Entering foreign Waters: when is a corporation or trust entity considered a ‘foreign person’?

In 2016, Revenue NSW introduced a surcharge purchaser duty on all conveyancing transactions which involve a ‘foreign person’. Where a ‘foreign person’ acquires an interest in residential land, they are required to pay a surcharge of 8%.1 Who is classified as a ‘foreign person’ under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the Act)?

Individuals

For individuals, if you are not an Australian Citizen or not ordinarily resident2 in Australia, you are considered to be a ‘foreign person’ for the purposes of the Act.

Corporations and trusts

Whether or not a corporation or a trust is classified as a ‘foreign person’ under the Act is a more complex question than for individuals. Despite the complexity associated with determining whether a corporation or trust is classified as a ‘foreign person’, it is vital to answer this question correctly if you are involved in a corporation or trust that intends to purchase residential land because there may be serious financial consequences if you make an error.

What makes a corporation a ‘foreign person’?

Under the Act, whether a corporation is registered in Australia or not does not determine if they are considered a ‘foreign person’.

A corporation is considered a foreign person when it is:

1. A corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest.

• A person holds a substantial interest in an entity if they hold an interest of at least 20%4
• The 20% interest can either be held by that person alone or together with associates5

2. A corporation in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest. 6

• Two or more persons holds an aggregate substantial interest in an entity if together they hold an aggregate interest of 40%. 7
• This interest can be held alone or together with known associates8

What qualifies as an ‘interest’ in a corporation?

A person is deemed to have an ‘interest’ in a corporation where they:

1. Control a specific percentage of the voting power in the entity; or
2. Hold an ‘interest’ in that percentage of the issued securities in the entity; or
3. Could hold an ‘interest’ in that percentage of the issued securities in the entity if relevant options were exercised.9

Tracing ‘interests’ in corporations or trusts

Section 19 of the Act allows for the tracing of ‘substantial interests’ in corporations or trusts.

This means that:

1. Where residential land is owned by a corporation or trust who is not a foreign person; but
2. In that corporation or trust is a ‘substantial interest’ held by an entity who is considered a foreign person;
3. The corporation or trust will then be considered a foreign person; and
4. The residential land will be subject to surcharge purchaser’s duty.

In short, you can’t simply assume that a purchase of residential land by a corporation or trust will not be subject to the surcharge simply because that corporation or trust is not a ‘foreign person’.

What makes a trust ‘foreign’?

1. If a trustee of a trust holds substantial interest in a trust and that trustee is considered a foreign person, then, the trust is considered a foreign person. 10

• A person holds a substantial interest in a trust if they, either alone or together with associates, hold a 20% beneficial interest in the income or property of the trust. 11

2. If trustees of a trust, who hold an aggregate substantial interest, and are both considered foreign persons, then, that trust entity is also considered a foreign person. 12

• Two or more persons hold an aggregate substantial interest in a trust if they, either alone or together with associates, hold a 40% beneficial interest in the income of property of the trust. 13

What qualifies as an ‘interest in a trust’?

Under the Act, an ‘interest in a trust’ is classified as a:

1. Beneficial interest in the income or property of the trust as above;
2. Interest in a unit of a unit trust; 14
3. An interest in a discretionary trust, where each beneficiary of the trust is taken to have an interest of the maximum amount allowed to be distributed to them.15

Who is classified as an ‘associate’?

Under the Act, the following are classified as ‘associates’:

1. Relatives of the person such as spouses, parents, grandparents, siblings, uncles, aunties, nephews, nieces, children (including adopted children) and the spouse of any of these persons);
2. A partner of a partnership;
3. Any entity in which the person is considered a senior officer;
4. A corporation of which the person holds a substantial interest; and 5. The trustee of a trust in which the person holds a substantial interest.16

Similarly with the tracing of interests, it is not enough just to look at the person involved in the transaction. The Act extends to situations where corporations and entities are involved. For example, the ‘associates’ of a person and whether or not they are constituted as ‘foreign’ may lead to a person/trust/entity having a substantial or aggregate interest. This would mean that the surcharge duty would apply.

What are the consequences if you are classified as a ‘foreign person’ under the Act but fail to pay the surcharge? If you, your corporation or trust entity is a ‘foreign person’ and you purchase residential land without notifying the Foreign Investment Review Board or prior to obtaining approval from the Board, you could face criminal penalties of up to 3 years imprisonment and/or 750 penalty units ($157,500 for an individual and $787,500.00 for a corporation).17 Civil penalties may also apply with the maximum being the greater of 10% of the consideration or the market value of the property purchased.18

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