NSW has reversed its decision to exempt citizens of eight tax treaty countries from surcharge purchaser duty on the purchase of residential property and surcharge land tax for owning residential property.
An option fee is paid for the grant of a real estate option. Normally, the option fee is credited towards the deposit under the Contract for Sale.
Revenue NSW Announcements
Revenue NSW made these announcements with effect from 8 April 2024:
Surcharge Purchaser Duty Announcement
It was previously identified that citizens of New Zealand, Finland, Germany, India, Japan, Norway, South Africa and Switzerland were not subject to surcharge purchaser duty due to international tax treaties.
Changes to federal law means that these citizens may now need to pay surcharge purchaser duty if they enter into an agreement to purchase residential property in NSW on or after 8 April 2024.
We will be providing further information related to the new legislation as it becomes available and encourage you to monitor this page for updates.
The announcement is not retrospective. Therefore, citizens of the eight tax countries who purchased (entered into contracts to purchase) prior to 8 April 2024 will not be liable to pay the surcharge purchaser duty. Surcharge purchaser duty is payable in addition to transfer duty at the rate of 8% of the dutiable value (greater of purchase price or value).
Surcharge Land Tax Announcement
It was previously identified that citizens of New Zealand, Finland, Germany, India, Japan, Norway, South Africa and Switzerland were not subject to surcharge land tax due to international tax treaties.
However, changes to federal legislation means that citizens of these nations may need to pay surcharge land tax on future land tax assessments for residential land they own in NSW.
We will be providing further information relating to the new legislation as it becomes available and encourage you to monitor this page for updates.
By using the phrase ‘future land tax assessments’, it can be assumed that the surcharge will apply from the 2025 Land Tax Year, for land owned as at midnight on 31 December 2024. The surcharge is 4%.
Background – Foreign Investment Law change
In February and May 2023, Revenue NSW exempted foreign citizens from New Zealand, Finland, Germany, India, Japan, Norway, South Africa and Switzerland from surcharge purchaser duty and surcharge land tax because it “determined that NSW surcharge provisions are inconsistent with international tax treaties entered into by the Federal Government”.
Because the treaties have the force of federal law, then a change to federal law was required to remove that exemption.
The ‘change to the federal law’ is the Treasury Laws Amendment (Foreign Investment) Act 2024 (Cth) which came into effect on 8 April 2024.
In the second reading, the Minister said:
This bill amends the International Tax Agreements Act 1953 to clarify the interaction between foreign investment fees, similar state and territory property taxes, and Australia's double tax agreements. This change ensures that the foreign investment fees and similar imposts prevail so that they can continue to be imposed on foreign nationals who purchase Australian property.
The Explanatory Memorandum provides this explanation:
The general proposition under Australian law is that … signature and ratification do not, of themselves, make treaties operate domestically. In the absence of legislation, tax treaties cannot impose obligations or create rights in domestic law.
Eight of these tax treaties [the tax treaties with the 8 counties] contain a Non-Discrimination Article providing that the Article extends to ‘taxes of every kind and description’. This has caused some uncertainty to arise in respect of the interaction with taxes that are not covered taxes under the treaty, such as foreign investment fees and some state and territory property taxes.
This amendment clarifies that where a provision of a tax treaty, that is given the force of law under the Agreements Act, is inconsistent with a Commonwealth, state or territory law that imposes tax (other than Australian tax), that provision of the tax treaty will not operate to the extent of that inconsistency, therefore ensuring that the Commonwealth, state or territory tax continues to apply as intended.
Conclusion
The amendments are consistent with the Commonwealth Government support for surcharges for purchaser duty and land tax for foreign purchasers of established residential dwellings. This is from the Explanatory Memorandum:
An overarching principle of Australia’s foreign investment policy is that investment in residential land should increase Australia’s housing stock (by creating at least one new additional dwelling). The amendments support this policy principle by enabling changes that encourage investors to purchase new dwellings (which supports construction) rather than established dwellings.