Similarly, the Government will increase the land tax surcharge on foreign owners of all taxable Victorian property (residential or otherwise) from 0.5% to 1.5%, with effect from the 2017 land tax year.
The stamp duty surcharge is in addition to the normal stamp duty that all purchasers must pay on the transfer of Victorian real property. For properties with a dutiable value exceeding $960,000, the increase in the stamp duty surcharge will result in an increase in the rate of duty from 5.5% to 12.5% for foreign purchasers.
Whilst we are yet to see any legislation introducing these changes, we understand that only the surcharge rates themselves will be changed and the remainder of the legislation which governs the surcharges will remain the same. On this basis, it is important to keep in mind that:
- The stamp duty surcharge only applies to acquisitions of residential property. However, residential property includes land on which a person intends to affix a residential building;
- The stamp duty surcharge cannot be reduced by any concessions, including the off-the-plan concession;
- An exempt stamp duty transaction is exempt from the general rate of stamp duty and the stamp duty surcharge;
- The increased stamp duty surcharge rate of 7% may apply if you are nominated as the purchaser on or after 1 July 2016 under a contract of sale entered into prior to 1 July 2016; and
- Certain foreign purchasers may be eligible for an exemption from the stamp duty surcharge.
Duty payable for off-the-plan acquisitions
For residential apartments that are currently subject to the off-the-plan duty concession, we understand that the 7% surcharge will be applied to the full purchase price of the apartment as at the date of the contract.
For example, under the off-the-plan concession an apartment in a high rise building (4 stories and above) with a purchase price of $500,000 could be subject to a stamp duty reduction of approximately 90%. That is, the duty payable by a local purchaser under the concession is reduced from $25,070 (otherwise payable on $500,000) to $2,750.
However, the off-the-plan concession is not available to foreign purchasers. Accordingly, following the increase in the stamp duty surcharge, the duty payable by a foreign purchaser will increase to $37,750 (i.e. $2,750 + $35,000), which represents a dramatic increase when compared to the amount of duty currently payable. Prior to 1 July 2015 the foreign purchaser’s stamp duty cost on the same apartment would have been $2,750, which equates to an increase in the duty payable of more than 1,000%.
We recommend that foreign buyers purchasing off-the-plan, or developers whose clients include foreign buyers purchasing off-the-plan, consider entering into contracts of sale prior to 1 July 2016 in order to minimise the amount of duty payable.
Exemption from the duty surcharge
The legislation provides that the Treasurer or his delegate (SRO) may exempt certain entities from the duty surcharge. This is on the basis that such entities are Australian-based and add to the supply of housing stock in Victoria.
However, at this stage it is still unclear whether international developers without an established track record of development activity in Victoria will be granted an exemption. As such, it is even more important for overseas developers who are currently contemplating acquisitions of Victorian land to consider whether they can enter into a contract of sale prior to 1 July 2016.
Impact of these surcharges on development projects
Overseas based clients, as well as local clients who are entering into property development projects with overseas partners, should pay close attention to the increases in stamp duty and land tax as they will represent a significant additional cost to a development project. They may also impact the appetite of non-residents to purchase the development product.
We recommend that international developers, local developers with foreign joint venture partners and other foreign purchasers who are contemplating acquisitions of Victorian property in the near future consider the potential increase in cost due to the increase in the stamp duty and land tax surcharges. Where commercially possible, contracts of sale should be entered into prior to 1 July 2016 in order to minimise the total stamp duty payable.
As we have not yet seen any legislation related to the announced increases in the surcharges, the views expressed above will need to be confirmed once the legislation is released.