Budget Measures Bill 2017

Second Reading

Adjourned debate on second reading.

(Continued from 26 September 2017.)

The Hon. J.A. DARLEY (16:52): The government is extending the grants from previous years for off-the-plan apartments. A $10,000 grant is available to certain eligible transactions for off-the-plan apartments. A stamp duty concession is also available to these transactions.

From the information provided by the Valuer-General's office, 22 per cent of apartments that have been bought and resold in the past five years have sold at a loss. The data provided showed that those who made money did not make a large profit from the resale of their property. However, those who did suffer a loss tended to incur a significant loss. The banks are generally reluctant to loan on single-bedroom apartments that are less than 60 square metres in area, and any apartment that does not have a car park allocated is difficult to sell.

This indicates that apartments are not the best choice for a property purchase when accounting for resale value and equity. As such, Advance SA believes it would be beneficial to extend the stamp duty concession and the $10,000 grant to all new house and land packages in the state to help stimulate the building and retail sectors associated with this area. I understand that with each new house and land package there is a significant multiplier effect with regard to associated industries.

Further to stamp duty concessions, as part of the 2015-16 budget the government progressively abolished stamp duty on the transfer of business premises. I recently encountered an issue with a constituent who purchased a property zoned commercial; however, it was being used as a residential property by the previous owner. I understand that, prior to historical rezoning, the entire area was residential, and that the previous owner had lived in the property prior to the commercial evolution of the area. That is to say that the previous owner had been there for many years, and over an extended period of time the use of neighbouring properties changed from residential to commercial to a point where the entire area was rezoned.

My constituent intended and, indeed, now has converted the property for commercial use, however is ineligible for the stamp duty concession as the use at the time of the settlement transfer was residential. The government should give consideration to providing a stamp duty concession in these circumstances by way of application if the property owner can demonstrate within a specified time frame that they are using the property for business purposes.

For those who have purchased an off-the-plan apartment, and have been eligible for the stamp duty concession, the government will also give them an exemption for land tax for the first five years. Whilst on paper this looks positive, it should be noted that most of the apartments purchased would be exempt in any case because the site value would be under the threshold where land tax is payable. Further to this, apartments that are purchased and used as a person's principal place of residence would also be exempt. The government advised during my briefing that they expect to forfeit $100,000 per year by providing this exemption—this really is an insignificant amount when compared to the government's total budget.

The government intends to introduce a surcharge on residential properties that are purchased by foreigners. I understand that most other states have already introduced similar measures; however, I find it curious that this surcharge is limited only to residential properties. I understand there is concern in the general public about foreigners purchasing land in Australia, and this may lead to an increase in housing prices. However, I understand there is concern about foreign ownership of Australian companies and particularly farming land. It will be interesting to see if the government will react to these community concerns in the future.

Finally, the government's bank tax. I believe that introducing this tax will impact on the cost of doing business or housing, as bank loans will be affected. Retirees, pensioners and others who rely on bank profits will also be affected. It will put South Australia into reverse gear, and that is the last thing we want. By introducing this tax, the government has sent a clear message to businesses that they may wake up one day and be faced with an additional arbitrary tax at the whim of the government.

Just because a business is successful does not mean they should be the government's cash cow. While it is only the banks that the government currently have in their sights, we do not know who could be next. It might be Coopers, Vilis, Rossi Boots or even the Shahins. I have never supported the bank tax, and I want to put on the record that Advance SA does not support it either, even though my former colleague, Senator Nick Xenophon, did support it until I convinced him to do otherwise. As it stands, I will not be supporting this bill.

The Hon. R.I. LUCAS (16:57): I rise to address some comments to the Budget Measures Bill and, given the lateness of the hour, I indicate that the reason why I asked the Hon. Mr Darley to speak before me is that I intend to seek leave to conclude my remarks. At the outset, I want to place on the record an advice for the benefit, in particular, of the Treasury officers who, over the years, will be familiar with advice I have sought from one of the leading tax lawyers in the state in relation to the budget measures bills. I intend to read his advice, comments and questions onto the record, as I have done for the last few years.

On at least two occasions, RevenueSA, in particular, has taken on board some of the issues this leading tax lawyer has raised and certainly in the last two years the government, as a result of the advice on one occasion, did introduce significant amendments to the equivalent to the Budget Measures Bill, taking on board the advice from this senior tax lawyer. The reason I want to read it onto the record now is that, given that we will not be sitting next week, it will give RevenueSA officers, in particular, a chance to consider the detailed forensic advice of the senior tax lawyer and respond at the end of the second reading to the questions and concerns.

I intend to read this advice and, for the benefit of Hansard, I do have a neatly typed copy of the 14 pages or so of tax advice, so they can put up their feet and rest. It is headed 'Some Comments on the Budget Measures Bill 2017.' It reads:

Clause 5.

1. Clause 5 requires the Commissioner to determine the Gross State Product (GSP) percentage for each financial year and publish the percentage so determined on website determined. Historically, such matters have usually been published in the Government Gazette and usually also the subject of a circular or other information guide or page on the RevenueSA website.

2. The proposal to simply publish such item on a website chosen by the Commissioner appears to be a departure from the long-established and recognised practice of publishing such items of significance in the Government Gazette.

Clause 11.

3. Clause 11 requires a taxpayer to provide a return or other document in a form determined or approved by the Commissioner. In T&S Liapis v Commissioner of State Taxation [2015] SASC 63 [134]-[136] there was an issue before the Supreme Court as to whether the form of assessment used indeed constituted a form approved by the Commissioner. The court inferred in the circumstances that the Commissioner approved the form and spreadsheet. In this situation, as the taxpayer will be required to complete such forms and returns. They must be clearly approved and prescribed for the particular purposes.

Clause 13.

4. Clause 13 provides that the State major bank levy payable by an ADI under this Act cannot be directly recovered from customers of the ADI and must be paid out of profits or other funds of the ADI. Such provisions usually raise a number of queries.

5. The major bank levy is payable in respect of liabilities. Whilst the imposition of a surcharge on customers borrowing funds from the ADI in the State would infringe the prohibition, would paying customers in the State a lower interest rate than depositors in other States so clearly offend this provision. Recover in a technical legal sense appears to involve recovery by action and judgement, though even in a broad sense it still appears to involve the customer paying an amount rather than receiving less (see J. James Stroud's Judicial Dictionary 4^th ed 2291).

6. If the common meaning of the word is used then it may include paying depositors a lesser interest, if it is regarded as making good. The Macquarie Online Dictionary includes the following meanings of the word recover:

(1) to get again, or regain (something lost or taken away): to recover lost property

(2) to make up for or make good (loss, damage, etc., to oneself)

(3) to regain the strength, composure, balance, etc., of (oneself)

(4) Law: a. to obtain by judgement in a court of law, or by legal proceedings: to recover damages for a wrong.

b. to acquire title to through judicial process: to recover land.

7. Ideally, both concepts could be dealt with to avoid doubt.

8. The provision does not express any consequences for a breach.

9. There had been a somewhat similar provision in section 31L of the Stamp Duties Act 1923 (SA) (SDA) dealing with passing on rental duty before that duty was abolished. Whilst it was, in the circumstances simply directed at passing on such duty, it did provide more extensively for the consequences of a breach. The section was inter alia, in the following terms:

31L (1) Subject to this section, a registered person or any person acting on his behalf shall not add the amount of any duty or of any part of the duty payable by the registered person as such under this Act to any amount payable by any other person with whom he has entered into or is conducting any rental business, whether by agreement or otherwise, or otherwise demand or recover or seek to recover any such first mentioned amount from that other person.

Penalty: Two hundred dollars. Expiation fee: Division 10 fee.

(2) In the event of a contravention of subsection (1)—

(a) the court by which the defendant is convicted shall, in addition to imposing a penalty for the offence, order the defendant to refund to the other person referred to in that subsection any such amount which has been paid by that other person; or

(b) the other person referred to in that subsection may recover any such amount from the registered person, or person to whom he paid it, by action in a court of competent jurisdiction as if it were a debt due to him from that person.

10. This provision used recover in the expected sense. It also provided for the consequences of breaching the prohibition. Clause 13 does not. Even when section 31L existed there were questions as to how it could be detected or enforced where the duty was simply built into the overall cost of the leasing and not specifically passed on.

Schedule 2

Part 1

11. Clause 2 of the First Home and Housing Construction Grants Act 2000 (FOGS) inserts a new clause 6A which provides for what is the market value of a home which is an eligible transaction and appears to replicate much of what has been in section 18BB of [the First Home and Housing Construction Grants Act].

The acronym used is FOGS. It continues:

The existing section 18BB is being replaced by this provision.

12. Clause 2 repeats a concept in section 18BB which appears to be designed to prevent grants being available in respect of homes built on farms where it is built on land (owned or to be by the person causing the construction) that does not form part of what is called a 'genuine farm'. It appears to do this by in effect preventing the market value of the eligible transaction being determined if the land on which the building is constructed does not constitute a genuine farm. Section 13(1)(a) of FOGS already requires it to be an eligible transaction that a person entering into the comprehensive home building contract must on the completion of the construction be the owner of the land.

13. In the case of an eligible transaction that relates to the construction of a home on a genuine farm, the proposed section 6A(2) and section 6(7), appear to require that for the property to be a genuine farm that the land is:

13.1 to be used for primary production by the person seeking the benefit of the section;

13.2 the land is by itself or with other land owned by that person;

13.3 capable of supporting economically viable primary production operations.

14. A number of observations may be made about these provisions:

14.1 there is no definition of primary production in FOGS, so it is likely to have a classic interpretation, this may be compared with the broader definition in the SDA [Stamp Duties Act] or the Land Tax Act 1936 (LTA);

14.2 the requirement that the land is owned by the person seeking the construction of the dwelling in effect requires not only that the land is owned by a person but the person must own other land in effect as part of the farm. In a period where much of the farm land is ending up in trusts (see section 71CC of the SDA) neither the ownership of the land requirement or if land on which the construction occurs is severed from such land, the requirement it constitute part of other farming land, are likely to be satisfied.

14.3 the requirement that the land is capable of supporting economically viable primary production operations does add an additional and higher threshold. It is also a threshold that can involve very differing views and is a much higher threshold than simply being in the business of primary production. The concept of a business of primary production is used in the SDA and LTA. It appears a more—

I think that should read 'appropriate threshold' rather than 'approach threshold'. It continues:

15. Some of the possible difficulties can be highlighted in the following example, assuming the foregoing correctly describes the intended operation of the provisions: the son of an established farming family who works on the family farm wishes to build a new home on the farm. The farming land used is either owned by his parents or in a discretionary trust (section 71CC of the SDA type of trust). If the dwelling is constructed under a comprehensive home building contract on the parent's land or the trust land, then the ownership requirements for the grant in section 13(1) will not be satisfied. If a portion of the land is transferred out of the trust to the son (say an acre or thereabouts and is owned by him on completion of the construction) the ownership requirement will then be satisfied.

There is a reference at the bottom of this page, which states:

See evidence and discussion in T&S Liapis Pty Ltd v Commissioner of State Taxation [2015] SASC 63 and on appeal in the Commissioner of State Taxation v T & S Liapis Pty Ltd [2015] SASCFC 151.

And a second note:

Assuming that the market value of the land on which it is built, that is the relevant component as defined in the proposed section 6A(7), is otherwise satisfied.

I continue with the narrative:

However, as the son does not own any other land, the land on which the dwelling is built will not constitute part of a genuine farm. He does not own any other of the farming land.

16. On the other hand, he does own the land on which the dwelling is constructed and as it is not part of a farm, it is not a transaction that relates to a farm. It would therefore not be within the genuine farm concept and therefore the son should be entitled to a grant. So one may question the purpose of the provision relating to genuine farms.

Clause 10

17. The clause proposes to amend section 25(1) of FOGS to include decisions of the Commissioner in respect of the imposition of penalties under section 39(2) and 39(3). The provisions of section 82 of the Taxation Administration Act 1996 (TAA) extend to a broad range of decisions under taxation laws.

18. It is not apparent why the various decisions of the Commissioner under FOGS should not be subject to objection rather than being limited to the grant and the specified penalty provisions.

19. The Objection decisions under FOGS go to the Treasurer. The Objection decisions under the TAA go to the Minister of Finance. Currently they are the same person, but that has not always been the case. It would be preferable if they all went to the same Minister.

Part 2

Clause 13

20. The proposed section5(10)(i) provides for land tax relief for a 'current owner' for up to five years on qualifying off-the-plan contracts. The concept of an 'owner' is nowhere else in the LTA qualified by the use of word 'current'.

21. The word 'current' does not appear to add anything but raises the question as what is the intended difference between an owner as used elsewhere and defined in section 2(1) and this more limited concept of a 'current owner'. It is suggested the word 'current' be deleted'.

Part 3

Clause 15

22. The amendments proposed by clause 15 to the Payroll Tax Act 2009 (PTA) partly follow amendments made to the like section 32 in the New South Wales Act and section 32 of the Victorian Act.

23. The amendments to be made by clauses 15(1) and 15(3) appear to bring the provision into line with the Victorian provisions. The like New South Wales provisions appear to be simpler. The amendments to be made by clause 15(2) appear to bring the provisions into line with New South Wales but not Victoria. Victoria appears to continue to provide for an exemption for door to door sale of goods and insurance sellers.

24. Tasmania and the Northern Territory appear to have fully followed the New South Wales provisions. The Victorian provisions go further than the New South Wales provisions in limiting the operations of section 32(2). So a level of harmonisation is once again further eroded.

25. The amendments do in effect three things. The first is to distinguish between services that are expressly dealt with by the provisions of section 32(2) of the LTA and other services. The decision in Smith’s Snackfood Company Ltd v Chief Commissioner of State Revenue (NSW) [2013] NSWCA 470 held that the relevant exclusions in the relevant section cannot apply to part of a relevant contract, only to the contract as a whole. The focus of exclusions is on an entire and indivisible contract. The amendments seek to overturn that exclusion for the whole contract and appears to require in the future some form of apportionment. There is no guidance as to how such apportionment is to occur. There should be at least some criteria, if a single contractual arrangement is to be split.

26. The second change, which will be limited to Victoria and South Australia, will limit the operation of the exclusions based on the time exclusion in sections 32(b)(ii) and 32(b)(iii). It is not clear why such a further limitation on these two time exclusions are required. The Treasurer's second reading speech does not appear to provide any explanation for the additional provisions.

27. In the case of the time exclusion in section 32(b)(ii) it excludes from payroll tax services that are of a kind ordinarily required by the designated person (the person seeking the services) for less than 180 days in a financial year. The proposed amendment (clause 15(3)(2b)(b) appears to mean that if the designated person usually requires such services for a period of less than 180 days but in fact utilises a person to supply such services for more than 180 days in one year then such services will attract payroll tax. This will be the case even if it occurs by inadvertence. It appears to undermine the concept underpinning section 32(b)(ii) of what is ordinarily required.

28. In the case of the time exclusion in section 32(b)(iii) it excludes from payroll tax services that are provided for a period that does not exceed 90 days or for periods that, in the aggregate, do not exceed 90 days in that financial year and are not services provided by persons providing similar services or work for periods that in aggregate exceed 90 days. One may question whether the proposed amendment, in this context, has any work to do. If the period of service under the contract exceeds 90 days or 90 days in aggregate the exclusion in 32(b)(iii) appears to not apply to such services (i.e. they are likely to be taxable).

29. The third change moves the anti avoidance clause that currently qualifies section 32(2)(c) to qualifying the operation of all of the provisions of section 32(2). It is unclear why this change is now required when to date it has been limited to section 32(2)(c) and there are also general anti avoidance provisions in section 47 of the PTA and Part 6A of the TAA.

Part 4

Clauses 19 and 20

30. The amendments proposed by clauses 19 and 20 will, in effect, no longer require that an instrument is stamped with stamp duty under the SDA. They will permit a separate certificate to be issued by the Commissioner and the instrument to be simply endorsed with an identifying number. These provisions raise a number of issues.

31. Under these arrangements, it will not be possible to see on the face of the instrument how it has been stamped and how much duty has been paid. Under the SDA if the correct stamp duty has not been paid then the validity and enforceability of an instrument in any court is adversely affected (see sections 21 and 22 of the SDA). It has therefore been important to be able to review such information. Whilst sections 21 and 22 of the SDA remain the ability to ascertain the actual duty paid on an instrument and the basis on which it was stamped remains important.

32. The proposed provisions in clause 20 contemplates the Commissioner issuing a certificate to a person on application. It is unclear whether that will be limited to persons who were parties to the instrument and their agents or other persons who may subsequently be interested. Section 77 of the TAA prohibits disclosure of taxpayer information and sections 78 enumerates particular exceptions to that. Section 79 permits certain limited general disclosure. Nothing in section 78 permits the disclosure contemplated by clause 20, unless it is to be permitted by a regulation, as contemplated by section 78. In the circumstances, it is suggested that section 78 of the TAA be amended to specifically permit disclosure of such information to third parties on request (it is being amended by the Bill for other purposes, see clause 31) if the instrument is not to otherwise be endorsed with the necessary stamping information.

33. It would still be of assistance if the instruments, with the possible exception of transfers under the Real Property Act 1886, were stamped at least with the identifying number, the amount of duty paid and the number of instruments stamped (i.e. original and copies). The clauses do not contemplate such further information appearing on the instrument.

34. Some provisions of the SDA require that an instrument has been stamped with ad valorem duty (i.e. section 71(5)(e)(ii)(A)). Nothing in the proposed sections 2(13) or 2(13a) expressly address that requirement that instrument has been stamped with ad valorem duty, not simply assessed with ad valorem duty.

35. In addition, various provisions of the SDA require that an instrument must be duly stamped for relief to be available (i.e. section 71(5)(e)(i). The proposed section 2(13a) provides for an instrument not chargeable with duty is to be stamped accordingly (which is consistent with section 23(1)). It does not say it is also deemed to be duly stamped, which ideally it should, so as to satisfy other requirements of the SDA (e.g. see section 71(5).

There is a note to that which states:

Also see section 40 of TAA that deems RevNet stamped instruments of all types to be duly stamped so as to satisfy such requirement. Also, there are differing views as to what constitutes duly stamped, which adds to the complexity of this concept, see IRC v Henry Ansbacher [1963] AC 191 and Wilcox Mofflin v Commissioner of Stamp Duties [1978] 1 NSWLR 341.

Parts 5 and 7—Foreign Stamp Duty Surcharge—Clauses 22, 26 and 27

Introduction

36. Clauses 26 and 27 amend the SDA propose the imposition an additional stamp duty of 4% on an instrument that effects, acknowledges, evidence or records a transaction whereby an interest in residential land is acquired by a foreign person or a person who takes the interest as trustee for a foreign trust.

37. The provisions will apply to transactions effected on or after 1 January 2018.

38. Where the foreign ownership surcharge applies, the surcharge is deemed to be duty payable on an instrument that effects, acknowledges, evidence or records a transaction whereby an interest in residential land is acquired by a foreign person or a person who takes the interest as trustee for a foreign trust.

39. Such surcharges have been imposed in New South Wales, Victoria and Queensland. The Western Australian recent Budget announced the intention to introduce such a surcharge. There appears to be limited consistency in the models used. So whilst the proposed provisions are apparently based, at least in part on interstate provisions that does not justify not amending them to ameliorate some of the potential issues.

40. The foreign surcharge is only payable on a 'dutiable instrument'. There is no definition of a dutiable instrument in the SDA. Whilst on one view it appears not to apply to an instrument that is dutiable but then exempted, ideally it should be clarified be an express provision in the proposed section 72 that a dutiable instrument is one assessed with ad valorem duty under the SDA so that the surcharge is only payable where ad valorem duty is payable.

Clause 22—Residential Land

41. The definition of residential land in the proposed provisions is similar to those recently adopted to facilitate the abolition of stamp duty on commercial real property. In effect, the Commissioner will rely on the land use codes provided by the Valuer-General in most situations to determine whether a property is residential land (clause 26, proposed section 72(8)). Such land use codes are provided by the Valuer-General as an administrative practice. They are not mentioned in the Valuation of Land Act 1971 or the regulations made thereunder. There is no right to object to such code as may be assigned by the Valuer-General, yet such codes are being increasingly used. There should be a right to object to such land use codes. This should be addressed by adding a right to object to them in the Valuation of Land Act 1971.

42. Under the proposed provisions if the land is not being used for a particular purpose at the time but the improvements to the land are of a residential character, then it will be taken to be residential land. If the land is not being used for a particular purpose at the time of the transaction and there are only minor improvements then the zoning of the land under the planning laws is to be used, so land with buildings of a residential character no matter what the zoning and land zoned residential will be treated as residential land for the purpose of these provisions.

43. As will be highlighted, these definitions create significant issues in the case of property the subject of a changing use or involving a mixed development (e.g. deemed residential land currently unused but is acquired for the purpose of a development of commercial premises on the ground and lower floors and residential use in the upper floors).

Clause 22—Foreign Persons

44. An actual person is a foreign person if the person is not an Australian citizen, the holder of a permanent visa or a New Zealand citizen who is the holder of a special category visa. A dual citizen would appear to satisfy the Australian citizen requirements.

45. A corporation is a foreign person if it is incorporated in a jurisdiction that is not an Australian jurisdiction. It appears that a corporation incorporated in another country and owned wholly by Australian citizens is still to be regarded as a foreign corporation ( including even, say a New Zealand company).

46. A corporation is also a foreign person if another person who is a foreign person or a trustee of a foreign trust, or a number of such persons in combination, hold 50% or more of the corporation's shares or are entitled to cast, or control the casting of, 50% or more of the maximum number of votes at a general meeting of the corporation. As the emphasis is on voting power rather than economic consequences this provision will be relatively simple to circumvent with foreign persons establishing companies in which they hold the shares entitled to the whole of the economic benefits and sufficient voting control (that is less than 50% but sufficient to block any special resolutions) to prevent the change of such rights.

I might interpose at that stage. There have been a number of recent examples where in tax law in South Australia and other jurisdictions as well these particular provisions have created significant questions and concerns. Certainly, I will be interested in RevenueSA and the government's response to these particular points raised by our senior tax lawyer in Adelaide. I return to the advice from the senior tax lawyer:

47. A foreign trust is one, where the beneficial interests are fixed, or one where a beneficial interest of 50% or more of the capital of the trust property is held by one or more foreign persons. In the case of a discretionary trust, it is a foreign trust if one or more of the following is a foreign person:

a trustee;

a person who has the power to appoint under the trust;

an identified object under the trust; or

a person who takes capital of the trust in default.

48. The last three of those trust nexus provisions have the potential to create real practical issues. One is the power to appoint that is vested in a foreign person, the second is an identified object who is a foreign person and the third is persons who may take the capital of the trust in default.

49. The first is the power to appoint. Most discretionary trusts have a wide range of powers to appoint, including the power to appoint property, income, a new trustee and a person to be a beneficiary. Most are held by the trustee though occasionally by a third person (e.g. the power to appoint a new trustee). So, if any person with any such power as a foreign person then the trust is a foreign trust without anything more. It is suggested this should be deleted or limited to the person with the power to appoint the trustee.

50. The next trust nexus provision that is likely to cause difficulties is the one referring to an identified object. The Macquarie Dictionary online describes identified as meaning:

1. to recognise or establish as being a particular person or thing; attest or prove to be as claimed or asserted; to identify handwriting; to identify the bearer of a cheque.

2. to serve as a means of identification for: this card identifies the bearer as a member.

51. So, does it mean a person who is actually named as an object or is a reference to the brothers, sisters and parents of the person, named as say the primary beneficiary sufficient. If it means persons identified by a relationship, then many discretionary trusts will be foreign trusts where any one of such relative is a foreign person. In a country of migrants, that Australia is, this will often occur. It is more likely to catch the unwary.

52. The Commissioner has indicated that his office is willing to publish guidance on the operation of this provision. Whilst in a practical manner this is likely to assist in many situations, in the case of a dispute, such guidance has little standing. A taxpayer in dispute with the Commissioner will be assessed by the Courts in accordance with the law not the Commissioner's practice. It is clearly preferable if this issue is specifically addressed in the legislation by specifically limiting it to actually named persons, as it appears is the intention, rather than a Commissioner's practice statement.

53. The third nexus provision is based on a foreign person being a taker in default of the capital of the trust. The provision applies to a 'person who takes capital of the trust property in default', one assumes that means in default of appointment prior to the ultimate vesting of the trust. Ideally it should state that.

54. Such default clauses are usually widely drawn. In many cases it would not be possible to identify any such persons until some time in the future (i.e. the lineal descendants of a named person living on the vesting day, see by way of example some of the issues in this area the discussion in Lygon Nominees Pty Ltd v Commissioner of State Revenue [2007] VSCA 140). If the class of such persons can be identified now and is say the relatives (i.e. brothers, sisters, aunties, uncles and their linear descendants and the spouses of such persons (as is common now living, or otherwise a closed class that is identifiable) there is a real possibility of one such person being a foreign person in a country of migrants, as already highlighted. It appears preferable to simply delete this requirement.

Clause 26—Foreign Surcharge—Adjustment Provisions

55. The provisions propose mechanisms for adjustments in respect of the surcharge where there is a change in status of the person in some situations within twelve months and others within three years. The refund provisions only apply if there is a change in status within twelve months.

56. The surcharge is also payable, if within three years of the acquisition, the person or trust becomes a foreign person or foreign trust. This provision is in effect an anti-avoidance provision to prevent the surcharge being circumvented by a corporation or trust that is not a foreign one at the time of the acquisition of the residential land but becomes one within three years of the acquisition of the land. When that occurs, the person must, within twenty eight days of becoming a foreign person or foreign trust, notify the Commissioner in writing of that fact and pay the foreign surcharge on the instrument. In addition, the Commissioner may impose interest and penalty tax as if the failure to pay the surcharge at the date of the acquisition were a tax default under the TAA.

57. That provision will not apply if the person or trust is paid, or is liable to pay, the foreign ownership surcharge in respect of the transaction by virtue of which the person or trust became a foreign person or a foreign trust. However, that particular exclusion (i.e. the proposed section 72(7)(b)(ii)) will not apply if the person or trust that has paid or liable to pay the surcharge is not a wholly foreign owned corporation or trust (as defined in the proposed clause 26).

58. In that situation, the amount of the foreign ownership surcharge is to be reduced by the amount of the foreign ownership surcharge (if any) paid in respect of the transaction by virtue of which the person or trust became a foreign person or a foreign trust. The meaning of this provision is particularly difficult to understand, as it is effectively an exclusion or an exclusion coupled with an apportionment. It is suggested that this exclusion on an exclusion be redrafted to simplify it, if possible.

59. The three year adjustment provision appears to be unduly harsh where there are changes in the control of a company or a trust for good family reasons (i.e. death, divorce etc), particularly as the proposed legislation does not provide any power for the Commissioner to provide relief from the operation of the provision in such situations.

60. A simple example is a resident taxpayer’s wholly owned company acquires residential land. The resident taxpayer dies shortly after that acquisition. The shares in the company are transferred to his non resident foreign citizen nephew pursuant to the terms of his will. The proposed section 72(7) will require the payment of the surcharge in this situation. Various other similar normal situations can be described.

61. A refund of the surcharge is available where a person was a foreign person when an interest in the residential land was acquired by the person but the person ceases to be a foreign person not more than twelve months after the acquisition of the interest and the interest in the land is still retained at the time that the person ceases to be a foreign person.

62. There is similar relief for the trustee of a foreign trust where the foreign trust ceases to be a foreign trust within twelve months of the acquisition. Such provisions will not apply if the interest in the residential land is no longer held by the trustee of the trust at the time that it becomes a foreign person or a foreign trust.

63. Whilst the trust refund of the surcharge is available if a foreign trust ceases to be a foreign trust within twelve months, it does not provide for a refund of the duty if the trustee of the foreign trust distributes the land in specie to a resident beneficiary of that trust within that period. Yet the effect is the same, the residential property is acquired by a resident.

64. A simple example of what may occur is an intended migrant to Australia arranges for a relative in Australia to buy a residential property as trustee for the migrant. This is likely to constitute a foreign trust. The migrant arrives within 12 months and the land is transferred to the migrant within that time. A surcharge refund will not be available on such transfer. The trustee will also not be entitled to a refund at the expiration of the twelve months as the trustee does not retain the interest in the land. In that situation, the migrant is better to await the expiration of the twelve months, have the trustee seek the refund and then take a transfer in specie from the trustee. This simply creates traps for the unwary.

65. It is not clear why the asymmetrical approach of twelve months for refunds and three years for payment of the surcharge is adopted. It is suggested there should ideally be a common period.

66. There are no similar adjustments where there is a change in the status of the land acquired, whether within twelve months or three years. There appears to be some inconsistency in the approach of adjusting within certain periods for a change in status of a person (whether natural or legal) but not the use to which land may be put. Obviously, any such adjustment provisions will add further complexity to what appear to be unduly complicated adjustment provisions where there is a change of status. It also appears to provide a disincentive for foreign developers to aggregate land for development that does not apply to local developers. Is this intended?

67. So, if the land is at the time of acquisition for a development predominantly being used for residential purposes, or is vacant but the premises have a residential character or are zoned residential it will be regarded as residential for the surcharge purposes. This is notwithstanding the land is being acquired for developmental purposes, whether as wholly commercial or commercial and residential. It is suggested that the change of status from residential land to commercial land within a specified period should lead to a surcharge refund.

Clause 27—Landholder Provisions

68. Clause 27 proposes the introduction of similar provisions to impose the surcharge on the acquisition of interests in companies or unit trusts that own residential land under the landholder provisions in Part 4 of the SDA including where there is a group acquisition that involves a foreign entity. These provisions include similar anti-avoidance provisions (including exclusion on an exclusion) and refund provisions. The same issues as described above will apply to many of these provisions.

69. In addition, whilst from a policy perspective, the Landholder provisions need to operate in the same way as a surcharge applies on an initial acquisition, they add an unwanted further layer of complications to a set of provisions that already operate on a notional basis.

70. This is particularly highlighted where the company has both residential and qualifying land (i.e. commercial land, on which a lower rate of duty is now payable). The Commissioner's current view is that if a company has such land then the value of both classes of land are aggregated for the purposes of working out the duty. The duty so calculated is then apportioned by reference to the value of the total land between the residential land and the qualifying land and the reduction in the rate of duty on the qualifying land is then only applied to the qualifying land portion. The surcharge provisions then require a further amount of 4% of the value of the interest in the residential land notionally acquired to be paid.

71. A very simple example and its computation highlights some of the issues currently being encountered and will be further encountered. A Pty Ltd owns some qualifying land of the value of $2.2 million. It also owns land that is classified as residential which it is in the course of seeking a rezoning. That land has a value $1.3 million. The whole of the shares in A Pty Ltd are sold in one transaction to three shareholders one of which a foreign company. The foreign company is acquiring 50% of the shares.

72. The Commissioner appears likely to calculate the duty as follows:

72.1 The duty will be first calculated on $3.5 million (i.e. $2.2 million commercial land and $1.3 million residential land), namely $186,330. It will then be apportioned to qualifying land on the basis of (2.2/3.5 x $186,330) namely $117,121 and the balance to the residential land, namely $69,208.

72.2 The qualifying land concessional duty will be applied to reduce the duty on the qualifying land to $39,040. The duty will then be assessed on a 100% acquisition in the sum of $108,249.

72.3 As the foreign person is acquiring a 50% interest as part of the group the foreign ownership surcharge under the proposed section 102AB(5) is likely to be 4% x 50% x $1.3 million namely an additional $26,000.

73. There is a view that an alternative method of calculating duty in this situation is more appropriate and is as follows:

73.1 Calculate the duty on the residential land of $65,330. Calculate the base duty on the qualifying land of $114,830 and reduce it by the qualifying land concessional amount to $38,277.

73.2 The result is the duty that is assessed on the basis of a 100% acquisition on this approach is $103,607.

73.3 Then as the foreign person is acquiring a 50% interest as part of the group the foreign ownership surcharge under the proposed section 102AB(5) is likely to be 4% x 50% x $1.3 million namely an additional $26,000.

74. Which approach is correct depends on view taken as to the operation of section 14(2) that was introduced in the 2015 Budget measures. Ideally, the what is and what was intended to be the correct approach should be clarified by amendments to section 14(2) and Part 4 of the SDA.

75. Whilst it may be expected that few residences will be held in companies or unit trusts, it is likely that land acquired for development that is considered residential land will be held in companies and unit trusts. The foregoing example highlights that issue.

76. Even apart from that issue, where the land is acquired for development there is potential for these provisions to create significant additional stamp duty issues and impediments where foreign developers are involved and the status of the land changes. There are likely to be at least two further areas of issue. One is where the status of the land on its acquisition is regarded as residential. The other is where as a consequence of the development the status of the land is altered from non-residential to residential.

77. In the case of the first situation the surcharge becomes an additional cost for such developers, as already highlighted. Obviously, the inclusion of any such adjustment provisions will add yet further complexity to what appear to be unduly complicated adjustment provisions where there is a change of status of the owner. However, such provisions will reduce the disincentive for foreign developers to be involved in such developments.

78. In the second situation, on the current interpretation that appears to be adopted by the Commissioner, the landholder provisions will apply on the change of status of the land from non-residential to residential. This will arise because on the conversion of the land from non-residential land to residential land it is likely the Commissioner will contend that that there is an acquisition of a prescribed interest by the existing foreign shareholders in a company or unit trust.

There is a note at the bottom:

There has been a similar issue in the past as to whether a change of status of a company from say a public company to a private company triggered the landholder provisions. There has also been a similar issue where a company owning land with a value of less than $1 million (this threshold is abolished 1 July 2018) enters into a contract to develop land and its value exceeds the threshold.

Point 79 states:

79. A company that is wholly foreign owned acquires some shops and an old industrial site on the eastern edge of the CBD. The land acquisition does not attract a surcharge on its acquisition. The company constructs a building with three floors of commercial premises (shops and offices). The balance of the buildings are residential apartments. On completion of the building it deposits a strata plan for the building. The company is now the owner of significant residential property. On the deposit of that plan the foreign shareholder notionally acquires an interest in residential land. Whether it is a result of the transaction may be open to some debate. If it is as a result of the transaction then the foreign ownership surcharge under section 102AB will apply.

Again, there is a note at the bottom of the page:

The current section 102A(4) highlights that the landholder provisions can be triggered by acts of a company not simply by acts affecting rights in respect of the shares of a company.

Dot point 80:

80. It is suggested that there be an express exception from the operation of the landholder provisions where the status of the land changes from non-residential to residential.

As I indicated at the outset, I have read in its entirety the 14 pages of advice from the senior tax lawyer. As I said at the outset, for the last few years I am indebted to this senior tax lawyer for applying his considerable intellect and knowledge of the tax law to government tax legislation. As I indicated at the outset, on at least two occasions the government and RevenueSA have accepted some of the advice of the respected senior tax lawyer and have either changed practices and processes or, in one case, significantly amended the budget measures type legislation before the house.

As I have indicated on previous occasions in placing on the record the views of the senior tax lawyer, I do not indicate that I or the Liberal Party agree in whole or in part with the 14 pages of tax advice. I seek from the government, or from RevenueSA in particular and the tax commissioner, their response to the concerns and questions and suggestions for changes that the senior tax lawyer has provided. I read this onto the record at this stage to give RevenueSA and the commissioner sufficient time to provide a detailed written response to the reply at the second reading when we recommence debate on the bill, and we can explore the various issues during the committee stage of the debate. With that, I seek leave to conclude my remarks.

Leave granted; debate adjourned.