28 May 2015

Further developments in Victorian State Taxes – Guidelines explaining “discretionary exemption” for foreign investor surcharge released

This article was written by Katrina Parkyn, Greg Protektor and Anthony Mourginos.

On 26 May 2015, the Victorian Parliament tabled guidelines which provide the Treasurer with a discretion to exempt “foreign purchasers” and “absentee land owners” from the newly introduced stamp duty and land tax surcharges (Guidelines).

The release of the Guidelines follows significant lobbying from industry bodies on the application of the surcharges following the introduction of the State Taxation Acts Amendment Bill 2015 (Bill) on 5 May 2015. King & Wood Mallesons published an alert on the Bill, which is available here.

Summary of foreign investor surcharges

As highlighted in our previous alert, the Bill proposes amendments to the Duties Act 2000 (Vic) and the Land Tax Act 2005 (Vic) in relation to the rate of stamp duty and land tax imposed on the purchase and holding of Victorian real estate by foreign investors.

By way of summary, if passed in its current form, the Bill will result in:

  1. a 3% surcharge to the rate of duty payable on certain acquisitions of residential property by “foreign purchasers”;
  2. the removal of the “off the plan” concession for foreign purchasers; and
  3. a 0.5% surcharge on the rate of land tax payable by “absentee land owners” on all Victorian landholdings held directly or indirectly by those land owners.

The Bill contains a discretion on the part of the Treasurer to effectively exempt certain “foreign corporations” and “foreign trusts” from paying the additional surcharges. The Guidelines have been prepared to inform the exercise of the Treasurer’s discretion.

The Guidelines follow significant lobbying from industry groups as to the breadth of the surcharges, the anticipated increase to the cost of housing as a result of the surcharges and the likelihood of surcharges leading to a significant disincentive to foreign investment in Victoria.

The Guidelines

The Guidelines clarify the factors that the Treasurer will consider in determining whether to exempt a foreign corporation or foreign trust from paying the proposed stamp duty and land tax surcharges.

According to the Guidelines, the persons intended to be exempted through the exercise of the Treasurer’s discretion are those “whose commercial activities add to the supply of housing stock in Victoria (either through new development or through re-development, where such development is primarily residential).

Separate Guidelines have been prepared in relation to the stamp duty surcharge and the land tax surcharge, although they broadly operate in the same way.

In this regard, in exercising the discretion to exempt a foreign corporation or foreign trust from paying the surcharges, the Guidelines set out a number of general principles and circumstances that the Treasurer must have regard to. These include:

  1. the nature and degree of a foreign investor’s interest or ownership and control of the relevant corporation or trust estate (as appropriate);
  2. the foreign investor’s practical influence to determine, directly or indirectly, the outcome of decisions of the relevant corporation or trust estate;
  3. the foreign investor’s ability to influence the outcome of financial, operating and management decisions of the relevant corporation or trust estate; and
  4. other relevant circumstances, including the impact of the foreign corporation or trust’s investment on the economy, the degree of competition in the market at the time of the investment, the impact that the corporation or trust and the investment have on the community, satisfaction of Foreign Investment Review Board (FIRB) requirements, the character of the controlling corporation or trust (i.e. transparent corporate governance practices, active or passive property investor etc) and the independence of management.

Transitional Arrangements

The Guidelines specify that the proposed stamp duty surcharge for foreign investors of residential real estate in Victoria will not apply retrospectively. This is a helpful confirmation of the proposed application of the new rules.

However, the treatment of direct transfers made pursuant to contracts entered into before 1 July 2015 remains unclear. While the Guidelines note that “non-resident purchasers who enter into a dutiable transaction (for example, enters into a contract of sale)… before 1 July 2015, will not be subject to the surcharge”, a “dutiable transaction” in Victoria does not occur when a contract of sale is entered into but rather when a transfer is effected.

It is, therefore, unclear whether the stamp duty surcharge will apply to transfers of land pursuant to contracts of sale entered into prior to 1 July 2015. Various statements published by the State Revenue would suggest that this is not the intention but this is not reflected in the Bill itself.

Purchasers under contracts entered into pre-1 July may wish to consider whether they can bring forward settlement to ensure that the transfer occurs before the amendments take effect.

Next Steps

King & Wood Mallesons will continue to monitor the progress of the Bill and the application of the Guidelines (particularly with respect to the application of the transitional rules) and will provide further analysis following the release of any further updates or clarifications from the Government.

Please contact a member of the King & Wood Mallesons team if you would like further information or would like to discuss how these changes might affect your business.

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