Vacancy Fee and Return
from 9 May 2017
The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 received Royal Assent on 30 November 2017, following a lengthy passage through Federal Parliament since its introduction in September 2017. The new Act introduces the following important Federal Budget measures regarding residential property:
- removal of all travel deductions and some depreciation deductions for residential property investors from 1 July 2017 (unless a specific exception applies) – refer our related Tax Astute Snapshot “Residential Property Investor Deduction Removal from 1 July 2017”; and
- introduction of a Federal foreign person vacancy fee regime creating a risk of substantial penalties for “foreign person” owners of Australian residential land (including various Australian tax resident entities) where either:
any of the relevant Foreign Investment Review Board (“FIRB”) application notification or Treasurer’s no objection notification or order for specified use; or
the developer’s FIRB exemption certificate application,
was made after 7:30 PM AEST on 9 May 2017 (regardless of whether the property itself was acquired before or after that date).
Why is FIRB “foreign person” status important
from a tax advisory perspective?
The Foreign Acquisitions and Takeovers Act 1975 and associated Regulations (“FATA 1975”) are complex provisions which are not tax law and should therefore be referred on to specialist legal professionals for advice. The provisions are, however, of relevance to tax professionals generally because the seemingly limited term “foreign person” is very broadly defined in s.4 of the FATA 1975 and can result in potentially substantial penalty risks for clients if not appropriately understood, referred and addressed.
As explained below, the broad “foreign person” definition results in a wide variety of Australian tax resident trusts and some resident companies and individual clients being “foreign persons” in relation to Australian residential land (broadly most residential land and dwellings in Australia as defined in s.4 FATA 1975). Where any client (including a tax resident) is a FIRB “foreign person” under the FATA 1975 definition then, subject to any exceptions which may apply, important implications regarding residential land ownership include:
- the pre-existing Foreign Investment Review Board (FIRB) “foreign person” requirements which broadly restrict acquisitions to new Australian residential land/premises and impose substantial penalties where initial FIRB acquisition application fees and notification requirements are not met at acquisition time; and
- the new foreign person vacancy fee regime (explained below) which will require many “foreign person” owners of Australian residential land/premises to:
undertake ongoing annual lodgements of Vacancy Fee Returns with the ATO and keep associated records (or face a substantial late lodgement and/or record keeping penalties of $52,500/250 penalty units p.a. per property); and
potentially pay an ongoing Annual Vacancy fee equal to their initial FIRB application fee (e.g. currently $5,500 or $11,100 p.a. for properties below $2 Million value with sliding scale increases for more valuable properties).
Who or what is a “foreign person”
potentially subject to the new Vacancy Fee Regime?
While the ATO will be largely responsible for administering the new Vacancy Fee Regime, the majority of the enabling legislative provisions refer to the FATA 1975 and its associated Regulations. The new Vacancy Fee Regime will only have potential application to “foreign persons” taking “notifiable actions” regarding Australian “residential land” (as defined in the FATA 1975 and associated Regulations).
For purposes of acquiring Australian residential land as a “notifiable action” (which attracts FIRB requirements including the new Vacancy Fee provisions) a combination of s.4 FATA 1975 and various residential land-specific exceptions effectively results in a “foreign person” broadly including:
- any IFP (individual “foreign person” as defined- see Note and A below) who has a legal or actual limitation on their stay in Australia unless they are an Australian:
Permanent Resident; or
Special Category Visa holder (i.e. various New Zealand Citizens); or
- a company or trust, including an Australian resident company or trust, (see B below) in which either:
a direct or indirect >20% substantial interest is held by an IFP (or on an associate-inclusive basis); or
a direct or indirect >40% aggregated/grouped substantial interest is held by >2 non-associate IFP’s (inclusive of each of their own associates).
The * shown above denotes that an Australian resident company or trust could also be an effective “foreign person” for Australian residential land purposes if a foreign company or companies (i.e. formed/incorporated outside Australia) held the substantial interest shown above instead of an IFP.
- A “substantial interest” percentage in a company or trust (under ss.17 and 18 FATA 1975) is broadly based upon the IFP’s direct or indirect actual or potential percentage of voting power, shares or units (including via exercisable rights).
In the case of a discretionary trust, each beneficiary/object is deemed to …
“hold a beneficial interest in the maximum percentage of income or property of the trust that the trustee may distribute to that beneficiary …”
for FATA 1975 “substantial interest” purposes. For example, if a relative (including by marriage/defacto relationship) of the key controllers and beneficiaries of an Australian resident discretionary trust was not an Australian Citizen, Permanent Resident or Special Category Visa holder, then assuming that family member was a beneficiary (due to the broad range of beneficiaries common under most discretionary trust deeds) they would be an IFP deemed to hold a 100% substantial interest in the discretionary trust. Such a substantial interest would make the resident discretionary trust a “foreign person” for FATA 1975 residential land purposes (per B below) and therefore potentially subject to the new Vacancy Fee regime (explained below).
- “Associate” is also very broadly defined for the above purposes (under s.4 FATA 1975 and associated Regulations) and contains some expansions when compared with the income tax definition of “associate” in s.995-1 ITAA 1997 (including a specific expansion related to residential land). This may prove important due to the associate-inclusive nature of the test shown above, potentially expanding the range of affected trusts.
- Companies and trusts which are non-residents for Australian income tax purposes will be subject to more onerous “foreign person” residential land requirements than those shown Additional and different provisions can also be relevant to limited partnerships and listed entities.
- It should also be noted that the diagram above incorporates the combined effect of various residential land-specific exceptions to the FATA 1975 defined terms “foreign person” and “notifiable action” for individuals and unlisted entities which, together, trigger potential FIRB residential land problems (including the new Foreign Person Vacancy Fee). If, for example, an individual or entity illustrated above were acquiring anything other than residential land (e.g. commercial or agricultural land, goodwill in a business, shares/units or similar) then different FATA 1975 and associated Regulation provisions would apply, including a broader concept of “foreign person”.
- In practice, a large number of Australian resident discretionary trusts (and/or companies or unit trusts in which they hold shares or units) will technically be “foreign persons” under the above definition. This occurs due to the broad range of potential beneficiaries in most discretionary trust deeds often including >1 of the IFP’s explained above.
- To remove a resident trust’s “foreign person” status (and the associated substantial Vacancy Fee risks noted below) specialist legal advice and an appropriate variation of the Deed (subject to its terms) may assist prior to acquisition of Australian residential land/premises. For residential property acquired pre-9 May 2017 by an entity which was a “foreign person” at acquisition date (but without a FIRB approval/application at that date) the Vacancy Regime could potentially apply. The likely ATO and FIRB compliance approach to such scenarios in practice is unknown at the time of writing – see further details below.
How will the new
Commonwealth Foreign Person Vacancy Fee regime operate?
The new Commonwealth Foreign Person Vacancy Fee regime will be administered by the ATO and will apply where a FIRB “foreign person” entity or individual for residential land purposes (including various Australian tax resident trusts - see explanation above) holds an interest in Australian residential property in circumstances where any of:
- the FIRB application/notification date (including developer exemption certificate applications); or
- the Treasurer’s FIRB notification/order/approval date,
occurs after 730pm on 9 May 2017 (see A below).
Where the above conditions apply:
- the actual (or deemed) FIRB application fee regarding the acquisition (e.g. $5,500 to $11,100 for acquisitions valued up to $2 Million on acquisition but with sliding scale increases above this value) may become an annual Vacancy Fee payable by the foreign person (subject to various exceptions noted at G below) (see B below);
- the start and end of each affected residential property’s Vacancy Year will need to be ascertained (generally starting at acquisition settlement date or the date of the fitness for occupancy certificate) (see C and D below); and
- within 30 days after each residential property’s vacancy fee year end (see D below) an Annual Vacancy Fee Return (see E below) must be lodged with the ATO by or on behalf of the foreign person.
Importantly, the Vacancy Fee Return (see E below):
- must be lodged each year in approved form, regardless of whether or not the residential property is in fact vacant;
- will result in a civil penalty of 250 penalty units (currently $52,500) plus deemed liability for the vacancy fee noted at B for late or non-lodgement; and
- is dealt with under a tax law which allows it to be prepared and lodged by a Tax Agent.
Subject to the Vacancy Fee Exemptions (noted at G below) the “foreign person” may be liable to pay an annual Commonwealth Vacancy Fee (based on the amount noted at B below) within 21 days after receiving an ATO Notice after the Vacancy Fee Return has been lodged (see F below).
While the above Vacancy Fee Return lodgement (see E below) will always be required in the circumstances shown above, a Vacancy Fee Exception may apply (see G below) to a particular Vacancy Year (i.e. resulting in no liability at F below) where the residential land/premises:
- were genuinely occupied by the foreign person owner or their relatives for >183 days of the Vacancy Year;
- were occupied (or genuinely available) under >1 lease/licence of >30 days duration during >183 days of the Vacancy Year;
- were sold or had no dwelling built upon them during the Vacancy Year; or
- were otherwise subject to a Treasurer’s waiver/remission and/or a specific exception which may arise under future Regulations.
- A foreign person’s failure to lodge even a single Vacancy Fee Return will result in a substantial penalty and penalties may extend across a number of future years or properties if the issue is identified after multiple breaches. For example, the current minimum penalty for not lodging a Vacancy Fee return for a single property would be $58,000 p.a. (comprising a $52,500 civil penalty and a minimum deemed vacancy fee of $5,500).
- As noted above, while it may be hoped that the new Commonwealth Vacancy Fee will primarily apply to new acquisitions of residential property, the broad application date (see A above) and the expansive FIRB “foreign person” definitions explained above mean that residential properties acquired pre-7:30 PM AEST on 9 May 2017 might be at risk under the new law. For example, if an ATO and/or FIRB audit resulted in a FIRB application or approval being retrospectively made after 9 May 2017 (following a property acquisition by a “foreign person” before that date) such a property would technically be exposed to the above Vacancy Regime (in addition to potentially substantial FIRB penalties for failure to notify the acquisition). At the time of writing the specific compliance approach intended by FIRB and the ATO for such scenarios is unknown.
- Importantly for borrowing and lending purposes, the Treasurer will have broad powers to place a charge over any property of the “foreign person” to recover unpaid Vacancy Fee penalties. Such a charge can override even secured creditor interests (e.g. mortgages held by banks and other lenders). This may change ongoing lender requirements regarding Australian resident entity borrowers which may be at risk of FIRB “foreign person” status before acquiring Australian residential land.
- The above Commonwealth Vacancy Fee and penalty regime will operate throughout Australia and may apply in addition to State-based foreign buyer fees and charges (each with their own specific definitions and requirements). Separate state-based foreign buyer provisions already operate in New South Wales, Victoria and Queensland with proposed application in South Australia and Western Australia from 1 January 2018 and 1 January 2019. Separate specialist legal advice will often be required to manage these issues.
WANT MORE DETAILS?
In addition to details available at www.taxastute.com.au, Tax Astute clients receive more information and specific details, questions and answers underlying the brief snapshot summary above as a part of their:
- Tax Astute Training Session;
- Tax Astute Final Reference Notes; and
- Tax Astute Detailed Multimedia Recording.
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