An update on our April 2019 article ‘Purchase stamp duty – Beware the FIDS!
When the Foreign Investor Duty Surcharge (FIDS) was introduced in 2018, it imposed an additional duty surcharge of 3% for residential property and 0.5% for primary production property for relevant purchases.
From 1 January 2020, the FIDS will increase. The rate for residential properties will increase to 8%, whilst the rate for primary production property is to increase to 1.5%. The increased surcharges are proposed to apply to contracts entered into and settling on or after 1 April 2020.
As mentioned in our earlier article, the definition of who is considered a foreign purchaser can be a trap.
A family trust is a common structure used for property investment and even though you may have no named beneficiaries who are foreign persons, the list of potential beneficiaries for most family trusts is broad enough to include persons, trusts or companies that may in fact be foreign persons; which would result in your trust being deemed a foreign purchaser.
As an example, if you use your family trust to purchase property valued at $500,000 and your trust is deemed to be a foreign purchaser, you will pay $40,000 in duty in addition to the $18,247.50 that you are already required to pay, totalling $58,247.50.
Legislation will be introduced in the current session of Parliament to amend the definition of foreign persons, but the proposed definition will still leave most family trust deeds exposed to be deemed as foreign persons.
Foreign Investment Review Board
The Foreign Investment Review Board (FIRB) is a non-statutory body that advises the Government on foreign investment policy and its administration in Australia. Under this framework, foreign persons need to apply for foreign investment approval before acquiring an interest in residential real estate in Australia. Any action taken by a foreign purchaser prior to receiving approval is considered a breach of the law.
Under the FIRB framework, foreign persons are prohibited from purchasing established dwellings in Australia unless an exemption applies. This means that if your family trust or company is deemed to be a foreign purchaser, then you will be unable to purchase property that has not been newly built and has not been previously sold as a dwelling, unless you obtain approval.
Like FIDS, the definition of a foreign person captures many family trusts.
A foreign person is deemed to include:
- an individual not ordinarily a resident in Australia;
- a corporation in which an individual not ordinarily a resident in Australia or a foreign corporation holds a substantial interest; and
- the trustee of a trust in which an individual, not ordinarily resident in Australia, or a foreign corporation holds a substantial interest.
Using the family trust example again, if your trust is deemed to be a foreign person due to the potential beneficiaries, FIRB approval may be required to acquire new or existing dwellings in Australia.
If you do acquire property without FIRB approval, in circumstances where approval is required, penalties may apply.
What to do?
- Consider if a family trust is the appropriate purchasing entity for you.
- If you decide it is, it may be that you establish a new family trust to exclude any potential beneficiary who is a foreign person and therefore not expose the trust to FIDS or FIRB regulation.
- You may be able to amend your existing trust to exclude any potential beneficiary who is a foreign person and therefore not expose the trust to FIDS or FIRB regulation.
Please contact David Shelley or Daniel Morgan, to discuss what options you may have in respect of your property purchase and the purchase structure you are choosing.
M: 0427 183 217
M: 0438 436 968
Published: 17 October 2019