The Queensland Treasurer announced in the State Budget on 14 June 2016 that foreign buyers of residential real estate in Queensland will pay an additional 3 per cent duty surcharge on acquisitions of specified residential property in Queensland, called Additional Foreign Acquirer Duty (AFAD), from 1 October 2016.
AFAD will be introduced under the Duties and Other Legislation Amendment Bill 2016 (Bill). Norton Rose Fulbright has been involved in industry review of the changes following the release of the Bill.
What transactions are caught?
AFAD will apply to acquisitions by foreign acquirers of AFAD residential land, which is land that will be primarily used for residential purposes – the legislation uses the concept of a building "designed or approved by a local government for human habitation by a single family unit" or a lot that will comprise such a building or part of a building.
AFAD will apply to a number of transaction scenarios. For example, transactions involving:
- Established housing.
- Vacant land on which a house will be built.
- Land to be refurbished, renovated or extended so it becomes residential.
- Existing apartments.
- A lot that will contain an apartment or other dwelling where the title is still to be created by subdivision - (i.e. sold off the plan, including during construction).
- A lot which has been created but the dwelling is still to be finished at the time of contract.
Are purchases of development sites caught?
Yes. AFAD will be payable not only on purchases of proposed or completed dwellings but also on development site acquisitions. AFAD residential land includes land on which the foreign acquirer is undertaking or will undertake development of the land so it becomes land on which houses or apartments are built.
Are acquisitions of interests in companies and trusts regulated?
Yes. The legislation will also catch indirect acquisitions of interests in AFAD residential land – where a foreign acquirer obtains a controlling interest in a company or trust that is purchasing or owns the relevant land. A controlling interest is defined as holding at least 50 per cent of the shares or controlling at least 50 per cent of voting power in a company, or at least 50 per cent of the interests in a trust.
Is AFAD apportioned between foreign and non foreign Buyers?
Yes. AFD is imposed to the extent of the foreign acquirer's interest in the land. So if a foreign acquirer buys with two other non-foreign parties AFAD will be imposed on the dutiable value of the foreign acquirer's one third interest in the land.
When will AFAD start applying?
AFAD applies if liability for duty arises after 1 October 2016. Liability for duty on a contract arises at contract date. Under the Duties Act 2001, where duty is paid on a contract it is not paid again on the instrument of transfer for the same property. For current pre-1 October 2016 contracts, buyers will not be charged AFAD when they stamp the contract, pay the duty on the contract and stamp the transfer after 1 October 2016 (for example an apartment buyer purchasing off the plan).
Buyers should not have to pre-pay duty on current contracts before 1 October 2016 to avoid AFAD. However, if there is an existing option exercised after 1 October 2016, the contract created with a foreign acquirer will be subject to AFAD as will a new contract created on rescission of an existing pre - 1 October 2016 contract. Buyers in these scenarios should consider whether to exercise options ahead of 1 October 2016 (where the option terms allow) and consider any entity change they may be looking to make by way of a proposed rescission of a contract.
Are changes in ownership after purchase caught?
Yes. AFAD can be applied retrospectively if a foreign person who did not have a controlling interest in a trust or corporation when the land was purchased obtains a controlling interest within 3 years of purchase.
However, the Bill says the reassessment provision applies where AFAD is not imposed on a relevant transaction only because an acquirer under the original transaction is not a foreign person. That means that where any non-foreign person acquires AFAD residential land, the transaction is open to reassessment regardless of whether any interest was initially acquired by a foreign person. This has significant cost implications.
For example, if a company acquires a residential development site post 1 October 2016 for $1 million, the land acquired is "AFAD Residential Land" even if the buyer is not foreign. The transfer duty on the transaction will be (at current rates) $30,850. A year later, the company obtains a development approval for the site. The value of the site with the approval is $2 million. It then decides to introduce a foreign JV party that takes a 51 per cent interest in the development project by buying shares in the Company. The foreign party will pay landholder duty on its acquisition as a foreign acquirer. Assume the price is 51 per cent of the then current value being $1,020,000. Duty of $32,000 plus AFAD of 3 per cent ($30,600) will be paid on the acquisition on the shares being a total duty of $62,600.
However, the Commissioner must also reassess the transaction under which the Company acquired the land – to impose AFAD on the original transaction as if, at the time the liability for transfer duty arose, the company was a foreign person. Transfer duty will therefore be the $30,850 originally assessed plus another 3 per cent of $1,000,000 (original purchase price) being an additional $30,000.
Despite the fact that AFAD is collected on the acquisition of the interest in the private landholder by the foreign investor, the Government also collects another $30,000 on the original transaction even though there is clearly no intention to avoid duty in any of these transactional steps. The blanket approach to reassessment in a fixed time frame with no regard to the transactional context results in 'double dipping'.
Charges on land
Where transfer duty including AFAD is imposed, any unpaid duty (not just AFAD but any other transfer duty) becomes a first ranking charge on the interest of the foreign acquirer in the residential land. The statutory charge has priority over all other encumbrances of the chargee's interest in the land. The charge applies despite other encumbrances being registered or unregistered and despite priority and indefeasibility principles in Land Title Act.
The Commissioner of State Revenue can register its charge unless the chargee is no longer the registered owner of the land. Once registered, the charge is not affected by a sale of the land, and if registered, the Commissioner can apply for the sale of the property if the liability is outstanding after 18 months from the date of registration. The Commissioner's charge will until registration give the Commissioner priority to the proceeds of sale of the land (to the extent of the secured liability).
This mirrors the regime introduced for electronic conveyancing and existing landholder duty. However, implications for developers, sellers, purchasers and lender practices and enforcement still need to be considered.
The Bill provides that a foreign acquirer must notify the Commissioner of a transaction within 30 days after the date of the transaction and similar notification requirements apply for circumstances triggering a reassessment. There is also a statutory right of recovery for non foreign parties who pay the foreign acquirer's duty liability. Despite these measures there will be no clearance certificate or similar regime to provide notification to third parties of unregistered Commissioner's charges or outstanding liabilities – if the Commissioner registered a charge that will be searchable on title.
The seller (and its financier) in a transaction with a foreign buyer will want to ensure that all duty including AFAD is paid to eliminate the risk of a statutory charge being created prior to completion of the transaction or where the buyer defaults. Contracts should provide for the production of evidence of lodgement of the required statement by the foreign acquirer and payment as an essential term of the contract. Financiers to purchasers will similarly want to know that all duty has been paid to avoid a charge subsisting over the land in priority to their securities. This will be particularly relevant in funding residential development site acquisitions.
Where a buyer defaults and does not settle but the seller keeps the contract on foot seeking specific performance, the seller may have to pay all unpaid duty to maintain title free of the statutory charge pending further enforcement action.
A purchase by a foreign acquirer (someone who is not an Australian Citizen or permanent resident) will not attract the concessions for homes and first homes to the extent of the AFAD imposed. This will not, however, exclude concessional treatment of the non AFAD component of the duty where the concession would otherwise apply.