The Queensland Government has legislated an additional three per cent stamp duty surcharge (known as Additional Foreign Acquirer Duty or 'AFAD'), which came into force on 1 October 2016. It focuses on when a foreign person acquires residential land in Queensland.
The AFAD will potentially apply to the following entities:
- In respect of any proposed acquisition or series of acquisitions of residential land in Queensland as a ‘significant developer’, or the land being acquired be deemed a ‘significant development.'[i]. Significant developer or significant development status may have access to ex gratia relief from the additional foreign acquirer duty. Guidelines for ex gratia relief are presented in DA000.15.1—Additional foreign acquirer duty—ex gratia relief for significant development, Public Ruling issued by the Commissioner of State Revenue, 28 September 2016.
- If a minority shareholder or unit holder in a company or trust respectively is a foreign person and they are a related person of the majority shareholders or unit holders, who are not foreign persons, then this might cause the company or trust to be deemed a foreign person and therefore potentially subject to the surcharge if it purchases residential land in Queensland.
- If you are a foreign person and you intend to acquire land in Queensland that contains, or is intended to be developed as, a retirement village, manufactured home park or student accommodation, you will need to consider whether the relevant buildings fall or will fall within the relevant definition of ‘residential land.’ The relevant ruling states that this will be determined on a case-by-case basis having regard to the facts.
On this point, zoning of the land, at the time of acquisition, upon which the development is to occur will be one matter for consideration by the regulator.
A foreign corporation is defined to include a corporation in which foreign persons have a controlling interest on the basis that foreign persons or ‘related persons’ of foreign persons together either:
- Are in a position to control at least 50 per cent of the voting power or potential voting power in a corporation, or
- Have an interest of at least 50 per cent of the issued shares in the corporation.
It is necessary for both the foreign person and the related non-foreign person to be able to control the voting power or potential voting power or to have an interest in the issued shares in the corporation. The ownership arrangements of any corporation or trust that may be affected by the Queensland Foreign Stamp Duty Surcharge are too complicated to address here. Legal advice from appropriately qualified professionals should be sought by any parties that are involved in residential land acquisitions that may result in determination as being a “significant developer” or “significant development” as defined by the legislation. Further, a purchaser should consider whether there is any good commercial reason for a related foreign person to maintain a minority shareholding or unit holding in the relevant corporation or trust.
AFAD is only payable where a foreign person or entity acquires land, definable as ‘AFAD residential land’, directly or indirectly. Broadly, this means land in Queensland that is or will be used solely or primarily for residential purposes, where the building or part of the building that is or will be used for the residential purposes is designed or approved by a local government for human habitation by a single family unit. The Commissioner of State Revenue has provided guidance on these matters in DA232.1.1—AFAD residential land, dated 28 September 2016.
In the ruling by the Commissioner of State Revenue, explanation is provided to assist in determining when these requirements will be satisfied and addresses matters including assessment based on per lot or per development basis, permanent residential and temporary residential purposes, differentiation between solely and primarily used for residential purposes and how “single family unit” definition is to be applied. The Commissioner:
- Lists examples where the definition of AFAD residential land will and will not apply
- Confirmed that land used for short-term accommodation and dormitory-style student accommodation will not fall within the definition of AFAD residential land
- Confirmed whether the test will be met in relation to other types of residential properties such as retirement villages, manufactured home parks and student accommodation (other than dormitory-style student accommodation). Each case will turn on the facts of the matter and will be considered on a case-by-case basis. Land use zoning will likely play a determination on this test.
Indicates that AFAD residential land will include:
- Established homes and apartments
- Vacant land upon which one or more homes or apartments will be built
- Land for development for residential use
- Land with buildings to be refurbished, renovated or extended for residential use (such as a disused warehouse that the developer intends to refurbish to create residential apartments).
Interestingly, in reviewing the rulings and explanations, it is unclear how land acquired with a non-residential zone being applied at the time of acquisition, which is subsequently amended to one of the many “residential use” zones available in Queensland as a consequence of the actions of the local or state government, is affected (e.g. new planning scheme adopted). The DA232.1.1—AFAD residential land ruling clearly states the “timeframe within which that status eventuates is not limited” in the notes of the intentions of the acquirer.
Does the AFAD affect government driven zoning changes to land and does the timeframe scenario apply to “government” driven zoning changes with regards to transaction liability?
Ex Gratia Relief For Significant Developments
The Commissioner of State Revenue has confirmed that ex gratia relief from AFAD will be available in exceptional circumstances, where five conditions must be satisfied:
- The foreign entity undertaking the transaction must be ‘Australian-based’ (which in itself has a number of indicators for determining eligibility).
- The foreign entity must have complied with any Foreign Investment Review Board (FIRB) requirements in relation to the acquisition of the land.
- The foreign entity must have met any other regulatory requirements, including complying with the Corporations Act 2001 (Cth) and any Queensland taxation laws.
- The development must be significant either because the development itself is significant or the developer has that status (as discussed above).
- The foreign entity must primarily employ or contract for services, materials from Australian building contractors and suppliers to engage in the development of land under the relevant transaction (which in itself has a number of indicators for determining eligibility).
There are formal processes defined in legislation and the rulings on how ex gratia relief applications can be lodged and the responsibilities of the Commissioner of State Revenue in determining applications within specified timeframes.
Implications of the Additional Foreign Acquirer Duty
Foreign developers must be confident that they will not cease to satisfy the requirements of AFAD because of the risk that they might be forced to repay the Queensland Government an amount equal to the relief provided if, for example, they decide to reduce the number of lots to be developed to less than 50. Clarifications on how state driven zoning changes to land owned by entities that may be affected by the AFAD need further clarification. It is difficult to ascertain if there will be a material effect on the volume of foreign entities seeking to acquire AFAD residential land in Queensland, or whether there is a material effect on the price points and the rate of price rises or falls in residential land.
Will property prices become more affordable for households?
Will there be a commensurate need to increase or decrease lands for future residential purposes as a consequence of this legislation?
Multiple jurisdictions around the world have implemented similar legislation in an effort to cool rapid price increases blamed on extensive foreign ownership of residential properties. Perhaps there is a justification for the adoption of the AFAD and similar legislation in these jurisdictions and maybe there isn’t. Such legislation may be populist in its adoption, where perception may be quite different to reality on how foreign ownership is affecting housing prices. The complexities of foreign investment, land use planning, land release policies, industry and economy variabilities at the city/regional/local levels in housing prices and ownership demographics make adoption of AFAD type legislation a fairly blunt instrument in managing housing affordability.
Anecdotally, AFAD type legislation appears to be having the desired affect if media reports and industry/association reports from relevant jurisdictions are to be taken at face value. Longitudinal research, built from solid baseline data is required to ensure AFAD type legislation does not distort the market to a significant degree and/or push the issues of housing affordability on to communities not currently experiencing these issues through investors targeting opportunities in currently stable communities. The impacts of the legislation will truly not be known for a number of years.
[i] DA000.15.1—Additional foreign acquirer duty—ex gratia relief for significant development, Public Ruling issued by the Commissioner of State Revenue, 28 September 2016.
Significant development will be satisfied if:
- “the land that is the subject of the relevant transaction is acquired by a foreign entity for the purposes of undertaking a development or re-development of 50 or more residential lots (transaction lot test), or
- where status cannot be established under the transaction lot test, the development or redevelopment will nevertheless make a significant contribution to the region in which it is occurring, having regard to factors including:
- the nature of the development
- the contribution made to housing stock and infrastructure by the development, in the context of population size and demographics, and activity in that region
- the economic and social impacts of the development, for that region
whether in the absence of the development by the foreign entity, such outcomes for the region would otherwise be likely. This will include, for example, the number of other developers, builders or owner-builders in the same market (regional significance test).”