The future of surcharge foreign purchaser duty and land tax in Australia

The New South Wales (NSW) surcharge foreign purchaser duty and land tax are additional charges imposed on foreign individuals or entities who purchase residential property in NSW, in addition to the standard stamp duty payable by all property purchasers. The surcharge land tax is an annual tax imposed on foreign owners of residential property in NSW, in addition to the regular land tax payable by property owners. 

On 21 February 2023, the NSW government made a determination regarding NSW surcharge provisions, highlighting inconsistencies with four double tax agreements (DTAs) entered into by the Australian government with the following countries: New Zealand, Finland, Germany, and South Africa. This decision brought relief to individuals from these nations who purchase residential property or land in a personal capacity, as they would no longer be subject to surcharge purchaser duty or surcharge land tax for properties located in NSW. Moreover, entities such as corporations, trusts, or partnerships affiliated with these countries may also see the elimination of surcharge liabilities due to the DTAs.

At the heart of concerns about potential breaches of the DTA identified by the NSW government lies the non-discrimination article. This article prohibits subjecting nationals of a foreign jurisdiction to taxation or requirements that are more onerous than those imposed on nationals in similar circumstances. While DTAs traditionally focus on income tax matters, the non-discrimination article within the affected DTAs extends its reach to encompass various types of taxes, aligning with the principles outlined in the OECD Model Convention.

Initially, Revenue NSW identified the applicability of DTAs to only four countries, which has now been expanded to include an additional four countries. The updated list comprises: New Zealand, Finland, Germany, South Africa, India, Japan, Norway, and Switzerland. Federally, Australia maintains DTAs with 46 countries, and more countries may be added to the list as the NSW government review progresses. Notably, only select federal DTAs contain broad-based, non-discrimination article provisions, and only a subset of these provisions is applicable to taxes levied by states and territories.

However, following this pivotal move by NSW, the spotlight shifted to similar levies imposed by other states and territories. This prompted a response by the Australian government and the unveiling of the Foreign Acquisitions and Takeovers Fees Imposition Amendment (FATFIA) Bill 2024. The FAFIITA bill proposes amendments that aim to enhance the International Tax Agreements Act 1953 by introducing an ordering rule to address inconsistencies between Australian taxes and DTAs. This crucial amendment, slated to have retroactive effect from 01 January 2018, clarifies the federal government's position that Australian federal, state, and territory taxes, excluding income tax and fringe benefits taxes, shall take precedence in the event of any conflict with a DTA.

The relevant explanatory memorandum states that the amendment to the Agreements Act clarifies: “[the Australian] government’s policy position” that Australian federal, state and territory taxes, other than income taxes and fringe benefits taxes, prevail in the case of any inconsistency with the Agreements Act.

These proposed amendments are troublesome. Firstly, they were introduced unilaterally by the Australian government without consultation with other governments. Secondly, they appear to sanction discrimination against nationals of other countries in situations where Australia and the respective foreign government appear to have negotiated a broad-based, anti-discrimination regime. And finally, the retrospective nature of the proposed changes undermines Australia’s rule of law principles, and also make it unclear whether foreign nationals who have already received refunds from the NSW government will be expected to return such funds. At this stage the NSW government has not informed taxpayers whether it will continue its review process, whether it will continue to process refunds, or whether recipients of refunds will need to return such funds.

These developments highlight the unpredictable landscape surrounding foreign surcharges, potentially raising concerns for foreign investors. We recommend foreign investors reach out to their respective advisors to ensure they remain informed about developments in Australia that may impact their investments.