate use of the residential property may vary from the intended use (at the time of the acquisition) of the residential property
Accordingly successful applications for ex gratia relief must advise RevenueSA in writing if the actual acquisition, development or re-development or any relevant circumstance or any other relevant information becomes materially different from that which was specified in the ex gratia relief application.
For example if a foreign person acquires residential land and proposes to develop 20 residential homes but subsequently only develops only 15 residential homes the foreign person must advise Revenue SA. In such circumstances Revenue SA reserves the right to recover an ex gratia payment if the applicant does not advise Revenue SA.
It is not clear from the Revenue Ruling whether:
- RevenueSA would seek to recover any ex gratia payment where the applicant provides the requisite information but the development differs materially from the proposed development or simply whether RevenueSA would only seek to recover any ex gratia payment where the foreign owner fails to provide the requisite information.
- RevenueSA would seek to recover any ex gratia payment in the event that a development is delayed (and if so what timeframe would apply) or if the development does not proceed at all.
- interest or penalties would be imposed by Revenue SA if the foreign owner fails to provide the requisite information relating to a material change with the development.
- RevenueSA might seek recourse against a vendor in attempting to recover any ex gratia payment following a change of circumstances. As such, it may be prudent for vendors to consider including additional provisions in any contract for sale whereby the foreign investor as purchaser indemnifies the vendor in respect of any potential recovery by RevenueSA of any ex gratia payment.
This Revenue Ruling does not impact on the existing change of circumstance provisions under s72 of the Act that might apply if a person becomes or is no longer a foreign person.
Developers selling apartments to foreign persons
The Revenue Ruling does not address the issues faced by vendors and foreign person purchasers of residential land where the foreign person does not intend to carry out a significant development.
The Foreign Ownership Surcharge continues to apply to dutiable instruments entered into on or after 1 January 2018 with foreign person purchases.
Specifically the Foreign Ownership Surcharge still applies and is not impacted by this Revenue Ruling where a contract for sale may have been entered into prior to 1 January 2018 (for example in relation to an off the plan apartment development) and the dutiable instrument (i.e. the memorandum of transfer) is not entered into until after 1 January 2018. No ex gratia relief is available under the Revenue Ruling in these circumstances.
Revenue Ruling SDA012 may provide some relief from the surcharge for foreign owners intending to acquire and develop residential land.
The Revenue Ruling does not apply to foreign purchasers who do not wish to or cannot undertake a significant development (for example; where a foreign person purchases a single apartment in a high rise residential apartment complex).
Careful consideration will need to be given to the particular circumstances in each instance to determine whether relief might be available.
Please contact Cowell Clarke for further information or if you require assistance in respect of transactions subject to foreign ownership requirements including making an application for ex gratia relief of the Foreign Ownership Surcharge.