The Chief Commissioner of State Revenue on 20 December 2016 released Revenue Ruling number G009 relating to the Definition of Foreign Person.
Background of Ruling
From 21 June 2016, a duty surcharge applies to acquisitions of NSW residential land by foreign persons, including foreign individuals, corporations, trusts and governments. The surcharge does not apply to Australian Citizens. The surcharge is payable in addition to any other duty payable on dutiable transactions. From 21 June 2016, the concession for residential off the plan purchases (which allows for an extension of up to 12 months in the payment of duty) is no longer available to foreign persons.
Commencing from the 2017 land tax year, surcharge land tax applies to foreign persons who are owners within the meaning of Section 3 of the Land Tax Management Act (“LTM Act”), and subject to Section 5A (4) of the Land Tax Act 1956. There is no tax-free threshold and no principal place of residence extension for the surcharge land tax. Other exceptions specified in the LTM Act apply to the surcharge land tax.
The ruling issued by the Chief Commissioner is the OSR’s interpretation of “Foreign Person” for both the surcharge duties and land tax purposes.
Revenue Ruling G009
For the purposes of both the surcharge duties and land tax, a person is a “Foreign Person” on the “Relevant Date”, if the person is a foreign person within the meaning of the Foreign Acquisitions and Takeovers Act 1975 (Cth) (“FAT Act”) and the Foreign Acquisitions and Takeovers Regulation 2015 (“FAT Regulation”), as modified by Section 104J of the Duties Act 196. Section 104J excludes Australian Citizens from the definition of a foreign person. Specifically, Section 104J:
- Deems an Australian Citizen to be ordinary resident in Australia [1];
- Provides that a New Zealand Citizen who hold a special category visa, within the meaning of Section 32 of the Migration Act 1958 (Cth), at any particular time is taken at that time to be an individual whose continued presence is Australia is not subject to any limitation as to time imposed by law.
Each of the following is a foreign person for the purposes of the surcharges:
- An individual who is not ordinarily a resident in Australia (other than an Australian Citizen);
- A corporation in which an individual “not ordinarily resident in Australia”, a foreign corporation or a foreign government holds a substantial interest;
- A corporation in which two or more persons, each of whom is an individual not ordinarily resident, a foreign corporation or a foreign government, hold an aggregate substantial interest;
- The trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest;
- The trustee of a trust in which two or more persons, each of whom is an individual not an ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest;
- A foreign government;
- A foreign government investor;
- General partners of limited partnerships;
- Any other person subscribed by the FAT Regulation 2015.
The “Relevant Date” is:
- For surcharge duty purposes, the date of the relevant transaction;
- For surcharge land tax purposes, the taxing date for the relevant land tax year.
Individuals who are Australian Citizens an Australian Citizen, including a person who holds dual citizenships (one of which is an Australian Citizenship), is not a foreign person under any circumstances, whether or not the person is ordinary resident in Australia. Section 104J deems an Australian Citizen to be ordinarily resident in Australia.
Individuals who are New Zealand Citizens
A New Zealand Citizen who, on the relevant date, holds a special category visa within the meaning of Section 32 of the Migration Act 1958 (Cth) and has actually been in Australia during 200 or more days of the 12 month period preceding the relevant date, is not a foreign person.
A New Zealand Citizen who does not hold a special category visa and is not ordinarily resident in Australia as described in the following paragraph is a foreign person.
The meaning of “Ordinarily Resident in Australia”
An individual (who is not an Australian Citizen) is taken to be ordinarily resident in Australia at a particular time if:
- The person has actually been in Australia during 200 or more days of the preceding 12 month period;
- At that time:
- The person is in Australia and the persons continued presence in Australia is not subject to any limitation as to time imposed by law;
- The person is not in Australia, but, immediately before the person’s most recent departure from Australia, the person’s continued presence in Australia was not subject to any limitation as to time imposed by law.
Persons whose presence in Australia is limited as to time imposed by law
Individuals who are permitted to be in Australia under a visa that is not a permanent entry visa are “Foreign Persons” because the visa imposed limits on the person’s lawful presence in Australia. Such visas include a spouse visa, work visa, a temporary entry visa and a visitor visa, a bridging visa and a business visa.
If a person is an unlawful non-citizen under Section 14 of the Migration Act 1958 (Cth), the individuals continued presence in Australia is subject to limitations as to time imposed by law Section 5 (2) of the FAT Act. Such persons are therefore “Foreign Persons”.
A person who is entitled to reside in Australia under a permanent entry visa (i.e. a permanent resident) is not subject to a time limit and is only classified as a foreign person if the person does not meet the test of being ordinarily resident in Australia, namely, the part that requires that the person has actually been in Australia during 200 or more days of the preceding 12 month period.
A person who resides in Australia under a temporary visa is regarded as a “Foreign Person” the conditions applying to such visas means temporary residents are not regarded as being ordinarily resident in Australia, and there presence in Australia is restricted by time and/ or may be terminated under the Migration Act.
General partners of limited partnerships
General partners of limited partnerships are foreign persons under Section 18 of the FAT Regulation where:
- An individual not ordinary resident in Australia, a foreign corporation or a foreign government holds an interest of at least 20% in the limited partnership; or
- Two or more persons each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate interest of at least 40% in the limited partnership.
When does a person hold a substantial interest in a corporation?
A person holds a substantial interest in a corporation if the person holds, alone or with two or more associates, and interest of at least 20% in the corporation (definition of ‘substantial interest’ in Section 4 of the FAT Act).
A person holds a substantial interest in a trust (including a unit trust) if the person, with any one or more associates, holds a beneficial interest in at least 20% of the income or property of the trust (definition of ‘substantial interest’ of Section 4 of the FAT Act). A substantial interest may be held through interests in other corporations or trust.
When do two or more persons hold an aggregate substantial interest in a corporation or a trust?
Two or more associated persons hold an aggregate substantial interest in a corporation if the persons, alone or with one or more associates, hold an aggregate interest of at least 40% in the corporation.
Two or more persons hold an aggregate substantial interest in a trust (including a unit trust) if the persons, with any one or more associates of any of them, hold in aggregate beneficial interest in at least 40% of the income or property of the trust (definition of ‘aggregate substantial interest’ in section 4 of the FAT Act).
How to determine the interest of aggregate interest of a specified percentage in a corporation or unit trust?
An interest of a specified percentage in an entity is generally:
- The percentage of the actual or potential voting power in that entity that the person with associates, is in a position of control; or
- The percentage of the issued securities in the entity held by the person, with associates; or
- The percentage of issued securities in the entity that the person, with associates, would hold at the relevant time, assuming that any future rights they hold to securities in the entity were exercised (unless it can be determined at that time from the right itself or from the circumstances existing at that time, that the right will not be exercised).
For an aggregate interest, an interest of a specified percentage means the aggregate of the interests of two or more persons who are not associates, with one or more associates of any of those persons.
How to determine the interest or aggregate interest of a specified percentage in a discretionary trust?
For a discretionary trust, each beneficiary that the trustee has the discretion to distribute the income or property is deemed to have the maximum percentage interest in the income or property that the trustee may exercise a discretion to distribute to them.
This includes all beneficiaries of the discretionary trust, not only the beneficiaries who are takers in default. The beneficiaries also do not need to be specifically named by the discretionary trust. If any beneficiary is a foreign person, the trustee or the trust would be deemed to be a foreign person.
If a discretionary trust contains a clause to exclude a foreign person as defined under the Duties Act 1997 and Land Tax Act 1956 from benefitting from the trust, such discretionary trust is therefore not a foreign person for the purposes of the Duties Act 1997 and the Land Tax Act 1956.
Tracing an interest held through interests in other corporations or trusts
A substantial interest or an aggregate substantial interest may exist as result of holding interests in other corporations or trusts under the tracing provisions of the FAT Act (Section 19 of the Act). The tracing process can be applied multiple times through a number of entities.
As a foreign person, if such person has a substantial interest in a company, such company is a foreign person. If the company has a substantial interest in a trust, such foreign person is deemed to hold 20% interest in the trust, making the trustee of the trust a foreign person. If such trust has a substantial interest in another company resulting in such company being a foreign person as this person is taken to hold 35% interest in that company.
Disregarding small holdings of securities in primary listed entities
Corporations and trusts are “Foreign Persons” if the aggregate substantial interest is held by two or more “Foreign Persons” (and their associates). However, small holdings of less than 5% are not counted towards an aggregate substantial interest if the corporation or trust has its primary listing on a stock exchange in Australia (Section 47 of the FAT Regulation).
Evidence of Australian Citizenship includes a birth certificate (with limitations after 1986), an Australian Passport or an Australian Citizenship Certificate (together with a change of name certificate if the name is different).
If the trustee is a foreign person, but none of the beneficiaries of the trust are foreign persons, then the trustee is not a foreign trustee and will not be liable for surcharge purchaser duty. A trustee will only be liable to surcharge land tax if it is a foreign person, because of its capacity as trustee of the trust and not because the trustee itself is otherwise a foreign person.
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