Foreign owner land tax surcharge exemptions explained
The Queensland Office of State Revenue (OSR) has released guidelines in Public Ruling LTA000.4.1 (Ruling) exempting certain entities from the foreign owner land tax surcharge. The implementation of the surcharge has been delayed to the 2020-21 financial year, as a result of the pandemic.
In March this year, we wrote about the process for objecting to land tax valuations and noted the OSR was preparing guidelines regarding the framework for ex gratia relief for foreign entities from the foreign owner land tax surcharge.
The new guidelines are not as expansive as the relief arrangements in the equivalent Victorian guidelines. As relief is ultimately determined on a case-by-case basis, it is yet to be seen how the OSR will assess the eligibility of applicants and the levels of relief provided.
Here, lawyer Luke Hefferan explains what the guidelines mean, and says entities need to confirm the impact of the surcharge on their assets and their potential eligibility for ex gratia relief.
Land tax surcharge regime
Here is a summary of the surcharge regime:
- Legislation was passed in 2019 which placed an additional land tax surcharge on all freehold land (not just residential land as is the case in other jurisdictions) owned by a foreign entity.
- The surcharge is calculated at a rate of 2 percent of the property value above $350,000 (ie surcharge amount = (property value – $350,000) x 2%).
- 'Foreign owners' include foreign individuals, foreign companies, or trustees of foreign trusts.
- A 'foreign corporation' is a corporation where one or more foreign persons (or related persons) individually or together control at least 50 percent of the voting power or have an interest in at least 50 percent of the shares in the corporation.
- A 'foreign trust' is—
- a unit trust where one or more foreign persons (or related persons) individually or together have at least 50 percent of the interests in the trust
- a discretionary trust where the default beneficiaries are foreign persons (or related persons).
- 'Foreign person' is defined broadly to include both individuals and corporations. If a foreign corporation owns 50 percent or more of the shares in a corporation incorporated in Australia, then that 'Australian' corporation is deemed to be a foreign person for the purposes of calculating the land tax surcharge.
- The surcharge was intended to be implemented for the 2019-20 financial year. However, this was delayed due to the pandemic and will now be implemented for the 2020-21 financial year (ie based on land ownership as at 30 June 2020 with assessments to issue in October 2020).
Criteria for relief
To be eligible for relief from the surcharge, a foreign entity must satisfy all the following requirements:
- be 'Australian based'
- comply with all Foreign Investment Review Board (FIRB) requirements in relation to the acquisition of the land
- comply with all regulatory requirements under the Corporations Act (or equivalent legislation in their relevant jurisdiction) and all Queensland taxation laws without having any outstanding liabilities.
- conduct commercial activities which make a 'significant contribution to the Queensland economy and community'.
Specifics of the criteria
The FIRB and regulatory requirements are essentially yes/no criteria. For completeness, the Ruling specifically confirms where the foreign entity is exercising their legal rights, for example, disputing an ASIC compliance notice under the Corporations Act, this will not go against the entity in determining whether the entity is complying with its regulatory requirements.
However, there is more scope, and greater discretion on the part of the OSR, in relation to the 'Australian based' and 'significant contribution' criteria.
The Ruling sets out a non-exhaustive list of factors the OSR will assess to determine if the entity is Australian based which include:
- a head office or principal place of business in Australia
- significant management staff and office presence in Australia
- employs Australian citizens or permanent residents
- carries on business in Australia
- a considerable level of 'Australian participation' in the foreign entity (eg where decisions relating to commercial activities that make a significant contribution to the Queensland economy and community are primarily made by management or employees based in Australia)
- primarily contracts for services and materials of Australian contractors and suppliers to engage in its commercial activities in Australia. In this context, 'primarily' means more than 50 percent of the value paid by the entity for goods and services goes to Australian contractors and suppliers.
An entity does not need to satisfy all the above factors to be considered Australian based. However, the OSR has indicated an entity will have a stronger likelihood of satisfying this criterion if more of these factors can be established.
The Ruling contains extensive details about the 'significant contribution' to the Queensland economy and community criterion. Four pages of the seven-page Ruling are dedicated to examples of what the OSR will consider to be a significant contribution.
We recommend readers familiarise themselves with these examples. In brief, the OSR will consider factors such as whether the entity conducts commercial activities in Queensland, engages local labour, and utilises local materials and services. The Ruling also provides indicative, but not binding, threshold tests to establish making a significant contribution, such as—
- employing 75 or more full-time equivalent employees (not labour hire or contractors)
- annual expenditure in Queensland of $20 million or more.
The Ruling also confirms that where an entity is wholly owned by a parent entity, the commercial activities of the parent entity and any other entities wholly owned by the parent entity can be taken into consideration in determining the extent of an entity's significant contribution. That is, the OSR will look at commercial activities at the group level as opposed to the individual entity level.
Also, if the entity's current commercial activities would not be considered to be a significant contribution as at surcharge liability date, then an applicant for relief may rely on their future activities in the 12 months after the liability date to be considered to be making a significant contribution. This would apply primarily to developers and in those circumstances (and assuming they satisfied the other relief criteria), the developer would be eligible to receive relief for the current surcharge assessment.
Omissions and potential pitfalls
In the equivalent Victorian guidelines, an automatic exemption from the surcharge is applied to entities which are publicly listed corporations or widely held trusts. This automatic exemption is not included in the Queensland guidelines.
There is also no proportionality between the surcharge liability and the percentage of foreign ownership of the entity. That is, a corporation which is 50 percent foreign owned will (in the absence of ex gratia relief eligibility) pay the full 2 percent surcharge just as a 100 percent foreign owned corporation would (ie the surcharge is applied in an 'all or nothing' approach).
A final (and possibly inadvertent) consequence of the 'significant contribution' test is the flow on effect for tenants under commercial leases with a foreign landlord. For example, if a foreign landlord entity owns a building and cannot establish they provide a significant contribution to the Queensland economy (ie the landlord simply owns the building for leasing purposes), then the landlord is liable for the additional land tax surcharge. If land tax is included as an outgoing payable by the tenant under this lease, the ultimate effect of the surcharge regime will be an impost on local tenants to pay the liability of foreign landlords.
Given the broad scope and look through provisions to determine which entitles are considered foreign from a surcharge liability perspective, we recommend commercial tenants contact their landlord to discuss the potential surcharge liability of their landlord and what steps (if any) their landlord will take to apply for relief or the extent to which this liability will be collected as an outgoing under the lease.
Applying for relief
Any landowners which the OSR considers may be liable for the surcharge would likely have received a notification last year requesting confirmation of their foreign status. To the extent a landowner did not receive this notice, there is still an obligation on the landowner to contact the OSR to confirm their foreign status if they know, or ought reasonably know, they should be liable for the surcharge. There are penalties for failing to comply with this obligation.
Although the issuing of the 2020-21 land tax assessments has been delayed until October 2020 due to the pandemic, affected foreign entities can lodge their applications in advance with the intention of receiving relief prior to the surcharge being applied. This would of course allow those entities to better manage liquidity by avoiding paying the surcharge and later seeking a refund.
Applications must be made by way of an approved form statutory declaration with the applicant to provide as much supporting evidence as possible to support the position outlined in their declaration that they satisfy, or will satisfy, all four eligibility requirements.
Fortunately, the Ruling confirms a common-sense approach will be taken where all land owned by a foreign entity which satisfies the ex gratia relief criteria will receive relief from the surcharge. So, a foreign entity only needs to make one application for relief and not separate applications for separate parcels of land which they own.
The relief will continue to apply for as long as the foreign entity satisfies the relief criteria. To that extent, eligible applicants will need to lodge annual statutory declarations confirming they continue to satisfy the relief criteria to receive continuing relief over multiple financial years.
Our Real Estate lawyers can help with any questions you may have about your eligibility for exemption from the foreign surcharge or applying for an exemption.