Australia: 2022-23 Budget Update: Key Changes To Australian States Taxes

Significant stamp duty and land tax changes have been proposed in a number of Australian states and territories, with ramifications for property acquisition and development, mergers and acquisitions, foreign investment and trustees.

21 June 2022 brought us the last of the budget announcements before the end of the financial year with New South Wales and Queensland closing out the States. The ACT is expected to deliver its budget on 2 August 2022.

This article canvasses the key reforms in each Australian jurisdiction, with the breadth of the changes – and the continuing divergence between the respective state tax regimes across Australia – underscoring the importance of seeking advice on duty and land tax well before entering into any transactions.

New South Wales

Earlier today saw the (anticipated) announcement of a 'once in a generation reform' in NSW with the Treasurer, the Hon. Matthew Kean MP outlining a proposal to transition from the upfront payment of stamp duty to an annual property tax. However, rather than being the sweeping reform foreshadowed by Premier (then Treasurer) in the 2020-21 Budget  (see our note on the original announcement), the reform will now be available for first home buyers only (called the "First Home Buyer Choice").

The budget  also saw a significant increase to the surcharge rate of land tax for foreign owners of residential property. As well as significant infrastructure expenditure ($112.7 billion is expected to be invested over the next four years) and new funding will be provided for Revenue NSW to improve its compliance systems which is expected to generate a further $368m in land tax revenue and $200m in transfer duty revenue over the next four years.

NSW Property Tax Reform

Overview

The NSW Government is proposing to allow eligible first home buyers¹ to opt in to annually pay the property tax instead of paying upfront stamp duty.

This is a significant change from the originally proposed reforms which would have seen a gradual transition from an upfront stamp duty regime to an annual property tax on all properties, including:

• residential property (owner-occupied and investment);
• commercial property; and
• primary production land.

Any applicable land tax would also be replaced by the property tax. Currently, land tax does not apply to a principal place of residence, primary production land and land below the applicable value threshold.

Opt in proposal – 'first home buyer choice scheme'

Under the proposal, eligible purchasers would have a choice to 'opt in' to annually pay the property tax. If not opted in, the current regime applies, that is the purchaser pays upfront stamp duty plus any ongoing land tax on unimproved land (if applicable).

Because of the dual system, an eligible purchaser would have to decide which system best suits their circumstances. Once a property has been opted in, it will not be locked into the property tax for subsequent purchases. Transfer duty will apply to a subsequent purchase, unless the purchaser is a eligible first home buyer who opts into the property tax. Non-first home buyers will remain liable to transfer duty (i.e. the existing regime applies).

The anticipated commencement date is 16 January 2023  with legislation to be introduced later this year. A threshold will be set to allow properties to opt in. The threshold will be set at $1.5m (likely calculated as the greater of unencumbered land value (not unimproved value of the underlying land) and the consideration under the contract for sale).

The new property tax will be imposed at specified rate on an annual basis, based on unimproved land value (likely as determined by the Valuer General on 1 July each year). The below rates are for 22/23 year:

There will be an indexation system to ensure average tax payments increase in line with average incomes – this will operate like a 'cap' (similar to council rates, rather than be linked to unimproved land value which can be more volatile). The proposed indexation formula tracks the Gross State Product per capita – i.e. the size of the NSW economy per person).

Over the four years to 2025-26, this measure is estimated to reduce revenue by $663.6 million. This consists of lower transfer duty revenue of $751.8 million and raising $88.2 million of property tax revenue.

Foreign investors

Under the current regime, surcharge purchaser duty and surcharge land tax apply to residential land acquired / owned by a foreign person. The surcharges will continue to apply. A foreign person (who is a first home buyer) will not be able to opt in to the property tax.

Unanswered Questions

There are many unanswered questions in relation to the proposed reforms and it is unclear the extent to which this reform will be seen a "trial run" before any broader reforms are considered. The next few months will certainly prove interesting to watch, with the Premier flagging that Federal support would be needed to smooth revenue implications if a broader reform agenda is adopted and that when a motion was put in the NSW Legislative Council encouraging the expedition of these reforms in November last year, there was  significant division between the Government, the Opposition and the Greens in relation to the details.

Foreign Owner Surcharge Land Tax

Since 2017 if you're a foreign person who owns residential land in NSW, you must pay surcharge land tax in addition to any land tax you may already pay. In yesterday's budget, the Treasurer announced a doubling of the rate from 2% to 4% which is anticipated to improve the NSW budget by $300m in new revenue over four years from affected foreign persons.

These reforms make it more important than ever to ensure that:

• trust deeds are appropriately drafted to ensure (where appropriate) that foreign beneficiaries are excluded in the manner required by legislation; and
• advice is sought on the various concession available to Australian corporations (which are foreign for the purpose of the Foreign Acquisitions and Takeovers Act 1975  (Cth) as modified by s 104J of the Duties Act 1997  (NSW). As explored in our  note on the significant NSW duty reforms which came into force on 19 May 2022, there is a new concession from the foreign surcharge rates of stamp duty where the acquired land is used by the transferee wholly or predominantly for commercial or industrial purposes. These reforms also extend to obtaining a refund of any surcharge land tax paid before the start of the use of the land wholly or predominantly for commercial or industrial purposes.³

Queensland

In what was anticipated to be a minimalist budget in light of the Queensland Treasurer's, the Hon. Cameron Dick MP, election pledge that there would be no new or increased taxes the budget has instead seen the introduction of a number of new reforms:

• A mental health levy will be introduced to meet increasing demands for mental health services. The levy, to apply to payroll tax liabilities arising on or after 1 January 2023, will be applied to large employers, or groups of employers, with annual Australian taxable wages:
  • 25% levy on the annual Australian taxable wages of employers, or groups of employers above $10 million; and
  • an additional 0.5% levy on the annual Australian taxable wages of employers, or groups of employers, above $100 million.
• New tiers will be introduced into the existing progressive coal royalty regime. The new tiers will apply on that part of the average price per tonne of the coal sold, disposed of or used on or after 1 July 2022 as follows:
  • an additional tier with a rate of 20% on that part of the average price per tonne that is more than $175 but not more than $225
  • a further tier with a rate of 30% on that part of the average price per tonne that that is more than $225 but not more than $300
  • a further tier with a rate of 40% on that part of the average price per tonne that is more than $300.
• An expansion to the gambling tax regime which will apply in addition to the existing betting tax regime, specifically the new regime introduces a 5% racing levy to be applied to the existing betting tax rate and bonus bets will be incorporated into the calculation of betting tax for liabilities arising on or after 1 December 2022. This is expected to generate an additional $80m per year in new revenue.

Reforms to land tax announced on 16 December 2021 as part of the 2021-22 budget update will also be implemented alongside the above reforms.

Tasmania: Foreign Investor Duty and Land Tax Surcharges

Through the Land Tax Amendment (Foreign Investors) Act 2022 (Tas) and the Land Tax Rating Amendment (Foreign Investors) Act 2022 (Tas), the Tasmanian Government has introduced a Foreign Investor Land Tax Surcharge, which will commence from 1 July 2022. The surcharge will be set at a rate of 2% of the land value and will apply to any interest in residential land that is acquired by a foreign person, company, or trust. The surcharge may be payable even if there is otherwise no land tax liability for the foreign person.

There are also significant changes to the meaning of "residential premises" under the Duties Act 2001  (Tas) which clarify the application of the Foreign Investor Duty Surcharge to commercial residential premises. The duty surcharge will not be payable on land on which a building is being used solely, or primarily, as:

1. a commercial establishment whose primary purpose is to offer short-term accommodation, or lodging, to persons for consideration;
2. a hostel or boarding house;
3. premises that are primarily used, to provide residential accommodation, by or on behalf of
   • a school, within the meaning of the Education Act 2016 (Tas); or
   • TasTAFE, within the meaning of the Education Act 2016 (Tas); or
   • an institution within the meaning of the Higher Education Funding Act 1988 (Cth);
4. a residential care service, within the meaning of the Land Tax Act 2000 (Tas).

These reforms will apply retrospectively from 1 July 2018.

Also, from 1 July 2022, surcharge duty and surcharge land tax relief will be available to Tasmania-based foreign developers who significantly contribute to Tasmania's housing supply by building a minimum of 50 residential dwellings over a 12-month period. However, given the narrow definition of "Tasmania-based foreign developer"⁴> it remains to be seen who will benefit from this new regime and careful consideration should be given at the establishment stage to the purchaser entity that is intending to rely on the relief.

Western Australia: build-to-rent concession

The Western Australian Government recently announced that it would introduce a new 50% land tax concession on eligible build-to-rent developments, which will commence on 1 July 2023. It is anticipated that this concession will help develop the build-to-rent industry in Western Australia by minimising barriers to investment.

This reform brings Western Australia in line with:

• New South Wales and Victoria which have already introduced similar reforms, and
• South Australia where it is anticipated that a 50% land tax reduction will be available for eligible build-to-rent developments where construction commences on or after 1 July 2021 for the 2022-23 financial year up to, and including, the 2039-40 financial year.

Footnotes

1 To be eligible:

• you must be an individual (not a company or trust);
• you must be over 18 years old;
• you, or at least one person you're buying with, must be an Australian citizen or permanent resident;
• you or your spouse must not have previously:
  • owned or co-owned residential property in Australia; or
  • received a First Home Buyer Grant or duty concessions,
• The property you are buying must be worth less than or equal to $1.5 million;
• You must move into the property within 12 months of purchase and live in it continuously for at least 6 months; and
• You must sign the contract of purchase on or after the scheme commencement date (expected to be on or after 16 January 2023).

2 In order to access the concession the first home buyer move into the property within 12 months of purchase and live in it continuously for at least 6 months.

3 Land Tax Act 1956 (NSW) s 5C(6)-(7). 

4 Section 16I of the Land Tax Act 2000 (Tas) and s 30HC of the Duties Act 2001 (Tas) provide, identically, that a "Tasmania-based foreign developer, in respect of a financial year, means a foreign person who operates a business –

(a) that acquires land within Tasmania with the aim of developing the land; and

(b) of which at least 80% of the wages of management and administration staff of the business are taxable wages, within the meaning of the Payroll Tax Act 2008 , in that year; and

(c) that operates in Tasmania for the majority of its business hours in that year."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.