Foreign resident tax rates and surcharges could sting the unwary
There are important laws governing investment in Australia by a foreign resident. These laws include legal definitions of what constitutes a “foreign person”. These laws could sting unwary people who consider Australia their home.
Guidance on laws governing the definition of a foreign person
The legal definition of who is a foreign person is very broad. So much so, that foreign residents who make investments or purchase property in Australia could unwittingly get caught up in legal requirements and special taxes they are not aware of.
For instance, under the Foreign Acquisitions and Takeovers Act 1975 and the Register of Foreign Ownership of Water or Agricultural Land Act 2015, even an Australian citizen could be defined as a foreign person if they are not classified as “ordinarily resident” in Australia.
Classifying an individual as ordinarily resident
There are tight restrictions on what qualifies a person as being “ordinarily resident” in Australia. It is also dependent on how many days the person has been in Australia over a two year period.
Similar restrictions apply to corporations and trustees of a trust, along with the proportion of a corporation that is defined as foreign-owned.
Foreign land tax surcharge imposed in eastern states of Australia
If a foreign resident has a discretionary family trust that owns or is considering the acquisition of residential property in eastern Australia, it is imperative to understand that the eastern states of Australia impose a transfer duty surcharge and land tax surcharge for foreign persons.
In NSW, the foreign land tax surcharge is two per cent. This surcharge is payable on the taxable value of all residential land owned by a foreign person, although a principal place of residence exemption may apply.
Complexities of a foreign person’s family trust when it comes to acquiring real estate
As is the case with many tax laws in Australia, classifying an individual as a foreign person is far from straightforward.
For instance, if one member of a family trust is defined as a foreign person, there is a possibility that if the family trust were to acquire residential property in the future, the transfer duty surcharge would apply. Furthermore, the land tax surcharge could apply to residential property that the family trust already owns.
In addition, some state revenue authorities take the view that the foreign person transfer duty and land tax surcharges will apply unless the trust deed for a family trust contains a specific provision excluding foreign persons from being beneficiaries of the family trust.
If you’re concerned about how the foreign person duty and land tax surcharges may affect you, it’s a good idea to seek professional advice and, if appropriate, have your trust deed reviewed by a business lawyer with experience in trust and revenue law.