Surcharge Duty
A purchaser buying land in NSW is required to pay the transfer duty. When foreign buyers acquire residential land in NSW, foreign buyers are required to pay an additional surcharge purchaser duty on top of any transfer duty. The surcharge purchaser duty rate has increased to 8%, starting on or after 1 July 2017.
The solicitor/conveyancer is responsible to advise the purchasers if they are subject to the surcharge,
so they can make the decision whether to proceed with the purchase.
Due Diligence
Thus, before entering into the contract, the solicitor/conveyancer must carry out due diligence to confirm the following about the purchaser:
- If the purchaser is a natural person, must confirm if the purchaser is an Australian citizen or a permanent resident, who satisfies the 200-day test.
- If the purchaser is a discretionary trust, must confirm if the deed irrevocably excludes foreign beneficiaries.
- If the purchaser is a company/unit trust, must confirm if 80% or more ultimate share or unit holders are non-foreign natural persons or the discretionary trust that satisfies paragraph b.
Nevertheless, purchasing entities is not always straightforward. An entity, either a person or incorporation may hold substantial interest through other corporations or trusts.
Tracing an interest
For the purposes of both the surcharge duty and land tax, the multiple tracing process throughout a few entities can be applied, to identify if a substantial interest may exist, as a result of holding an interest in other corporations or trusts under the tracing provisions in Foreign Acquisitions and Takeovers Act 1975 of the Commonwealth. (the FAT Act)
Company C applied the tracing process as below:
C is a registered company in NSW, C is purchasing residential land in NSW, B holds 35% interest in C, while A has 20% interest in B, and Z, a foreign person holds 25% interest in A.
This chain resulted in the consequences as following:
- A is deemed to be a foreign person, because Z has a substantial interest in A;
- B is a foreign person, due to A holding a substantial interest in B; and Z is deemed to have 20% interest in B;
- C is a foreign person for the purpose of the surcharge duty and land tax, C is liable to pay an additional 8% transfer duty on top of the transfer duty. Since B has a substantial interest in C; and Z is taken to hold 35% interest in C.
Conclusion
Based on the above possible scenarios, tracing an interest held through an interest in other corporations or trusts is crucial. The solicitor/conveyancer must take the necessary steps to conduct due diligence on the purchaser, to provide correct transfer duty advice to the client.
Contact CFS Legal to conduct due diligence prior to your purchase. Email: info@cfslegal.com.au