52ND UIA CONGRESS

Bucharest - Romania
October 29-November 2, 2008

 

 

TAX LAW

Friday, October 31, 2008

 

REAL ESTATE TAXATION

 

QUESTIONNAIRE

 

Alan Jessup
Piper Alderman, Level 23, Governor Macquarie Tower,
1 Farrer Place, Sydney NSW 2000, Australia
Tel +61 2 9253 9999 / Fax +61 2 9253 9900
ajessup@piperalderman.com.au

 

© UIA 2008

 

1UIA Congress, October 2008, Bucharest (Romania)

Questionnaire

The upcoming UIA congress in Bucharest (Romania) in October 2008 will focus on the taxation of real estate. The purpose of the present questionnaire is to analyze, for each jurisdiction represented at the Congress, the regimes of taxation of cross-border real estate ownership and transactions.


Name of Author(s)

Alan Jessup

Corresponding state

Australia

Introductory remarks:
The following situations have to be analyzed: The taxation of acquiring, holding and transferring real estate, whereas the person – whether an individual, a legal entity or a real estate fund, is domiciled in another state than the real estate property is located (cross-boarder situation).
Two possible scenarios have to be examined, i.e. scenario (i) where the real estate is located in your own jurisdiction and (ii) where the residence of the owner of the real estate is in your jurisdiction.
In addition, in case the real estate owner is an individual, the answer has to distinguish between a private asset and a business asset. Furthermore, the real estate may be a residential property or a business property. Finally, a distinction may be made between a structure where the property is owned directly or indirectly (through the ownership of the shares of a real estate company).
The questionnaire invites the participants to present in some brief answers the tax consequences in the different scenarios mentioned above.
The questionnaire is split into a section (i) dealing with the taxation of a transfer of real estate, into a section (ii) dealing with the taxation of ongoing ownership of real estate and into a section (iii) dealing with other objects of taxation. For all those situations, each type of tax shall be covered.
As an introduction, some basics of civil law topics are raised in order to summarize the underlying civil law system relevant for the taxation of real estate in the different jurisdictions. Additionally, general questions on some basics of tax law topics are addressed and a chapter regarding a general overview over some taxes is available.

 


Overview:
CIVIL LAW
TAX LAW
General Questions
Specific Questions

Civil Law

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Hereafter, some civil law questions are raised in respect of the state where the real estate is situated.


How is real estate property defined according to the law of the corresponding state?

The meaning derives from the common law. It denotes:

land and things attached to the land so as to become part of it;

  • rights in the land which endure for a life.

However rights in land which are for a term are personal property and not real property e.g. leasehold interests in land.

Is there a public register stating the ownership of a real estate property
(land register)?

Yes. Each State and Territory has a land titles office for registration of dealings in land

If there is a land register, what is the nature of the register and what are the legal effects of a registration with the register?

Australia has a State based system of registration of title to land with each State or Territory of Australia having their own statutes which govern the registration of dealings in land.
However all States and Territories have a system of title registration developed in Australia in the ninetheenth century called Torrens Title.
The Torrens Title system that applies to all States and Territories of Australia is a Government guaranteed title system. Ownership of land is determined by the Register maintained by the title office of the relevant State or Territory.
There is an Assurance Fund to compensate persons who suffer loss or damage as a result of the operation of the Torrens System.
The Register is everything. The legal effect of the Register is that notwithstanding the existence in any other person of any estate or interest  in the land which might be held to be paramount or to have priority under the common law, the registered proprietor for the time being of any estate or interest in the land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded except:
(a)   the estate or interest recorded in a prior folio of the Register by reason of which another proprietor claims the same land,
(b)   in the case of the omission or misdescription of an easement subsisting immediately before the land was brought under the provisions of this Act or validly created at or after that time under this or any other Act or a Commonwealth Act,
(c)   in the case of the omission or misdescription of any profit à prendre created in or existing upon any land,
(d)  as to any portion of land that may by wrong description of parcels or of boundaries be included in the folio of the Register or registered dealing evidencing the title of such registered proprietor, not being a purchaser or mortgagee thereof for value, or deriving from or through a purchaser or mortgagee thereof for value, and
(e)  a tenancy whereunder the tenant is in possession or entitled to immediate possession, and an agreement or option for the acquisition by such a tenant of a further term to commence at the expiration of such a tenancy, of which in either case the registered proprietor before he or she became registered as proprietor had notice against which he or she was not protected:
Provided that:
(i)      The term for which the tenancy was created does not exceed three years, and
(ii)      in the case of such an agreement or option, the additional term for which it provides would not, when added to the original term, exceed three years.
This means that subject to the limited exceptions referred to above the holder of a registered interest obtains an indefeasible title to that interest.
However there is still some land that is based on a title system established at common law prior to the Torrens Title system being introduced although these titles are gradually disappearing by conversion across to the Torrens Title system. This common law system relies on a chain of deeds and documents starting with a good root of title more than 30 years old such as a conveyance or mortgage. However even this common law title system relies on registration of the deeds at the titles office.

Is the land register a national or a regional register? – Which authority is in charge of the land register, how is the register kept?

State and Territory based. Each State or Territory maintains a land titles office at which the Register is maintained. There is a folio for each parcel of land (which can just be air space such as strata title apartments). It will record the lot and plan number of the parcel and the dealings with respect to that land. The registered proprietor is recorded thereon as the owner of the land. Other interests are then registered thereon such as mortgages, easements, covenants, leases, profit a prendres etc.  A caveat can be placed to given notice of an unregistered dealing preventing registration of further interests that would take priority over that unregistered interest if registered.

Which form has to be observed when the ownership on land is transferred (e.g. public deed, notarization)?

A prescribed form of document is prepared such as a Transfer. It records the title concerned, the parties, the consideration and is signed by the Transferor. In some States and Territories it is also signed by the Transferee or the lawyer for the Transferee. Similarly with a mortgage, lease, profit a prendre, easements, covenants etc

Who is entitled to acquire real estate property in the corresponding state? Are there any limitations applicable to persons without residence in the state of the real estate property?

There is no residency requirement. However there are some national restrictions on foreign investment generally which may require the purchase to be approved by the Foreign Investment Review Board  (FIRB). 
Proposals to acquire the following require notification and approval: 
•           vacant land, regardless of value;
•           residential real estate, regardless of value;
•           an accommodation facility, regardless of value;
•           property being acquired by a foreign government or its agent, regardless of value;
•           developed commercial real estate subject to heritage listing valued at $5 million or more unless the acquirer is a US investor; and
•           developed commercial real estate where the total value of the property being acquired is $50 million or more, or $913 million (indexed annually) or more for acquisitions by US investors.  

In the corresponding state, how is real estate preferably acquired / held / transferred? Directly (asset deal / asset property) or indirectly (share deal / asset property)? According to civil law, what are the reasons for such structuring? (cf. also hereafter, page XX question according to tax law)

It is done by contract between a vendor and purchaser. A prescribed form of transfer is prepared to register the change of ownership on completion of the cotnract. The transfer is handed over on completion and is then registered. A purchaser gets the same protection that it would have had if it was registered immediatly on completion to cover the delay between completion and lodgement of the transfer at the titles office.

Is there a statutory mortgage (legal lien) securing the tax liability, due on the transfer of the ownership of real estate?

The only statutory liabilities are statutory charges that specifically relate to the land itself such as council and water rates and land tax.
A purchaser however can rely on a certificate issued by these authorities and if there is a charge for payment of any of these they can be cleared prior to completion.

 

 

Tax Law

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General Questions

Acquisition of real estate

In the corresponding state, is real estate property preferably acquired directly (asset deal) or indirectly (share deal)?
From a tax point of view, what are the advantages / disadvantages of an acquisition of real estate by way of an asset deal or a share deal? Especially, are there any advantages of a share deal regarding inheritance and gift taxes, or with respect to real estate capital gains taxes etc.?

 

In Australia, land can be a capital asset or trading stock. It will only be trading stock if the owner trades in land such as a developer. If it is a capital asset then gains and losses are dealt with under special provisions relating to capital gains and capital losses. If it is trading stock then gains and losses are dealt with on revenue account.
There are no inheritance taxes in Australia.
The following discussion relates to when land is a capital asset which is the most usual circumstance.
Australia does not have a separate capital gains tax although colloquially it is often referred to as such as the acronym CGT is used without definition in the legislation. However capital gains come to be taxed indirectly as part of general income tax.
Net capital gains are included in assessable income. Assessable income less deductions is taxable income on which income tax is assessed.
Net capital gains are calculated using a method statement that takes into account your current year capital gains, current year capital losses, past year net capital losses and reducing any relevant discount capital gains by the relevant discount percentage.
An individual or trust will only include 50% of any capital gain made with respect to an asset held more than 12 months e.g. if the capital gain is $10,000 you only include $5,000 of that gain in the calculation of your net capital gains.
A complying superannuation fund or a life insurance company with respect to any asset that forms part of its complying superannuation fund business will only include  33⅓% of any capital gain made with respect to an asset held more than 12 months.
Companies do not get any discount capital gain so the whole of any capital gain is included in the calculation of a company's net capital gains.
This discount applies to disposal of any form of CGT asset which is any kind of property or                any legal or equitable right that is not property .Therefore a CGT asset includes direct real estate and shares in a real estate company.
In certain circumstances if the taxpayer is a small business taxpayer a discount capital gain of 50% is available which is in addition to any general discount capital gain referred to above (e.g. an individual would then have a 75% discount capital gain). Unlike the general discount capital gain, this discount applies to all entities including companies.
If land is an active asset (which is only in limited circumstances where the land is used in a business such as a hotel, motel, boarding house or the like but not investment properties) If the land has been held for more than 15 years and you are over 55 or permanently incapacitated then the total capital gain is disregarded. Where the entity that owns the land is a company then if the shareholder is a significant individual (holds at least 20% of the company) and that individual  is over 55 or permanently incapacitated then the total capital gain is neither assessable income nor exempt income i.e. it will be tax free and therefore can be distributed to the individual without any tax effects.
However this benefit will only apply if the land has been used in a business such as a farm or hotel. It does not apply to rental premises such as investment properties. 
As a result of the above, if you are an individual, trust or a complying superannuation fund it will always be better from a taxation perspective to directly own the land rather than through a company.
The following illustrates why this is the case.
If land is sold and the capital gain is $10,000. Assuming there are no other capital gains and there are no offsets of past net capital losses or current capital losses, then if the owner was an individual, its net capital gains for the year will be $5,000 which is the amount included in the individual's assessable income which if taxed at the highest marginal tax rate would result in income tax of $2,250 on the gain..
On the other hand of the owner is a company, it will make a net capital gain of $10,000. It will pay company tax of $3,000 on the gain. If the $7,000 is distributed to an individual shareholder at the highest marginal tax rate the amount of tax paid by the shareholder is $1,500. The total income tax is therefore $4,500 as against $2,250 if the land had been held directly by the individual.
A sale of shares is dealt with in the same way as above. If it is trading stock i.e. the owner is a share trader then gains and losses are dealt with on revenue account. If the shares are on capital account then gains and losses are dealt with on the same basis as discussed above in relation to land.
For most taxpayers land and shares will be a capital asset so the following applies where the land and shares are a capital asset.
Seller:
If you are a company it makes no difference from a taxation point of view.
However if you are an individual, trust or complying superannuation fund, then it is better to own the land directly because of the benefit of the discount capital gain that applies to these entities.
However if the land is already owned by a company then if you are an individual, trust or complying superannuation fund that holds shares in the company then the sale of the shares would be better than the company selling the land and distributing the proceeds by way of dividend or on a winding up. This is because the discount capital gain applies to the sale of the shares.
If the company sells the land then any capital gain is included in the net capital gains and therefore taxed within the company without the benefit of any discount on the capital gain. The net capital gains will therefore effectively be taxed at 30%. The profit can be distributed as a franked dividend which means the shareholder gets a tax offset against their marginal rate for the tax paid by the company e.g. if the marginal tax rate is 45% then only 15% is taxed in the shareholder's hands. If the marginal tax rate is less than 30% then you get a refund of the tax overpaid from the Government.
The difference between selling the shares or the land for say an individual on the highest marginal tax rate is the difference between tax at 22.5% and 45%.
The following illustrates the point.
If a company sells land for $100,000 and makes a capital gain of $10,000 and has no other capital gains or capital losses, then it will pay tax of $3,000. If the company  the distributes the after tax profit of $7,000, the shareholder will include $10,000 in his or her income tax return (i.e. the $7,000 dividend plus the franking credit of $3,000 representing the tax paid by the company). At the highest marginal tax rate the tax on this is $4,500 but the shareholder gets a tax offset credit for the $3,000 paid by the company. The total tax paid on the gain is therefore $3,000 paid by the company and $1,500 paid by the shareholder.
If an individual shareholder sells the shares in the land holding company for say $100,000 for a capital gain of $10,000 and the shareholder has no other capital gains or capital losses, then the shareholder only includes $5,000 in his net capital gains. Tax on this at the highest marginal tax rate is $2,250.
The difference between the two is tax of 45% for a company selling the land and 22.5% for the shareholder selling the shares.
If the land owning entity is a trust it is not going to make any difference between selling units in the trust and the trust selling the land because taxation generally occurs in the hands of the unit holders (beneficiaries) rather than the trustee.
Purchaser:
Generally you would not want to purchase shares in a company because you take on any pre-existing liabilities.
Also if you are an an individual, trust or complying superannuation fund it is much better from the point of view of a future disposal that the land be directly owned rather than through a company. 
In addition if you are an individual, trust or complying superannuation fund it also works out better if you have direct ownership of the land rather than shares because there are certain deductions available with respect to land ownership which give a lower overall tax result in their hands than if owned by a company and then distributed to a shareholder. 
For example, deductions will be available for the decline in value of plant and equipment and a deduction for a percentage of the costs of capital works such as buildings. This will reduce taxable income but not distributable income.
If the taxpayer is a company because no tax has been paid on that proportion of the income against which the deduction is made, any dividend will be unfranked meaning the shareholder is subject to tax at the full marginal tax rate on the distribution. This means the shareholder does not benefit from the tax deductions obtained within the company.
If the taxpayer is an individual, trust or complying superannuation fund some of the income from the land will not be subject to income tax which means they get tax free money. The only downside for them is that an adjustment is made to the cost base of the real estate for future calculation of capital gains for the amount of the deduction although it is still tax favourable because of the discount on fhe capital gain available to those entities.
For example if the income from the land is say $1,000 and there is a deduction of $200 for decline in value of plant.
A company would pay income tax on $800 leaving $560 after tax plus the $200 that was subject to the deduction and therefore not taxed. If the company paid a dividend of $760 then only $560 would be franked and $200 would be unfranked. The overall tax including allowance for the company tax paid will be $450 where the shareholder is at the highest marginal tax rate
On the other hand an individual would receive $1,000 but only pay tax on $800 at their marginal tax rate. This means the overall tax is only $360 as against $450 with a company. The cost base of the land will be reduced by $200 and therefore would increase any future capital gain by that amount. However only half of this would be taxable for an individual assuming there are no offsetting losses. The overall tax would still only be $405 as against $450 for a company.
Also with complying superannuation funds, once the fund enters the pension phase (e.g. when the member attains retirement age) then any capital gain will not be subject to any income tax. Therefore the land could be sold free of income tax with respect to capital gains in the future.
However in some instances a purchase of shares in a company can work out better where the purchaser is a company.
We have tax consolidation for groups of companies in Australia and on a company joining a group you can sometimes get an uplift in  tax value of assets held by the joining entity. Generally where this is done the assets would be moved within the group after joining and the joining entity will be wound up.

Separation of operational business and real estate property

Provided that the real estate is held by a company domiciled in the state of location of the real estate, and provided that the company is performing operating activities/ conducting a business, how is the ownership of the assets of the company usually structured?
I.e., are real estate assets separated from the operating business (two separate companies under the same control)?
And, what are the drivers behind such structuring? Civil law (ring fencing) and/ or tax reasons, other reasons?

Generally one would keep the ownership of the land in a separate entity to the entity which carries on the business from an asset protection point of view.
For reasons stated above in relation to the taxation of capital gains, it is better that the entity which owns the land is an individual, trust or complying superannuation fund with a company owning the operating business, The land owner can then lease the land to the operating business entity. The operating business entity can claim the rent as a deduction and the land owning entity will be subject to tax on the net income i.e. the rent less deductions such as the decline in value of the buildings, plant and equipment.

What is the definition of a transfer of real estate?

Is there a taxation upon change of ownership in accordance with civil law(asset deal)?

Yes.
There are income tax, GST and State or Territory stamp duty issues.
Income Tax
If a CGT event occurs in relation to a CGT assets such as land this gives rise to CGT consequences. Unless the capital gain or capital loss is disregarded (.e.g because of some exemption such as a pre-CGT asset or the main residence) such capital gain or capital loss is taken into account in working out your net capital gains for the year and then included in your assessable income. 
Any change of ownership other than of the bare legal title (such as a change of trustee of a trust) will be a CGT event.
GST
There is GST of 10% on taxable supplies. A transfer of real estate can be a taxable supply but not all transfers of real estate are taxable supplies.
A transfer of land that is used for residential purposes other than new residential is an input taxed supply and not liable to GST.
A transfer of farming land used in a farming business or subdivided land from farming land used as a farming business in the past 5 years is GST free.
A transfer of commercial property that is subject to a lease may be GST free if the parties agree being a supply of a going concern.
A transfer of new residential and other land not referred to above previously is subject to GST.
However in some circumstances an owner may apply the margin scheme where GST is only charged on the margin between the acquisition cost and the sale price. Developers often use this to reduce the end sale price such as where it is new residential where the purchaser is not going to be able to claim the GST back.
Stamp Duty
Australia's States and Territories all charge a stamp duty on the transfer of real property payable by the purchaser. There are some lmiited exemptions e.g. the family home can be transferred from one spouse to both spouses, first home purchases below a certain value etc.

Is there a taxation upon indirect transfer of real estate, in particular in the event of a change of ownership in a real estate company (change of control, share deal)?

Yes.
Income Tax
There is no taxation on a change of control. However a change of control can have other effects e.g.

  • Loss of pre-CGT nature of assets (which are assets acquired prior to introduction of CGT and therefore are free of any income tax on a disposal)
  • loss of any unused revenue and capital losses within the company.

A share is an asset and a disposal of the share is treated the same way as the disposal of real estate referred to in the previous question.
GST
A transfer of shares is a financial supply and therefore not subject to GST.
Stamp Duty
The States and Territories all have provisions which treat transfers of shares in land owning entities as a transfer of the underlying interest in the land.
However in general terms this is only triggered where there is a majority acquisition or further interests by a holder who is a majority shareholder on change of ownership in the shares. This can occur without a transfer of shares e.g. a change in rights which gives majority control. Usually there are some other thresholds such as the land value being above a certain threshold (e.g in NSW it is $2m)and forms a certain percentage of the overall assets of the company (.g. in NSW it is 60%)

Does the law of the corresponding state provide for a deferral of, or exemption from, taxation in certain cases? In what situation (e.g. upon succession; upon donation to the spouse / descendant; upon disposal of the shares of a real estate company)?

Real estate capital gains tax

As stated above, Australia does not have a separate capital gains tax. However capital gains can come to be taxed as part of income tax.
This occurs by reason of capital gains forming part of your net capital gains which are included in your assessable income. Assessable income less deductions is taxable income and you are assessed for tax on this amount.
As discussed above, any CGT event with respect to any asset including real estate may give rise to a capital gain or capital loss.
Save where any capital gain or capital loss is to be disregarded (e.g. your main residence), then you must include any capital gain or capital loss that is triggered by the CGT event in the calculation of your net capital gains for the income year.
Your net capital gains are calculated under a method statement that takes into account all your capital gains, all your past and present capital losses and any discount capital gain to which you are entitled (e.g. individuals and trusts are entitled to a discount capital gain of  50% and complying superannuation funds and assets held by life insurance companies with respect to complying superannuation fund business are entitled to a discount capital gains of 33⅓% provided the asset was held for longer than 12 months).
Your net capital gains then form part of your assessable income. Assessable income less deductions is taxable income and you are then taxed on this amount.
This applies to all assets for residents wherever located including real estate whether located in Australia or offshore.
For non-residents it only applies to:

  1. Australia real estate (which will include mining and exploration tenements)
  2. non-portfolio interests (10% or more) in land rich companies (those whose majority of assets are in Australian real estate)
  3. any other CGT asset not covered by the above that is used in carrying on business in Australia through a permanent establishment;
  4. options over any of the above
  5. any CGT asset where determination of the capital gain or capital loss was deferred on your becoming a non-resident.

Exemptions
There are a few exemptions. The relevant ones for real estate are:

  1. the main residence

Any capital gain or capital loss made with respect to the sale of your main residence or a proportion thereof where it was not always your main residence is disregarded i.e. it is exempt from tax.  The exemption also applies if the legal personal representative or a benefidiary of a deceased person sells the main residence within 2 years of the deceased's death. There are also allowances for changeover of residences where you have 2 for a period and for absences for periods of up to 6 years to allow for the fact that you may have to work overseas or interstate for a while.

  1. any CGT asset (including real estate) acquired before 20 September 1985.

This was the date on which a tax on net capital gains was introduced. All assets owned at that date were grandfathered  and any capital gain or capital loss made with respect to a transfer of the same are disregarded.

  1. if real estate is an active asset ie it is used in the course of carrying on a business (but not where it is rented out such as an investment property) e.g a farm used in a farming business, a hotel used in the sale of liquor  etc) and is held for more than 15 years then if the owner is a small business entity (e.g. an annual turnover of less than $2m or has less than $6m net  assets), is over 55 and you are selling the same in connection with your retirement or you are permanently incapacitated then any capital gain or capital loss is disregarded.

Deferral of Taxation on death
On death the deceased's assets are transferred either to the legal personal representative or the beneficiary. This is a disposal and would normally therefore give rise to a capital gain or capital loss which would be then required to be included in the deceased's net capital gains.
However there are various deferral rules which defer the income tax effects until such time as the legal personal representative or the beneficiary disposes of the asset (including real estate).
Because the main residence is exempt from tax,  the main residence is given a cost base equal to is market value on the date of death for calculation of future capital gains or capital losses.
However if the main residence is sold by the legal personal representative or beneficiary  within 2 years of death of the deceased then any capital gain or capital loss is disregarded i.e. it is exempt from tax.
If it becomes the main residence of a beneficiary then it remains exempt from tax in the beneficiary's hands as the beneficiary's main residence.
In relation to other real estate, on death, any capital gain or capital loss made on transfer of real estate to the legal personal representative or beneficiary is disregarded. The capital gain or capital loss is only then considered at the time of disposal by the legal personal representative or beneficiary.
For the purpose of the legal personal representative or beneficiary working out their capital gain or capital loss on disposal they effectively inherit the deceased'd cost base of the asset and have the same choices e.g. for some assets held on or prior to 21 September 1999 a choice may be made between taking the 50% discount or indexation of the cost base depending on which give you the best tax result.
On death for assets that were acquired before 20 September 1985 (when CGT was introduced) by the deceased these are given a cost base for future disposal equal to the market value at the date of death of the deceased.
On death if the beneficiary is a non-resident, land and non-portfolio interests in land rich companies are treated the same as the above for the resident but not for other types of assets which will be subject to taxation with respect to capital gains or capital losses as if the deceased had sold those other assets at his or her death.
Deferral of tax on marriage breakdown
If an asset including real estate is transferred from one spouse to another as part of the propertly settlement involved in a marriage breakdown, any capital gain or capital loss is disregarded but the transferee will get a cost base for the asset that the transferor had and have to include the capital gain or capital loss in their net capital gains when they dispose of the asset.
Deferral of tax where transfer is to a wholly owned company
An individual, trust or partnership may transfer an asset including real estate to a wholly owned company. They get a cost base for their shares equal to the cost base of the asset sold for the purposes of a future disposal of those shares. The company has a cost base for the asset which the shareholder(s) had on the transfer.
Deferral of tax for certain small business entities
If real estate is an active asset ie it is used in the course of carrying on a business but not where it is merely rented out e.g a farm used in a farming business, a hotel used in the sale of liquor, a motel used for holiday lettings, a boarding house and similar) and is held for more than 15 years then if the owner is a small business entity (e.g. an annual turnover of less than $2m or has less than $6m net  assets and you roll over that part of the proceeds of sale that is the capital gain that is included in your net capital gains into another active asset then the inclusion of that amount in your net capital gains is deferred until a disposal occurs with respect to the replacement asset.
Alternatively you can roll over that amount into superannuation up to a lifetime limit of $500,000 and the capital gain is then never included in your net capital gains.


Corporate income tax

A transfer of real estate within a consolidated corporate tax group is not subject to income tax.
However a disposal of real estate outside a corporate group that is not subject to any roll over relief will be subject to tax in the normal way i.e. any capital gain or capital loss is taken into account in working out net capital gains which is then included in assessable income and then subject to the normal company tax of 30%.

Real estate transfer taxes

The States and Territories charge stamp duty to the purchaser on a transfer of real estate based on its value as well as on majoirity acquisitions in real estate companies.
There is corporate reconstruction relief in most States and Territories which would allow intergroup transfers to be made without any stamp duty.
There is no specific real estate transfer tax other than stamp duty which is payable by the purchaser.

Inheritance and gift tax

There are none.
However there are CGT issues. On death there is a deferral until the legal personal representative of beneficiary disposes of the real estate.
A gift is still a disposal. The real property will have a deemed market value on the date of the disposal and if the donor makes a capital gain or capital loss as a result of the gift based on that deemed market value, then he or she must include that capital gain or capital loss in the calculation of their net captial gains for the income year in the manner discussed previously.

Other taxes

There are State and Territory based land taxes charged on the value of land held at a certain date. The principal residence is generally exempt and there is usually a period on death where no land tax is not charged with respect to the deceased's residence.
Councils, Rural Protection Boards and Water Authorities usually charge annual rates or levies on all relevant real estate to cover the costs of services they provide to land owners.

Relevant time


What time or what civil act is relevant for the taxation of the acquisition of real estate (time of conclusion (signing), time of completion (closing) or time of registration?

There is only stamp duty levied on the acquisition of real estate. It must be paid within a specified time of the date of the contract which ranges from 1 month to 3 months depending on the State or Territory concerned.
There are no other forms of taxes on acquisition.
There are State based land taxes but this is not on acquisition only ongoing ownership. In NSW this is calculated on the basis of the value of land owned at midnight on each 31 December. There are various exemptions such as your principal residence and there is a tax free threshold. The valuer general issues valuations of the unimproved capital value of land periodically on which this is based. There are differences in the way this is done between the States and Territories but there are similarities.

Depreciation and amortization


Depreciation and amortization of real estate.

If you use the real estate to earn assessable income e.g. rent then you may claim as a deduction the decline in value of fixed improvements such as the plant and equipment etc. The Commissioner issues guidelines as to the relevant percentage.
The cost of construction of buildings may be claimed either at  2.5% or 4% for the original construction expenditure of a building. The deduction runs with the building so both the original purchaser and future purchasers may claim at that rate until it is fully claimed.


Tax Overview

Taxes relevant to real estate taxation in the corresponding state

Real estate capital gains tax

As stated above Australia does not have a separate capital gains tax. It just has an income tax. However capital gains can come to be taxed as part of income tax by becoming part of your overall taxable income on which income tax is paid
As discussed above, any CGT event with respect to any asset including real estate may give rise to a capital gain or capital loss.
Save where any capital gain or capital loss is to be disregarded (e.g. your main residence), then you must include any capital gain or capital loss that is triggered by the CGT event in the calculation of your net capital gains for the income year.
Your net capital gains are calculated under a method statement that takes into account all your capital gains, all your past and present capital losses and any discount capital gain to which you are entitled (e.g. individuals and trusts are entitled to a discount capital gain of  50% of the capital gain and complying superannuation funds and assets held by life insurance companies with respect to complying superannuation fund business are entitled to a discount capital gains of 33⅓% of the capital gani provided the asset was held for longer than 12 months).
Your net capital gains then form part of your assessable income. Assessable income less deductions is taxable income and you are then taxed on this amount.
This applies to all assets for residents wherever located including real estate.
For non-residents it only applies to Australia real estate (which includes exploration and mining tenements) and non-portfolio interests (10% or more) in land rich companies (those whose majority of assets are in Australian real estate).

Income tax (corporate and individual income taxes)

There is no separate income tax on real estate. However as above and as with any other asset, if a capital gain or capital loss is made with respect to a disposal of real estate (and certain other CGT events) then that capital gain or capital loss is taken into account in working out the taxpayers net capital gains for the year and then included in normal assessable income. Your taxable income is assessable income less deductions. Your taxable income is subject to income tax at the relevant tax rate (companies 30% and individuals at the relevant marginal tax rate which cascades at various levels of income from 0 up to 45%)

Real estate transfer taxes

A purchaser will pay a State or Territory based stamp duty on acquisition of the real estate.
See above for treatment of capital gains or capital losses on transfer.

Inheritance and gift tax

There are none.
However there are CGT issues. On death there is a deferral until the legal personal representative of beneficiary disposes of the real estate.
A gift is still a disposal. The real property will have a deemed market value on the date of the disposal and if the donor makes a capital gain or capital loss as a result of the gift based on that deemed market value, then he or she must include that capital gain or capital loss in the calculation of their net captial gains for the income year.

Net wealth tax

None. However there are State and Territory based land taxes that are based on the value of land owned so in a sense there is a tax on wealth based on that value.

Special tax on immovable property

None.

Value added tax (VAT)

GST does not apply to residential properties other than new residential. GST does not apply to a supply of a going concern such as a sale of leased property. GST does not apply to farming land used in a farming business or is a subdivision of land used in a farming business over the last 5 years.
GST therefore will generally only be applicable to new residential or other property that is not leased.
However we have a margin scheme which may be available where GST only applies to the difference between the acquisition price and the sale price (developers may use this to reduce the effect of GST on a sale of the developed property as new residential) Where the margin scheme applies the GST may not be claimed back by the purchaser as an input tax credit.

Other taxes

Stamp duty and land taxes referred to above. Annual local council and water rates are levied on land owners based on the value of land.

Double Taxation Treaties (DTT)


Under the double taxation treaties concluded by the relevant jurisdiction, which State is entitled to levy a tax on income derived from real estate?

The Commissioner of Taxation regards double tax agreements entered into prior to 20 September 1985 (when CGT came into effect) as not applying to capital gains (a view disputed by tax practitioners because taxation on capital gains is part of the Australian income tax to which all double tax agreements apply) so he applies the normal rules without reference to the double tax agreement.
For double tax agreements entered into after 19 September 1985, the contracting state where the land is located may tax the gain but Australia also reserves the right to do so in relation to land located in the other contracting state in relation to Australian residents.
Our International Tax Agreements Act states that the provisions of the double tax agreement that apply to real property also apply to shares in companies and other entities whose assets consist of either directly or through interposed entities wholly or principally of real estate located in Australia.
Therefore Australia will tax a non-resident in relation to real estate located in Australia. Any capital gain or capital loss made by a non-resident arising out of a sale of real property located in Australia or non-portfolio interests in a company or a trust where the market value of the company's direct and indirect interests in real property exceed the market value of its other assets must be included in the calculation of that non-resident's net capital gains which is then included in their assessable income. The non-resident's taxable income is that assessable income less deductions. They will then be subject to Australian income tax on that taxable income.
There is no withholding tax. However Australia may issue a notice to prevent the proceeds going offshore before the income tax is paid (if they find out about it before the money goes offshore).
Australia also taxes its residents on worldwide income. Therefore capital gains or capital losses made by a resident with respect to disposals of real estate located outside Australia will be included in the resident's net capital gains for the year which is then included in its assessable income.  This is irrespective of whether the other contracting state where the land is located also taxes the gain. However a foreign tax offset is available up to the amount of Australian tax payable on that income to offset against that Australian tax.
Land also includes exploration and mining tenements under our double tax agreements.
There is a special withholding tax regime applicable to foreign investments through certain types of managed investment trusts which includes REIT's (real estate investment trusts).
The withholding tax is The rate is:
(a)   if the address or place for payment of the recipient is in an information exchange country:
(1)   22.5% for fund payments in relation income year starting 1 July 2008; or
(2)   15% for fund payments in relation to the ncome year starting 1 July 2009; or
(3)   7.5% for fund payments in relation to later income years; or
(b)        otherwise - 30%.
However you do not include in the amount against which the withholding tax is calculated any foreign source income or any amounts that have already been subject to withholding tax as interest, dividends or royalty income. In calculating the amount against which tax is to be withheld the trustee is required to disregard any discount capital gain that would otherwise be applicable to the trust.

Which State is entitled to levy a net wealth/ net equity tax on immovable property?

Australia does not charge such a tax. There is no provision in our double tax agreements in relation to this probably because we do not charge such a tax.

Which State is entitled to levy a tax on capital gains derived by the alienation of immovable property

Both contracting states may tax subject to double taxation relief.

Methods for the elimination of international double taxation under the treaties concluded by the relevant country (tax credit/ imputation or exemption method):

A foreign tax offset is available for the amount of foreign tax paid on that income up to the amount of Australian tax that would be payable with respect to the same income.

Specific Questions

Introduction/ Instructions:
Below you find 12 different cases. The criteria to distinguish the cases are the following:

  1. Owner of the properties: Individual ("I"), real estate company ("REC") or (other) legal entity ("LE")
  2. Type of property: Residential ("Res") or Business ("Bus")
  3. Type of deal: Asset deal ("AD") or Share deal ("SD")
  4. Type of wealth to which property or shares belong: Private ("Pr"), Business ("Bus") or Business of a legal entity ("BLE")

The following table gives an overview of the 12 cases:

Case No.

Owner

Type of property

Type of deal

Type of wealth to which properties/ shares belong

1

I

Res

AD

Pr

2

REC

Res

SD

Pr

3

I

Bus

AD

Pr

4

REC

Bus

SD

Pr

5

I

Res

AD

Bus

6

REC

Res

SD

Bus

7

I

Bus

AD

Bus

8

REC

Bus

SD

Bus

9

LE

Res

AD

BLE

10

REC

Res

SD

BLE

11

LE

Bus

AD

BLE

12

REC

Bus

SD

BLE

It must be noted that the above criteria have been elected from a Swiss legal and tax perspective. It may be possible that in your jurisdiction other criteria are more relevant. For this purpose, under all cases listed below, the specific situation of your jurisdiction can be described in the section "Comments".
The 12 cases have been put into the following three sub-sections:

  1. Real estate is part of private wealth of an individual: Cases 1 –4.
  2. Real estate is a business asset of an individual: Cases 5 – 8.
  3. Real estate is an asset of a legal entity: Cases 9 – 10.

Each case contains a Part A asking for the tax treatment if your jurisdiction is the country where the real estate is located. Part B deals with the situation where your jurisdiction is the country of residence of the owner, or shareholder of the real estate company, as the case may be.
Within the questionnaire, the taxation upon transfer of the ownership of real estate (e.g. by way of a sale) will be covered as well as the ongoing taxation of real estate (i.e. recurring taxation such as income and wealth taxes).

I. Real estate is part of private wealth of an individual

 

Case 1

 

Part A (Your jurisdiction is the country where real estate is located)

Description

Country of taxation

Taxation in the state where the real estate is located

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal


Taxation upon transfer of the ownership of real estate

Real estate capital gains tax

As discussed above, there is no separate capital gains tax but capital gains and capital losses are taken into account in working out your net capital gains which are then included in your assessable income. After deductions this becomes your taxable income on which income tax is calculated and payable.
If the residential property is the individual's main residence then any capital gain or capital loss is disregarded i.e. it is exempt from tax.
If the residential property was acquired before 20 September 1985 then any capital gain or capital loss is disregarded ie. it is exempt from tax.
In relation to residential property in calculating their net capital gains:

  1. an individual is entitled to the 50% discount capital gain whether a resident or not if indexation of the cost base is not chosen (see next point) i.e. only 50% of the capital gain is included in the net capital gains calculation
  2. if the property was owned on or before 21 September 1999, the taxpayer irrespective of residency may choose indexation of the cost base in lieu of the 50% discount whichever works out best – if indexation is used then the capital gain is the difference between the capital proceeds and the cost base indexed from inflation
  3. if the residential property is an active asset such as a motel or boarding house then for individuals who are  small business taxpayers there is a further 50% discount or if they are over 55 or incapacitated and have held the property for 15 years the capital gain is completely disregarded.

Under its double tax agreements, Australia has the right to tax income, profits or gains made with respect to real estate or alienation of real estate located in Australia.
Therefore non-resident individuals will be subject to the above regime in relation to net capital gains with respect to residential property located in Australia.
Non-resident Individual
They must include in their net capital gains worked out as above, any capital gains or capital losses made with respect to a disposal of residential property located in Australia which is then included in their assessable income. Their assessable income less deductions is their taxable income which is subject to income tax in Australia. They may be entitled to double taxation relief in their own country.
There is no withholding tax although if the Commissioner finds out about it in time he can issue a notice to prevent the profit going offshore before the tax is paid.
Residential Individuals
They must must include in their net capital gains worked out as above, any capital gains or capital losses made with respect to  disposal of residential property wherever located.

Income tax

Net capital gains referred to above are included in assessable income which after deductions is taxed under the general income tax provisions. There is no separate tax.
However if the residential property is trading stock which would only be applicable if the individual was a developer or otherwise traded in residential properties, the gain or loss on sale is ordinary income and included as such in assessable income without the benefit of any of the concessions that apply if it was held on capital account and formed part of the net capital gains of the individual.

Real estate transfer tax

The States and Territories charge stamp duty to the purchaser on a transfer of real estate located in the State or Territory based on its value as well as on majority acquisitions in real estate companies.
There is no specific real estate transfer tax other than stamp duty which is payable by the purchaser.
This applies irrespective of residency.

Inheritance and gift tax

There are none.
However there may be CGT issues. 
Generally there is roll over on death with income tax deferred until a later disposal by the legal personal representative or beneficiary.
The following rules apply irrespective of the residency of the owner of the real estate.
The legal personal representative or beneficiary will be liable to include in their net capital gains any capital gain or capital loss made with respect to the disposal of any real estate that has passed to them on the death of the deceased using the cost base of the deceased (although the main residence of the deceased or a property that was acquired prior to 20 September 1985 by the deceased will get a deemed cost base equal to the market value at the date of the death of the deceased). Effectively income tax is deferred until the real estate is disposed of by either the legal personal representative or the beneficiary. There is no disposal because of the transfer to the legal personal representative of the beneficiary.
Although there is no gift tax, a gift constitutes a disposal of property and any capital gain or capital loss that arises with respect to that disposal must be included in the net capital gains of the donee. The capital proceeds from the disposal will be the market value of the real estate at the time of the disposal.

Other taxes (VAT, etc.)

GST does not apply to residential properties other than new residential. GST does not apply to a supply of a going concern such as a sale of a property that is leased. GST does not apply to farming land.
GST therefore will generally only be applicable to new residential or other property that is not leased. However we have a margin scheme which may be available where GST only applies to the difference between the acquisition price and the sale price (developers may use this to reduce the effect of GST on a sale of the developed property as new residential) Where the margin scheme applies the GST may not be claimed back by the purchaser as an input tax credit.
There are also State based land taxes based on the value of the residential property that is owned at a particular date in a calendar year with the principal residence generally exempt
Local councils and water authorities levy an annual rate based on the value of land owned.

Ongoing taxation of real estate

Net wealth tax

None.
However There are State based land taxes based on the value of the residential property that is owned at a particular date in a calendar year with the principal residence generally exempt.

Income taxes: Taxation of rental income, imputed rental value, deductibility of interest

Rental income is ordinary income and included with other assessable income. Interest is deductible if it was incurred to earn assessable income e.g. to buy the residential property (other than the main residence). There is no imputed rental value because the main residence is exempt from tax and no deduction is allowed for the interest.

Other taxes

There are State based land taxes and local and water authority rates.

 

Comments

Australia taxes worldwide income of residents which includes net capital gains with respect to assets including real estate and shares in real estate companies wherever located. Australia taxes non-residents on income with an Australian source which includes net capital gains with respect to taxable Australian assets which is direct and indirect holdings in real estate located  in Australia i.e. direct real estate holdings and non-portfolio interests in companies or trusts whose majority of assets consists of Australian real estate

Part B

Description

Country of taxation

Taxation in the state of residence of the owner of the real estate

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Taxation upon transfer of the ownership of real estate

Real estate capital gains tax (RECGT)

I have assumed the real estate is located outside Australia and owned by an Australian resident.

The position is the same as in Case 1 Part A under this topic.

However the Australian resident individual will be entitled to a foreign tax offset for the amount of any foreign tax paid on the gain up to the amount of Australian tax payable on the same income.

Income tax

The position is the same as in  Case 1 Part A under this topic

Real estate transfer taxes (RETT)

Not Applicable

Inheritance taxes

Same as in  Case 1 Part A above

Gift taxes

Same as in Case 1 Part A above

Other taxes (VAT, etc.)

Not Applicable

Other taxation (other than upon holding or upon disposal)


Nil

Comments

Australia taxes worldwide income of residents which includes net capital gains with respect to assets including real estate and shares in real estate companies wherever located. Australia taxes non-residents on income with an Australian source which includes net capital gains with respect to taxable Australian assets which is direct and indirect holdings in real estate located  in Australia i.e. direct real estate holdings and non-portfolio interests in companies or trusts whose majority of assets consists of Australian real estate

Case 2

 

Part A

Description

Country of taxation

Taxation in the state where the real estate property is located

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The company is domiciled in the state where the real estate is located. Its shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company
Share deal

 


Taxation upon transfer of the ownership of real estate

Real estate capital gains tax: Is there a real estate capital gains tax on the sale of shares of a real estate company?

If so, is the buyer of the shares entitled to claim a step-up in tax basis for a later asset and/ or share deal?

As discussed above, there is no separate capital gains tax but capital gains and capital losses are taken into account in working out your net capital gains which are then included in your assessable income. After deductions this becomes your taxable income on which income tax is calculated and payable.  This applies to all CGT assets whether direct real property or any kind or shares in a land holding company.
If the shares were acquired before 20 September 1985 then prima facie any capital gain or capital loss is disregarded ie. it is exempt from tax.  However notwithstanding this if the market value of the property of the company that was acquired on or after 20 September 1985 (post CGT assets) is at least 75% of the net value of the company then you will make a capital gain equal to that part of the capital proceeds from the disposal of the shares that is reasonably attributable to the amount by which the market value of the post CGT assets is more than the cost bases of those post CGT assets. This means that you look through the shareholding to the underlying assets of the company and once post CGT assets meet this threshold you can make a capital gain notwithstanding the shares are pre-CGT but then only with respect to the proportion that represents the underlying post CGT assets held by the company. The 50% discount capital gain is available to this capital gain.
An individual in calculating their net capital gains made on a sale of the shares:

  1. is entitled to the 50% discount capital gain whether a resident or not if indexation of the cost base is not chosen (see next point) i.e. only 50% of the capital gain is included in the net capital gains calculation
  2. if the shares were owned on or before 21 September 1999, the taxpayer irrespective of residency may choose indexation of the cost base in lieu of the 50% discount whichever works out best – if indexation is used then the capital gain is the difference between the capital proceeds and the cost base indexed from inflation
  3. if the individual is a significant individual in the company (holds at least 20% participation interest in the company), the company is an Australian resident and the market value of the active assets of the company is 80% or more of the market value of all of the assets of the company,  the small business tax concessions discussed in Case 1 - Part A  may apply to the sale of the shares in the company as it did with the disposal of the land although if the only asset of the company is residential real property it will only be an active asset for this purpose if it is used in a business e.g. a motel or boarding house but not and investment property.

Under its double tax agreements, Australia has the right to tax the income profits or gains derived by a non-resident from the alienation of share in a company the assets of which consist wholly or principally of real property situate in Australia i.e. a land rich company.
Non-resident Individual
If the shares are a non-portfolio interest in the land rich company (10% or more) then any capital gains or capital losses made by the non-resident on the sale of shares will be included in the net capital gains of the non-resident worked out in the manner discussed above.
There is no withholding tax although if the Commissioner finds out about it in time he can issue a notice to prevent the profit going offshore before the tax is paid.
Residential Individuals
They must must include in their net capital gains worked out as above, any capital gains or capital losses made with respect to  disposal of shares in a land rich company (as with any CGT asset wherever located).
Step Up for Buyer
The buyer of the shares will have a cost base for a future disposal of the shares equal to the capital proceeds given for the acquisition of those shares.

Corporate income tax

See answer in Case 1 - Part A above

Real estate transfer taxes.

Land rich duty may apply if there is a majority acquisition of the land owning company. This varies from State to State and is usually either 50 % or more than 50%. There may be a threshold such as the land being worth more than a certain value e.g. in NSW it is $2m and the land assets being a particular percentage of overall assets e.g. in NSW 60%.

Inheritance and gift tax

None. However there are CGT issues to which see answer in Case 1 - Part A above.

Other taxes (VAT, etc.)

A transfer of shares is a financial supply and therefore not subject to GST.
The company but not the individual is subject to land tax.

Ongoing taxation of real estate

Net wealth tax, net equity taxes

None.

Corporate income taxes.

The real estate company will include in its assessable income any net capital gains that it makes and will be taxed at the corporate tax rate. Companies are not entitled to any discount capital gain.

Other taxes

The company will be subject to land tax, council and water rates levied on the Australian real estate it owns.

Other taxation (except upon holding or upon disposal)


N/A

Comments

Nil

Part B

 

Description

Country of taxation

Taxation in the state of residence of the (indirect) owner of the real estate property.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal.

Comments

Under its double tax agreements, although the contracting state where the land owned by the company is located has the right to tax the income profits or gains derived by a non-resident from the alienation of share in the company the assets of which consist wholly or principally of real property situate in Australia i.e. a land rich company, Australia also reserves that right and does so.
The Australian resident individual must therefore include any capital gain or capital loss made on the disposal of shares in the land rich company in the calculation of their net capital gains in the manner referred to in Case 2 – Part B above but they will be entitled to a foreign tax offset for any foreign tax paid with respect to the gain up to the amount of Australian tax payable on that same income.

 

 

 

 

 

Case 3

 

Part A

 

Description

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Comments

The same answer applies as in Case 1 Part A although of course the main residence exemption would not obviously apply. Otherwise the type of property is irrelevant to the taxation of net capital gains made on a disposal of any type of real estate (or most other CGT assets for that matter)

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

The same answer applies as in Case 1 Part B.

 

Case 4

 

Description

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal

Comments

The same answer as in Case 2 Part A applies.

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

The same answer as in Case 2 Part B applies

 

 

 

 

 

II. Real estate is a business asset of an individual

 

Case 5

 

Description

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Comments

The same answer as in Case 1 Part A applies save of course the main residence exemption cannot apply. It does not matter whether the type of wealth is private or business.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

The same answer as in Case 1 Part B applies. It does not matter whether the type of wealth is private or business.

 

Case 6

 

Description

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares of the real estate company are part of the business assets of an individual. The company is domiciled in the state where the real estate is located.

Property / Deal

Shares in a real estate company
Share deal

Comments

The same answer as in Case 2 – Part A applies. It does not matter whether the type of wealth is private or business.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

The same answer as in Case 2 Part B applies. It does not matter whether the type of wealth is private or business.

 

 

 

 

Case 7

 

Description

Country of taxation

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Comments

The same answer as in Case 1 Part A applies (save of course for the main residence exemption). It does not matter whether the type of wealth is private or business.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

The same answer as in Case 1 Part B applies. It does not matter whether the type of wealth is private or business.

Case 8

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of the business assets of an individual.

Property / Deal

Share property
Share deal

 

Comments

The same answer as in Case 2 Part A applies. It does not matter whether the type of wealth is private or business.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

The same answer as in Case 2 Part B applies. It does not matter whether the type of wealth is private or business.

 

 

 

 

 

 

 

 

III. Real estate is an asset of a legal entity

 

Case 9

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Residential property

Owner of the real estate

The belongs to a legal entity.

Property / Deal

Asset property
Asset deal

 

Comments

If dealing in land is the business of a legal entity then the land will be trading stock and not a capital asset. The amount included in your assessable income, irrespective of what type of entity that you are, is the difference between the cost of the land and the sale price. You may then be entitled to deductions in relation to dealing with the land against that assessable income. The balance is your taxable income on which you are taxed.
If you are a non-resident then the business profits article of the double tax agreements (rather than the alienation of real property article) will apply to any profit made on disposal of the land so Australia will tax the same as per the previous paragraph.  The non-resident may be entitled to a foreign tax credit in their own country for the Australian tax paid.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

If dealing in land is the business of a legal entity then the business profits article of the double tax agreements will apply to any profit made on disposal of the land offshore. Australia will still tax the income as well but will allow a foreign tax credit for the foreign tax paid up to the amount of Australian tax payable on the same income..

 

Case 10

 

Description

Classification

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The company is domiciled in the state where the real estate is located. Its shares belong to a legal entity.

Property / Deal

Share property
Share deal

 

Comments

The same position as applied in Case 2 Part A applies to the sale of the shares. It does not matter that the land is the business of the legal entity.

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

The same position as applied in Case 2 Part B applies to the sale of the shares. It does not matter that the land is the business of the legal entity.

 

 

 

 

Case 11

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Business property

Owner of the real estate

The property belongs to a legal entity.

Property / Deal

Asset property
Asset deal

 

Comments

The same position as in Case 9 Part A applies. The type of property does not matter.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

The same position as in Case 9 Part B applies. The type of property does not matter.

Case 12

 

Description

Classification

Taxation in the state where the real estate property is located

Type of asset

Business property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares belong to a legal entity.

Property / Deal

Share property
Share deal

Comments

The same position as applied in Case 2 Part A applies to the sale of the shares. It does not matter that the land is the business of the legal entity or that the property is business property.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

The same position as applied in Case 2 Part B applies to the sale of the shares. It does not matter that the land is the business of the legal entity. . It does not matter that the land is the business of the legal entity or that the property is business property.