NSW Land Tax Changes - Time Running Out

The last NSW budget introduces changes to NSW Land Tax. And the changes impact on 31 December 2016 (The 2017 land tax year !!)...That's just a few weeks away. 2017 year assessments will issue from March 2017.

If you are a FOREIGN PERSON not ordinarily resident in Australia and own ANY RESIDENTIAL LAND in NSW then the 0.75% Land Tax Surcharge applies. This applies to your own home in NSW or investment property if it includes residential land and ...no threshold applies. For many foreign landowners they wont be registered for land tax. They may also think they are exempt from land tax on a home they occupy. This rule changes that view that a home is exempt from land tax.

This land tax grab will affect students and temp residents here incl those who do not have perm residency. So a student who lives in a home in Ryde with $500,000 of land will be subject to a surcharge of $3750.

Can I avoid paying it ? Yes. However penalties may apply. Land tax is subject to a check prior to sale and arrears and penalties will be recovered. Unpaid land tax can prevent a sale if it remains a charge on the property.

Warning for discretionary trusts - POTENTIAL beneficiaries who are foreign persons may trigger the surcharge land tax for the discretionary trust.

Key elements of who is affected:
- Individual
- Corporation
- Trust beneficiary of a fixed unit trust that is otherwise exempt from land tax
- Partners in partnership

What does it mean?- a foreign person who is ordinarily resident ?
- You are NOT a Australian citizen absent overseas.
- You are NOT a foreign person if you have perm residency and reside here for 200days+ in the year AND has no visa or other conditions which limit presence in Australia.
- A lesser definition applies to NZ citizens resident in Australia

If you consider you may be affected or know someone who is then they may need to register for land tax or update their details as soon as possible

Details here : Land tax surcharge | Office of State Revenue

 

Similar to Victoria? Absentee owner surcharge | State Revenue Office

Do you mean "Who is a foreign person not ordinarily resident"

 

Not really - I have edited for clarity. A foreign person is exlcuded by permanent residency IF they also are factually resident. Mere possession of right to perm residency isnt enough.

 

Many people are going to be caught out by this.

 

For these people do they need to do anything? i.e. confirm that they are factual resident?

 

The requirement is that all persons potentially affected must advise OSR of their status. Land tax is not a automatic tax like council rates and OSR dont have details of owners residency and citizenship. However I will argue they will develop it....ie If Mr Bruce Lee of HK owns with others at two lots his sole ownership property will get caught

 

This is interesting...assuming the trust has a resident beneficiary and a foreign non-resident beneficiary how can they apply the surcharge because the trust is discretionary and maybe the trustee may decide not to allocate any income or other proceeds of the IP to the foreign non-resident beneficiary.

 

Does this apply to Aussie Citizens - that are working overseas?, ie. non-residents for tax purposes but Australian citizens.

 

No. Ignore the owners tax residency anyway. It exempts Australian citizens who are offshore from this surcharge.

 

The trustee is obliged to advise OSR that there is a non-resident issue. Further OSR info below. Note my emphasis. My reading suggest if you dont distribute to that person its OK but when you do......surcharge ? Note sure if it applies every year ?

Special trusts
For special trusts, beneficiaries are not treated as owners and therefore they will not have to pay the surcharge. However, if any one or more of the potential beneficiaries are foreign persons, the trustee will be liable for surcharge land tax on the trust's interest in the property.

Interest in a trust is:

• ƒƒa beneficial interest in the income or property of the trust; or
• ƒƒan interest in a unit in a unit trust.

For a discretionary trust, each beneficiary is taken to hold a beneficial interest in the maximum percentage of income or property that the trustee may distribute to that beneficiary.

 

Because the trustee has the ability to appoint all of the income or the capital to the evil foreigner.

 

I havent been able to confirm but for a DT the issue of trustee control seems not a issue. A hybrid trust may have that concern. A fixed unit trust should be guided by the fixed entitlement.

The issue refers to potential beneficiaries and also mentions "each beneficiary is taken to hold a beneficial interest in the maximum percentage of income or property that the trustee may distribute to that beneficiary"....My emphasis added. That suggests a actual distribution but the word "may" isnt definitive. "May" refers to a alternative for the word might ...or a possible outcome.

I cant ascertain what that means :My concern is that if a non-resident is a potential beneficiary and unless there is a deed limit on potential entitlement then its assumed it could be 100% ? Or does it mean that it is based on a actual past distribution to that beneficiary ? (If so how far back or it an annual test ?)

I can see that some NSW disc trusts may need to amend deeds.... For example most trust deeds leave the determination of income to the trustee and nearly every trust could have potential beneficiaries that are not resident. ie Second cousin Joe....A clause that makes the TRUSTEE the beneficiary by default until such time as the trustee resolving to otherwise make a distribution determination may bypass such a issue and leave no such "potential beneficiary" if the OSR view is that a possible entitlement is the offending concern.

We need to see how the Commr of State Revenue determines this. And interested in feedback from our legal friends. Rob ?

I have placed a call to a OSR expert. They cant seem to find one on this issue. It may need a ruling. Great law ?

 

Where is the legislation for this? Has it been passed?

To get around the issue in VIC you just need to have restrictions that the capital could not be distributed to a beneficiary who is a non resident.

I haven't seen the nsw legislation yet but something similar could do the trick - beneficiaries are only beneficiaries while they remain a resident as per the XXX Act.

 

Terry you might like this. OSR told me - "Dont worry about beneficiaries its only the trustee"...Really ? I referred them to their website and heard a "oh ship". Anyway its referred to a specialist and they think they need a ruling on the same bloody law they asked Parliament to approve. WTF.... I reckon this one will be a tax avoiders joy I have a number of ideas. Shhh. Lets see what OSR say.

Before I get a personal audit of my property holdings I will say they are getting back to me. A techie specialist. Probably after getting legal advice from the NSW Solicitor General LOL. Three weeks from taxing date and this happens ?

 

The so called Budget Legislation is thin on details ??
https://www.parliament.nsw.gov.au/bills/DBAssets/bills/BillText/3312/b2016-087-d09-House.pdf

I suspect a Revenue Ruling in a schedule to the revised Act will be made as a Regulation.

The transfer duty provisions in the budget also seem worse than I suspect originally. I see an indirect stamp duty issue. If a land owners transfer shares units etc or just ownership and a foreign owner becomes a shareholder etc then further owner duty is triggered. Loads more I see too. ie Parents die and a non-resident beneficiary of land inherits !! Terry perhaps you can interpret this better than me and maybe provide a synopsis for our PCers ? refer to above Bill.

 

Thansk Paul

I think it is all there - the acts having already been amended. Start date was back in June.

It seems the land tax act takes its definition of foreign person from the duties act which takes the definition from the foreign acquistions and takeovers act - but modifies it.

I had a quick read and I think if any foreign person controls the voting power of a trust the trust itself, as an 'entity', would be classed as a foreign person.

 

OK people here goes ....I had a interesting chat with a lad from OSR and I have the answers on the issue with Disc Trusts and its F%$$#G STUPID.

ALL Discretionary Trusts will be subject to a test of the trust deed. Ifa POTENTIAL BENEFICIARY included a non-resident non-citizen etc then 100% of the surcharge land tax will be applied.

Now here is the question I asked and I dont think I was the only to ask it based on the response. How the F^C% will OSR work out which trusts are affected ? They will be asking ALL discretionary trusts over time to provide their trust deed for review. Thats right.. Hiw many people are they going to employ Its bizarre ...And it gets worse.

I asked how they may determine WHO potential beneficiaries are in a trust deed when most DTs use a deed convention of naming "primary beneficiaries" and then using a process of relationships to those persons eg relatives, spouses etc.......

So I boldly asked if OSR were planning on asking for Ancestry.com searches for all trusts? He laughed and agreed that that is basically what the law requires them to do. The onus is on taxpayers to ensure they register and they will undertake a rigorous compliance campaign to review disc trust deeds for this issue.

All jokes aside this is illogical. Heaps of trusts may get dragged into this. And merely having a relative who is not an AU citizen could land any trustee director with a tax burden for the trust. This issue will impact many Chinese, Maltese, Italian, Greek etc etc families where a property is in a disc trust. Of course they have relatives back home. They fail the tests !! So what is my suggestion ?

1. ALL DTs and Hybrid Discretionary Trusts in NSW will be affected by this. Some will have no risk and others high risk

• High Risk. Any trust where primary beneficiaries have ANY relatives or family who fail the citizenship / residency requirements for ANY RELATIVES.
• Low Risk : Any trust where primary beneficiaries consider they dont know of any concerns. I say its low risk since OSR may annoy them later and conduct a review for no purpose.

From here I will refer to "NRP" to explain a non-resident person who fails to meet the land tax surcharge citizen rules.

High Risk Trusts include the following charecteristics:

• Human Trustees where any named trustee is a NRP. IMO this is an automatic tax problem.
• Beneficiary named in the schedule to deed who is a NRP. IMO an automatic tax problem.
• Appointor named in the schedule to deed who is a NRP. IMO an automatic tax problem.
• A potential beneficiary within the family group who is not named in the schedule is a NRP. A strategy is proposed to address this.

Proposed strategy where a unnamed person is a potential beneficiary who is a NRP....Seek legal advice to amend the deed to amend the clauses which address excluded beneficiaries. A clause which specifically states that any person who is not named in the schedule as a primary beneficiary who may be considered a potential beneficiary by virtue of the potential beneficiary clauses. Where they are not a citizen of Australia or otherwise cause the trust to become liable for NSW Land Tax Surcharge they shall be an excluded beneficiary unless the Trustee validly amends the trust deed to make that person a primary beneficiary etc....So the amendment strips possible offending beneficiaries unless its a precise choice to include them.

A special note about hybrid trusts. HDT take many forms but the typical deed has ability to issue units but is first settled with discretionary terms applicable to the settled sum and any future corpus. A $1 settled sum of a ssHDT is a concern and automatically invokes a treatment just as if the trust was a disc trust. Land Tax Surcharge would apply to the entire land holding.

And for any disc or hybrid trust where a trustee, primary beneficiary or appointor is a NRP these trusts need to seek immediate legal advice to amend their structure prior to 31 December 2016 if they seek to avoid this new tax impost. Thats now just over 2 weeks off

 

From my cursory reading of the legislation I think what Paul was advised by the OSR is wrong.

Paul did you ask for legislation to back up this claim that where a potential beneficiary is a 'foreign person' the trust will be deemed a foreign entity?

 

My sister was born and raised here, but now lives in Singapore with her husband and kid.

She wants to buy a place here because she does want to move back.

She holds an AU passport. Does she could as an Australia Citizen and therefore not subject to this surcharge?

"Australian citizens are not foreign persons, regardless of where they live"

 

She would be a Citizen if she holds an Aussie passport.

Wonder if there could be a rush on people getting citizenship now. Many qualify for it but don't apply.