In brief - Rulings affect foreign investors' acquisition of residential land in these two states
The Queensland and New South Wales Offices of State Revenue have recently issued public rulings which consider certain aspects of the foreign investor surcharges for the acquisition of residential land.
- ex gratia relief for significant development
- the meaning of AFAD residential land
- how interests of foreign persons and related persons will be considered when determining whether a corporation is a foreign corporation or a trust is a foreign trust
New South Wales
- the meaning of foreign person
Queensland Office of State Revenue ruling on ex gratia relief for significant development
gives effect to the Queensland Treasurer's announcement of 16 September 2016 (Foreign Buyers Surcharge exemptions to support regional development
) which was made following consultation with the property sector. Ex gratia relief will be considered for transactions undertaken by foreign corporations and trusts that are Australian-based that involve significant development by adding to the supply of housing stock in Queensland. There is a similar measure applicable in Victoria.
Ex gratia relief - conditions for eligibility
Ex gratia relief will only be considered for transactions which have the following features:
- the foreign corporation or trust (foreign entity) is Australian-based
- the foreign entity has or will comply with any Foreign Investment Review Board (FIRB) requirements relating to the acquisition of the land, including any conditions imposed by FIRB
- the foreign entity has complied with other regulatory requirements, including the Corporations Act 2001 or equivalent legislation and the Queensland taxation laws
- the transactions involve significant development by adding to the supply of housing stock in Queensland
- the foreign entity primarily uses Australian materials, services and personnel in the development activities
The ruling provides a non-exhaustive list of factors that may indicate a foreign entity is Australian-based:
- head office or principal place of business in Australia
- significant management staff and office presence in Australia
- employment of Australian citizens or permanent residents
- carrying on business in Australia
- considerable level of Australian participation in the foreign entity (for example, where decisions relating to the development of the land are primarily made by management or employees based in Australia)
- more than 50% of the value of goods and services used in the development of the land is paid to Australian suppliers, contractors and personnel
The more of these factors that are present, the more likely that the foreign entity is Australian-based.
Significant development by adding to the supply of housing stock
This condition can be met by establishing either significant development or significant developer status.
Significant development status will be established if either the land is acquired for the purposes of undertaking a development or redevelopment of 50 or more residential lots (transaction lot test) or the development or redevelopment will make a significant contribution to the region (regional significance test).
The regional significance test is targeted at regional areas as development in metropolitan areas and urban in-fill development are excluded. The following non-exhaustive list of factors will be considered for the purposes of the regional significance test:
- the nature of the development
- the contribution made to housing stock and infrastructure in the context of population size and demographics and activity in the region
- the economic and social impacts of the development for the region
- if the development did not proceed, whether such outcomes for the region would otherwise be likely
Significant developer status will be established if the developer will undertake development or redevelopment of 50 or more residential lots in the relevant year, being the 12 month period that includes the relevant transaction. Averaging for up to five years will be permitted. Developments undertaken by members of a wholly owned group to which a foreign entity belongs may also be counted for significant developer status but not for significant development status.
Consideration will also be given to whether the land is in a priority development area or part of a declared coordinated project by the Coordinator General. However, the presence of these features alone will not be determinative of whether a development or developer is significant.
Lodgement and application for relief
The usual lodgement process applies to the acquisition of the land, except self-assessment is not available. The application for relief requires lodgement of a Form D4.1 (which includes a form of statutory declaration) together with evidence that the eligibility conditions have been satisfied. It is possible to apply for in-principle approval based on draft transaction documents, although final approval will still need to be obtained. A streamlined process may be available for subsequent transactions undertaken by the foreign entity once it has obtained approval for the initial transaction.
The foreign entity must notify the Commissioner of State Revenue within 28 days if any of the conditions are no longer satisfied or if there has been a material change in circumstances.
AFAD residential land meaning under Queensland ruling excludes hotels, motels and dormitory-style student accommodation
AFAD residential land is land in Queensland that is or will be used solely or primarily for residential purposes, where the building or part of the building that is or will be used for the residential purposes is designed or approved by a local government for human habitation by a single family unit.
considers the meaning of "solely or primarily used for residential purposes" and "designed or approved by a local government for human habitation by a single family unit". In doing so, it confirms that hotels, motels and dormitory-style student accommodation are not AFAD residential land.
The ruling confirms that AFAD residential land will include:
- established homes and apartments (including self-contained studio apartments)
- vacant land upon which one or more homes or apartments will be built
- land for development for residential use (such as smaller unit block developments, housing subdivisions, and major developments with a residential component)
- land with buildings to be refurbished, renovated or extended for residential use, such as a disused warehouse that the developer intends to refurbish to create residential apartments or a commercial block that is to be demolished for residential development
Other types of residential property (such as retirement villages, manufactured home parks and student accommodation other than dormitory-style student accommodation) may be AFAD residential land if the use of the relevant property meets the tests set out below.
The words "solely or primarily" take their ordinary meaning. In determining what the sole or primary used of land is or will be, relevant factors include:
- the overall nature and use or intended use of the land
- the proportion of the land that is or will be used for residential purposes
- the proportion of the construction costs attributable to the land that is or will be used for residential purposes
Use for "residential purposes" involves consideration of the use or intended use of the land for normal home living. The relevant factors include:
- the zoning of the land
- whether any buildings or parts of buildings are designed or approved by a local government for human habitation by a single family unit
- the degree of permanence of the use
- whether the use is self-contained (for example, contains bathroom and kitchen facilities)
Determination of whether land is AFAD residential land is tested at the time of the transaction on the objectively ascertainable present or future use of the land by the acquirer. If at the time of acquisition, land is not residential but there is evidence that the acquirer has plans to develop the land at a future date so that it will become AFAD residential land, the transaction may be liable to the additional foreign acquirer duty and the timeframe within which that status eventuates is unlimited.
Queensland ruling on interests of foreign persons and related persons
A foreign person for the purposes of additional foreign acquirer duty includes a foreign corporation and the trustee of a foreign trust. A foreign corporation includes a corporation in which foreign persons have a controlling interest. A trust is a foreign trust if at least 50% of the trust interests are foreign interests. In each case it is relevant to consider the interests held by foreign persons and related persons of foreign persons in the corporation or the trust.
confirms that corporations and trusts that are controlled by Australian persons will not be considered to be foreign corporations or foreign trusts if those Australian persons are related to foreign persons who have no involvement in the corporation or the trust.
Accordingly, in determining whether foreign persons have a controlling interest in a corporation or at least 50% of the trust interests in a trust, a related person of the foreign person is only relevant if:
- for a corporation, both the foreign person and the related person are each in a position to control some voting power or potential voting power in the corporation or have an interest in the issued shares in the corporation
- for a trust, both the foreign person and the related person each have a trust interest in the trust
Therefore, the mere fact that a person who is in a position to control voting power or potential voting power or has an interest in the issued shares in a corporation is related to a foreign person who has no such control or interest, is not relevant for the purposes of determining whether the corporation is a foreign corporation. Similarly, the mere fact that a person who has a trust interest in a trust is related to a foreign person who has no trust interest in the trust, is not relevant for the purposes of determining whether the trust is a foreign trust.
The ruling also confirms that the interests of all foreign persons will be aggregated in determining whether foreign persons have a controlling interest in a corporation or at least 50% of the trust interests in a trust, regardless of whether the foreign persons are related persons.
The Commissioner of State Revenue has taken a practical view in relation to discretionary trusts that have a foreign person that is a default beneficiary. The ruling says that it depends on the facts and circumstances of each case and the Commissioner will consider the likelihood of distribution to the foreign person having regard to the terms of the trust deed. Therefore, the fact that a discretionary trust has a foreign person that is a default beneficiary will not automatically make the discretionary trust a foreign trust.
Foreign person meaning confirmed in New South Wales Revenue Ruling No. G 008
The modifications are as follows:
• a foreign person includes a general partner of a limited partnership where:
- at least 20% of the interests in the limited partnership are held by an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, or
- at least 40% of the interests in the limited partnership are held by two or more persons referred to above
• a foreign person includes a foreign government investor
• when determining whether a corporation or a trustee is a foreign person, the following interests are excluded:
- interests of persons that are in a position to control potential voting power of the corporation or trust, and
- interests of persons which would be held if future rights were exercised
• generally corporations and trustees are foreign persons if they are held by two or more foreign persons (and their associates) with an aggregate substantial interest. However, holdings of less than 5% in an entity that has its primary listing on a stock exchange in Australia are not counted towards an aggregate substantial interest
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2019.