DO NOT FLUSH YOUR MONEY DOWN THE TOILET – IT PAYS TO ENSURE IT WILL NOT BE DEEMED TO BE A FOREIGN ENTITY
When purchasing residential property in Queensland, New South Wales or Victoria, significant additional taxes may be payable if the buying entity is deemed foreign.
We’ve set out a break down below of what constitutes a foreign entity across the states and the implications.
Queensland
What is a foreign corporation?
A foreign corporation is one that is:
- Incorporated outside Australia; or
- Foreign persons or related persons* of foreign persons have, in aggregate:
o A controlling interest of at least 50% of the voting power or potential voting power; or
o At least 50% of the issued shares in the corporation
What is a foreign trust?
A foreign trust is one in which at least 50% of the trust interests are foreign interests.
A trust interest is a person’s interest as a beneficiary of a trust.
For a discretionary trust, only a taker in default of an appointment by the trustee can have a trust interest (these are beneficiaries who receive a distribution of income or capital if a trustee fails to make distributions).
A foreign interest means:
- A trust interest of a foreign individual
- A trust interest of a foreign corporation
- A trustee interest of a trustee of a foreign trust
- A trust interest held by a related person of any of the above
Note:
If a discretionary trust has a foreign person as a default beneficiary, the Commissioner will consider all circumstances in determining if the discretionary trust is a foreign trust, including the likelihood of distribution to a foreign person, taking into account the terms of the trust deed concerning any priority or proportion for sharing between default beneficiaries.
What is a foreign person?
A foreign person is a natural person who is:
- Not an Australian citizen;
- Not a permanent resident; or
- Not a New Zealand citizen with a Special Category Subclass 444 Visa.
What are the implications?
Foreign entities must pay Additional Foreign Acquirer Duty (AFAD). This is calculated at 7%* of the dutiable value and is payable on top of any standard transfer duty liability.
* Please note that for contracts signed on or after 1 July 2024, AFAD will increase to 8% of the purchase price.
New South Wales
What is a foreign corporation?
A foreign corporation is one in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a ‘substantial interest’ or ‘aggregate substantial interest’ in the voting power or issued shares in the corporation.
‘Substantial interest’ – a person, alone or together with one or more associates**, holds an interest of at least 20% in the entity
‘Aggregate substantial interest’ – two or more persons, alone or together with one or more associates, hold an aggregate interest of at least 40% in the entity
What is a foreign trust?
A foreign trust is one in which any beneficiary is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government and holds a substantial interest or aggregate substantial interest in the trust.
An interest in a trust includes:
- A beneficial interest in the income or property of the trust; or
- An interest in a unit in a unit trust.
‘Substantial interest’ – a person holds a substantial interest in a trust if the person, together with any one or more associates, holds a beneficial interest of at least 20% of the units, income or property of the trust
‘Aggregate substantial interest’ – two or more persons hold an aggregate substantial interest in a trust if the persons, alone or together with one or more associates, hold an aggregate interest of at least 40% of the units, income or property of the trust
Note:
A trust will be considered foreign unless it can satisfy the following criteria:
- No beneficiary or potential beneficiary is a foreign person; and
- The terms of the trust must not be capable of amendment that would result in a foreign person being a potential beneficiary
It is irrelevant that a trustee may not exercise discretion to distribute income and/or capital to a foreign person.
What is a foreign person?
A foreign person is a natural person who is:
- Not an Australian citizen
- Not ordinarily resident in Australia
- Not an Exempt permanent resident
- Not a holder of a Partner (provisional) visa (subclass 309 or 820)
- Not a holder of a Retirement visa (subclass 405 or 410)
- A citizen of a nation not identified as being exempt from surcharge purchaser duty due to international tax treaties
What are the implications?
Foreign entities must pay Surcharge Purchaser Duty. This is calculated at 8% of the dutiable value and is payable on top of any standard transfer duty liability.
Victoria
What is a foreign corporation?
A foreign corporation is one that is:
- Incorporated outside Australia;
- Foreign natural persons, foreign corporations or trustees of foreign trusts and associated persons***, in aggregate:
o Are in a position to control more than 50% of the votes (voting power or potential voting power);
o Have more than 50% of the issues shares in the corporation; or
o Have (in the Commissioner’s opinion) the ability to influence the outcome of the decisions about the corporation’s financial and operating policies
What is a foreign trust?
A foreign trust is one in which a foreign natural person, foreign corporation or trustee of another foreign trust has a substantial interest in the trust estate of that trust.
‘Substantial interest’ – a foreign natural person, foreign corporation or the trustee of a foreign trust has a substantial interest in a trust when that person or entity either alone, or together with an associated person, or another foreign natural person, foreign corporation or the trustee of a foreign trust has:
- a beneficial interest of more than 50% of the capital of the estate of the foreign trust, or
- in the Commissioner’s opinion, the capacity to determine or influence the outcome of the decisions about the administration and conduct of the trust
Note:
For discretionary trusts, a person is taken to have a beneficial interest in the maximum percentage of the capital of the trust estate that the trustee of the discretionary trust is empowered to distribute to that person. This means that a discretionary trust will generally be a foreign trust if it has any potential beneficiaries, whether specifically named or simply a member of a general class, that are foreign.
What is a foreign person?
A foreign person is a natural person who is:
- Not an Australia citizen;
- Not a permanent resident; or
- Not a New Zealand citizen with a Special Category Subclass 444 Visa
Note: a foreign purchaser may be entitled to an exemption from additional duty if they purchase a principal place of residence jointly with their spouse/domestic partner who is an Australian citizen, Australian permanent resident or New Zealand citizen who holds a special category visa. They must live in the property as their principal place of residence for a continuous 12-month period, starting within 12 months of becoming entitled to possession of the property.
What are the implications?
Foreign entities must pay Foreign Purchaser Additional Duty. This is calculated at 8% of the dutiable value and is payable on top of any standard land transfer duty.
nOTES
* Related person: https://qro.qld.gov.au/definitions/?q=related%20person%20or%20relative%20individual
*** Associated person – https://www.sro.vic.gov.au/foreign-purchasers-of-property
