The Treasurer has released new guidelines, effective from 5 January 2018, regarding the factors to be considered when determining whether a foreign purchaser is entitled to an exemption from foreign purchaser additional duty (FPAD) on residential land.
We’ve summarised below the changes from the old guidelines, as well as the significant new guidelines.
The new guidelines:
- still only outline factors to be considered, but additional detail has been given in relation to those factors;
- gives greater guidance in relation to granting the FPAD exemption to a foreign discretionary trust;
- expand the scope of what it means for a development to be deemed as having “significantly added to the housing stock in Victoria”;
- narrow the scope of the requirement for a foreign corporation or trust to “impact on the economy and community in Victoria”;
- contain a new requirement for a foreign corporation or trust to exhibit “good corporate behavior” in order to be considered for the FPAD exemption; and
- delete the need to consider relevant circumstances in relation to “competition” in determining whether to grant the FPAD exemption.
Factors to consider in determining whether the FPAD exemption should be granted
The new guidelines provide further scope and examples in relation to the factors to consider in relation to granting the exemption, for example the exemption is less likely to be given:
- where say 100% of a foreign corporation is owned and controlled by a foreign person, compared with a foreign corporation that is owned and controlled 51% by a foreign person and 49% by Australian citizens;
- the greater the frequency and impact of the foreign person’s involvement in the financial and operating policies of the corporation;
- where the foreign corporation does not have management staff in Australia; and
- where the foreign corporation makes the decisions in relation to the development of the property.
The new guidelines distinguish between the factors to consider in relation to foreign corporations versus foreign trusts. Specifically, the new guidelines give greater guidance in relation to granting the FPAD exemption to a foreign discretionary trust where it is not possible to quantify a beneficiary’s interest in the trust. The FPAD exemption is less likely to be given in relation to a foreign discretionary trust:
- where the principal or primary beneficiary of the trust is a foreign person; and
- the closer the relationship between the foreign beneficiary and the trustee or the appointor of the trust,
but more likely to be granted where a trust is a foreign trust because the class of general beneficiaries includes a foreign person who has never received any distributions from the trust and is unlikely to receive any distribution.
Other relevant circumstances to consider
Significantly adding to the housing stock in Victoria
The exemption will more likely be granted where the development results in a net increase in housing stock (the greater the number of residential premises added to the housing stock, the more likely the exemption will be granted).
A development that adds 50 or more residential premises to the housing stock is seen as being a “significant contribution to the housing stock” (this figure can include residential premises added to the housing stock via other developments carried out by the foreign corporation or trust within a 12 month period of the development in question).
A development that adds less than 50 residential premises to the housing stock may be regarded as significantly adding to housing stock taking into account:
- the nature of the development;
- the context of the population size and demographics and activity in the region in which the development occurs;
- the economic and social impacts of the development in the region; and
- where, in the absence of the development, such outcomes would be unlikely for the region.
Impact on the economy
The new guidelines narrow the scope of the requirement for the foreign purchaser (corporation or trust) to impact on the economy and community and Victoria. The new guidelines delete the consideration of whether the entity has heavily invested in the development, and how far progressed any relevant planning or building approvals are, from the relevant factors in relation to whether it should be granted the FPAD exemption.
Good corporate behavior
A corporation will be regarded to exhibit good corporate behavior where it has complied with all laws, including:
- FIRB requirements;
- Australian laws relating to governance of the entity; and
- Victorian taxation laws.
The ability of the foreign corporation to complete fairly in the Victorian marketplace, and whether other Australian-based corporations would be at a competitive disadvantage to the foreign corporation, is no longer a relevant consideration in assessing whether the FPAD exemption should be granted.
If you think that the additional duty might apply to you, or if you have any questions, get in touch with us.
The Treasurer has also released new guidelines on factors to be considered when determining whether a foreign purchaser is entitled to an exemption from foreign purchaser additional land tax duty, which we’ve covered in an earlier post.