State legal battles may loom after NSW scraps foreign buyer taxes

Massive taxes imposed on foreign buyers at purchase and in annual land taxes have been scrapped by the New South Wales Government after it was determined they were in breach of international treaties.

For now the other states have refrained from following suit, raising the question of whether legal battles may be looming if the taxes are inconsistent with the international tax treaties to which Australia is a signatory.

The abolition of the foreign surcharges related to residential land purchases apply to residents of eight countries that have a reciprocal arrangement with Australians buying in those nations.

Among them is India, from which a huge number of property enquiries emanate.

As Simon Gold, Director, Australasian Taxation Services, explained, the taxes were an enormous impost on foreign buyers and a strong deterrent to purchase in Australia.

New South Wales might now be well placed to attract more foreign investment in Australian residential property.

Mr Gold said there are two state taxes at play here.

“The first is a stamp duty surcharge, which for foreign buyers in NSW is set at a whopping 8 per cent of the purchase price.

“There is then a yearly land tax surcharge too, which for foreign investors in NSW stands at a massive 4 per cent.”

Other states levy a similar burden on foreign buyers.

Victoria and Tasmania are also 8 per cent, with the other states sitting at 7 per cent. There is no stamp duty surcharge in Northern Territory or ACT. 

This applies even if the property happens to be exempt from ordinary land tax for example if the property was below the threshold. The other states and territories then range from a land tax surcharge between zero and 2 per cent.

Are foreign property surcharges legal?

Revenue NSW’s website has recently announced it was rescinding the two taxes because they were “inconsistent with international tax treaties entered into by the Federal Government with certain nations.”

“These international tax treaties are related to taxation and other matters and have been given the force of federal law,” the website states.

Mr Gold told API Magazine that it would be interesting to watch how other states responded to the NSW move and whether they could somehow shirk the legal obligations to which the New South Wales Government felt compelled to adhere.

“It’s a good question, and in short who knows?

“As this is a state-based tax, each state and territory has the ability to review , modify and/or repeal this policy independently.

“NSW is the first state to proceed in implementing this change, while the other states and territories have so far decided against repealing the foreign surcharges. 

“It will be interesting to see if that is ultimately challenged through the courts,” he said.

Under the new framework in NSW, individuals who are citizens of the above nations purchasing residential-related property or who own land in their own capacity do not have to pay surcharge purchaser duty and surcharge land tax.

Surcharge purchaser duty or surcharge land tax liability for non-individuals, such as corporations, trusts or partnerships that arises because of an entity’s affiliation with these nations may also be affected by the international tax treaties.

The state may now find itself refunding millions in taxes that it has collected against the terms of the treaties.

Refunds may be available for those from one of the nations concerned, who paid surcharge purchaser duty or surcharge land tax on or after 1 January 2021.

Will foreign property investors flock to NSW?

Given the critical rental shortage, encouraging foreign investment in housing (or at least, not discouraging it) would seem a sensible measure to boost supply and help ease what is fast becoming a desperate situation for many Australians trying to find a home in which to live.

While some bemoan the impact of foreigners on property affordability, in 2021-22 foreign buyers represented about 3 per cent of all transactions on new property, and less than 1 per cent of total property sales.

Mr Gold said that with housing affordability a current hot topic, it will be interesting to see if the transaction costs necessary to buy a property appear on the political agenda, whether it be the foreign buyers stamp duty surcharge, or even stamp duty in general.

As to whether the NSW measures will encourage a major influx of investment activity is yet to be seen.

“Ultimately time will tell, however, one would expect that foreign nationals from the eight listed countries may now look to invest in NSW as opposed to other states.

“Anecdotally – and perhaps coinciding with rising rents – a few of our clients from the affected countries have actually reached out expressing their desire to now buy their home as opposed to feeling they need to keep paying rent until such time as their permanent residency application comes through,” Mr Gold said.

South Australia made sweeping reforms to stamp duty last month, while NSW has also passed legislation in June granting increased stamp duty exemptions and concessions.