Understanding Australia's indirect taxes
In this section, we outline some of the key indirect taxes in Australia. Unlike direct tax, indirect tax is a tax that can be passed on to another entity or individual. Understanding these taxes is crucial when making informed investment decisions.
Goods and services tax
Australia has a broad-based flat-rate value-added tax of 10% on the supply of goods, services, real property, intangible property and other items. Goods and Services Tax (GST) operates in a similar way to other consumption and value-added taxes in other jurisdictions such as Canada, the United Kingdom, and New Zealand. The taxpayer making the supply will have the GST liability (i.e. liability to pay GST to the ATO) and the entity receiving the supply will ordinarily pay an increased amount for the good or service, which reflects the GST liability but will be entitled to claim a credit for the GST liability where the good or service is used in the carrying on of an enterprise.
Companies can form GST-groups. Similar to other tax groupings, GST groups allow business entities to operate as a single business for GST purposes. This streamlines compliance, and GST credits can be used across entities.
Exemptions from GST
- The sale of a ‘going concern’ – where a transaction involves the sale of an enterprise and the transaction is the supply of all things necessary for an entity to continue operating the enterprise, the transaction supply may be exempt from GST.
- GST-free supplies – exports, supplies of certain food and medical supplies.
- Input-taxed supplies – financial supplies (such as loans and shares) and residential real property.
GST withholding obligations
There are also GST withholding obligations for certain transactions. For example, where an entity makes a supply of new residential premises by way of sale or long-term lease, the purchaser will be required to withhold from the consideration a GST amount and remit to the ATO, unless an exception applies.
Stamp duty
All Australian States and Territories impose stamp duty on transactions involving certain types of “dutiable property”, including interests in land and acquisitions of business assets, with specific rules varying across the different jurisdictions.
Duty is also charged on acquisitions in land-owning companies and trusts, subject to certain thresholds. The duty is calculated as a percentage of the value of the relevant assets to a maximum of 6.5%.
In many States and Territories, there is a duty surcharge for “foreign” purchasers of direct and indirect interests in residential land. This can be as high as 8%, although this varies between jurisdictions.
The rules also capture some Australian-based entities with overseas investors. Detailed factual analysis may be required prospective investors in Australian land should seek advice before making an investment.
If you need help with understanding the potential impact of foreign purchaser duty surcharges on your residential property investment in Australia, seek advice from our team.
Commercial and industrial property tax
The Victorian Government announced in its 2023-24 State Budget that from 1 July 2024 it would introduce the “Commercial and Industrial Property Tax” (CIPT) as part of its long-term plan to replace stamp duty with an annual property tax.
These reforms will apply to qualifying commercial or industrial properties that are sold on or after 1 July 2024, with the new CIPT first applying 10 years after the property is first transacted after that date at a flat rate of 1% of the property’s site value.
More details on the new Victorian regime can be found in our article here.
Land tax
Each State and Territory (other than the Northern Territory) also imposes a periodic (usually annual) land tax, typically levied on the unimproved value of land.
Although there are many exemptions from land tax, land used for rental income or development, and vacant land, are generally taxable. Some States have land tax incentives for build-to-rent projects (see below).
Similar to stamp duty, many jurisdictions impose a land tax surcharge for foreign owners of certain types of land. The surcharge can be up to 4% of the taxable value of land, in addition to the usual rates each year.
The land subject to surcharge tax, and the definition of a “foreign” owner, vary from state to state so it is prudent for prospective investors to seek specific advice.
New South Wales
It had previously been identified in New South Wales that the terms of certain international tax agreements meant that citizens of some states were not subject to surcharge land tax rates. This is no longer the case, with changes to federal legislation making clear that foreign surcharges can apply in respect of citizens from any foreign jurisdiction.
Victoria
In late 2023, substantial expansion to Victoria’s vacant residential land tax (VRLT) was legislated to apply to all residential land in Victoria from 1 January 2025.
VRLT applies to taxable residential land that is ‘vacant’, meaning land that has not been used and occupied for more than 6 months of the year (continuous or aggregate), by either the owner or a permitted occupant as their home, or a tenant under a bona fide lease. From 1 January 2026, this will also include undeveloped land in metropolitan Melbourne that has been unimproved for more than 5 years. VRLT is levied at 1% of the capital improved value of the land and will increase by 1% for each year that the property remains subject to VRLT (up to at 3% after three years).
Property owners in Victoria should be aware of how these changes might affect their properties.
Build-to-rent concessions
Income tax concessions for build-to-rent (BTR) projects and developments apply in addition to any land tax and duty concessions available at a state level.
State concessions that may be available to eligible BTR properties include:
- a 50% reduction in the land value for the purposes of calculating land tax (reducing the overall land tax liability); and
- an exemption (or refund) for foreign purchaser duty and foreign land tax surcharges.
There are nuances across each state, with each having slightly different eligibility requirements and timing considerations. For example, a key difference in NSW is that the refund and exemption from foreign land tax and duty surcharges only apply to Australian-incorporated companies (i.e. the 50% land value for land tax purposes is available for all types of entities). This means that choice of entity type will be a relevant consideration for BTR concession purposes in NSW.
It is important to seek specific advice in relation to the State in which you are operating, or propose to operate, to ensure that you can take advantage of any available concessions.
Windfall gains tax
From 1 July 2023, Victoria’s new windfall gains tax came into effect.
The tax operates by charging up to 50% of the value uplift, where certain planning changes are made to allow development of the land.
Landowners can defer paying the tax until the land is sold, with a maximum deferral of 30 years if they also accrue interest at government bond rates. However, a prohibition against apportionment of any existing windfall gains tax liability between a vendor and purchaser applies for contracts of sale after 1 January 2024.
It remains to be seen whether other jurisdictions will impose a similar tax.
Contact our team
If you have any questions about the above or would like assistance with tax advice for doing business in Australia, please contact one of our team members below.
