All Australian mainland states and territories, except the Northern Territory, levy additional taxes on the ownership of Australian real property by non-citizens who are not permanent residents. This practice sits uncomfortably with the reality of relevantly expansive non-discrimination clauses contained in a number of international tax agreements to which Australia is a party.
International tax treaties and tax non-discrimination
The provisions of international tax treaties entered into by Australia that are mentioned in section 5(1) of the International Tax Agreements Act 1953 (Cth) have, under the terms of the section, the force of Commonwealth law.
There are more than 40 such treaties at present, 12 of which contain tax non-discrimination clauses which are, therefore, incorporated into Australian domestic law. However, it should be noted that the non-discrimination clause in the 1982 United States Convention is not incorporated into Australian domestic law.
By way of example, the tax non-discrimination clause in the United Kingdom Convention relevantly provides that:
Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.
Unlike the United Kingdom Convention, the South Africa Double Taxation Agreement expressly states that, for the purposes of its tax non-discrimination clause:
the taxes to which the Agreement shall apply are taxes of every kind and description imposed on behalf of the Contracting States, or their political subdivisions or local authorities.
Expansive non-discrimination clauses along similar lines may also be found in Australia’s international tax agreements with:
- New Zealand;
- Finland;
- Germany;
- Japan;
- Norway;
- India; and
- Switzerland.
Are Australia’s sub-national, foreigner-specific property taxes consistent with its tax treaties?
In Addy v FCT, the High Court of Australia observed, in relation to the United Kingdom Convention’s tax non-discrimination clause, that:
Article 25(1), as well as Art 25(5), make explicit that foreign residency is a permissible basis for imposing other or more burdensome tax requirements on foreign nationals — accordingly, if Ms Addy were a non-resident ‘working holiday maker’, Art 25(1) would offer no relief. But this is of no assistance in the present case: it is precisely because of the Commissioner’s initial acceptance of Ms Addy’s status as an Australian resident for tax purposes that Ms Addy’s objection to her assessment was chosen by the parties as a ‘test case’ to determine the effect of Art 25(1). With respect to tax residency during the relevant period, at least, there is no doubt that Ms Addy was ‘in the same circumstances’ as an Australian national who was also a tax resident.
Herein lies the potential issue with the current Australian sub-national, foreigner-specific property-related taxes: the residency reference in these taxes centres on immigration residence (namely, Australian citizenship or permanent resident visa status), whereas the residency reference in the treaties is to residence for income taxation purposes, which is more transitory in nature.
So, a non-Australian national who does not hold an Australian permanent residence visa but who, nevertheless, is a resident of Australia for income tax purposes (as was the case in Addy) could be subject to the foreigner-specific sub-national property taxes mentioned above, whereas an Australian citizen would never be, regardless of his or her Australian income tax residency status.
It is difficult to see how this does not contravene the text, context and purpose of the non-discrimination clauses, particularly in light of the High Court’s approach in Addy.
Relevant, therefore, is section 109 of the Australian Constitution, which stipulates that:
When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid.
What then, of nationals from countries without a relevant non-discrimination clause?
What then, of the position of nationals from countries with no relevant tax treaty or no relevant tax non-discrimination clause? Are they, due to the absence of applicable treaty protection, still subject to the taxes in question?
In other words, could the relevant sub-national, foreigner-specific property taxes potentially be ‘read down’ or ‘partially disapplied’ so as to be taken to encompass only nationals of those countries without a relevant tax treaty non-discrimination clause?
In Clubb v Edwards, it was observed that:
The technique of partial disapplication cannot be used if it would alter a statute’s general policy or scheme or the specific policy or purpose of the relevant provision. To do so would cross the line between adjudication and legislation. One way in which the general policy or scheme of a statute or a provision could be altered is where the partial disapplication would lead to a result that contradicts or alters any policy of the statute.
In this regard, the relevant second reading speeches and explanatory memoranda reveal a policy intention to relevantly tax foreigners generally, as a market-intervention measure aimed at increasing the cost associated with such persons taking a stake in property, to therefore favour non-foreigners in this regard.
It would, therefore, seem that judicial reading down or partial disapplication of the provisions in question to somehow interpretively ‘carve out’ nationals of countries with applicable treaty protection, could be somewhat problematic.
Where to from here?
This post has identified potential incompatibilities vis-à-vis the foreigner-specific property taxes enacted in many Australian jurisdictions, and the expansive non-discrimination clauses in various international tax treaties entered into by the Australian government.
While at least one jurisdiction, namely New South Wales, has recognised the imperative to, accordingly, discontinue the collection of relevant taxes from nationals who are protected by the clauses in question, all jurisdictions are yet to, perhaps for political reasons, amend their legislation to put the collection of tax from non-protected nationals beyond the constitutional doubt that has been identified in this post.
While the issue of ongoing collection from non-protected nationals could likely be addressed by expressly providing in the state or territory legislation for the ‘carving out’ of protected nationals, whether such amendments could validly be made retrospective, so as to potentially stymie some private law claims that might otherwise arise (namely, ones from non-protected nationals), is another matter entirely and attended with some uncertainty.
As an alternative option, possibly: (1) tax could be increased for all foreigners and non-foreigners alike, by the amount of what would otherwise be the surcharge; and (2) all non-foreigners could be eligible to apply for a grant from the government that covers this additional amount.
Editor’s note: The blog was updated on 16 November 2023 to include an alternative policy suggestion.
First, the income tax treaties only apply to the specific taxes listed.- ie income taxes or replacements.
Second, nothing wrong with introducing a 1% or more Federal land value tax and giving a non-refundable PAYG tax credit to homeowners with TFNs registered for their principal residence.
Most taxpayers owning homes would pay nothing net while a lot of foreign dummying behind local relatives would be flushed out and contribute to revenue for income tax/GST cuts as would a lot of money laundered into real estate.
There would be downward pressure on land (hence housing) prices since a land rate cannot be shifted.
Before the mid nineteenth century only a British subject could hold land under the Crown – a very sensible understanding of sovereignty.
As alluded to above in the post, the relevant non-discrimination provisions state that, for the purposes of the provision, ‘the taxes to which the Agreement shall apply are taxes of every kind and description’ (ie not just income tax or the like), with most also having words to the effect that the provision encapsulates taxes ‘imposed on behalf of the Contracting States, or their political subdivisions or local authorities’.
The does not seem correct.
All DTAs are about income or capital gains taxes and sometimes include FBT. So the non-discrimination rivulet cannot rise higher than its DTA source.
eg Article 2 of the South African DTA which mirrors usual practice.
Article 2
Taxes covered
1 The existing taxes to which this Agreement shall apply are:
(a) in the case of Australia:
the income tax, and the resource rent tax in respect of offshore projects relating to exploration for or exploitation of petroleum resources, imposed under the federal law of Australia;
(b) in the case of South Africa:
(i) the normal tax; and
(ii) the secondary tax on companies.
2 The Agreement shall apply also to any identical or substantially similar taxes which are imposed under the federal law of Australia or by the Government of the Republic of South Africa under its domestic law after the date of signature of the Agreement in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any substantial changes which have been made in the law of their respective States relating to the taxes to which the Agreement applies within a reasonable period of time after those changes.
Perhaps have a look at (current) art 2(3)?
I can’t see it. How on earth can a non-discrimination article in a tax treaty about income taxes possibly apply to a Federal or State land value tax?
As a matter of interpretation it seems a non-starter.
One wonders what the Parliamentary Committees looking at treaties would think of such a bold argument.
This bold, non-starter argument has, as discussed in the post, been accepted by New South Wales.
The offending article reflects the relevant article in the OECD’s Model Tax Convention on Income and on Capital.
Commonwealth Treasurer’s Announcement on 10 December 2023
On 10 December 2023, the Treasurer announced, amongst other things, the Commonwealth government’s intention to introduce legislation in 2024 to increase the amount of the pt 6A Foreign Acquisitions and Takeovers Act 1975 (Cth) vacancy tax for foreign acquisitions of residential land, a tax worked out pursuant to the Foreign Acquisitions and Takeovers Fees Imposition Regulations 2020 (Cth) and imposed under s 5 of the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (Cth).
For reasons similar to those set out in the post, this tax may be problematic in relation to the nationals of the eight treaty countries (which have been mentioned above) with expansive tax non-discrimination clauses.
Even though this situation would not fall within s 4(2) of the International Tax Agreements Act 1953 (Cth) (see s 3(1)), ordinary, general principles of statutory interpretation would appear to suggest that s 5 of this Act would have the effect that nationals of these eight countries would not be subject to the tax, at least where they are Australian income tax residents.
Treasury Laws Amendment (Foreign Investment) Bill 2024 (Cth)
Presuming the bill, in its present form, is passed (with the Senate, not a forgone conclusion), it raises additional issues of (1) unconstitutionally attempting to overcome s 109 (see, eg, R v Credit Tribunal; Ex parte General Motors Acceptance Corp (Australia) (1977) 137 CLR 545, 563) (2) retrospectively (University of Wollongong v Metwally (1984) 158 CLR 447).
These, of themselves, mean that the legislation may not achieve what it seeks to do, at least in relation to the states.
If it is, in fact, effective (possibly in relation to the Commonwealth and the territories), this might then raise the potential for an acquisition of property on other than just terms, contrary to s 51(31) of the Constitution, at least in so far as retrospectivity is concerned: compare Georgiadis v Australian and Overseas Telecommunications Corp (1994) 179 CLR 297.
The proposed ‘fix’ also does not, and cannot, address the potential issue that arises under s 10 of the Racial Discrimination Act 1975 (Cth): see https://www.liv.asn.au/Web/Law_Institute_Journal_and_News/Web/LIJ/Year/2023/08August/Are_various_state_and_territory_property_taxes_on_foreigners_constitutionally_unsafe.aspx.
Is the Treasury Laws Amendment (Foreign Investment) Act 2024 (Cth) Unconstitutional?
1. The Treasury Laws Amendment (Foreign Investment) Act 2024 (Cth) received Royal Assent on 8 April 2024.
Potential incompatibility with the wording of s 109 of the Constitution
2. The Act provides that:
‘The operation of a provision of an agreement provided for by subsection (1) [of section 5 of the International Tax Agreements Act 1953 (Cth)] is subject to anything inconsistent with the provision contained in a law of the Commonwealth, or of a State or Territory, that imposes a tax other than Australian tax [ie a tax other than income tax or fringe benefits tax], unless expressly provided otherwise in that law.’
3. Section 109 of the Constitution, however, stipulates that:
‘When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid.’
4. By expressly providing for a Commonwealth-state law inconsistency resolution rule that is contrary to that provided for in s 109, the Act therefore may offend s 109 of the Constitution (according to the observation by Mason J, as his Honour then was, in R v Credit Tribunal; Ex parte General Motors Acceptance Corp (Australia) (1977) 137 CLR 545, 563).
Impermissible retrospectivity
5. The Act, further, provides that it applies in relation to taxes payable on or after, or to taxes payable in relation to tax periods on or after, 1 January 2018.
6. Following University of Wollongong v Metwally (1984) 158 CLR 447, it would seem that a s 109 inconsistency cannot be overcome retrospectively: ie it is beyond Parliament’s power to remove an inconsistency that has already occurred.
Acquisition of property on other than just terms
7. If the Act is effective in overcoming the existing s 109 inconsistency retrospectively (despite points 4. and 6. above), it would, conversely, effect an acquisition of property on other than just terms, contrary to s 51(31) of the Constitution, along lines similar to those discussed in Georgiadis v Australian & Overseas Telecommunications Corp (1994) 179 CLR 297.
8. This is because all bar one of the eight relevant non-discrimination clauses pre-date the introduction, from 2015 onward, of the state and territory taxes at issue (ie the relevant state taxes have been invalid under s 109 from their inception). By retrospectively validating these previously invalid taxes, the Act thus extinguishes any choses in action that would exist for the recovery by taxpayers of such amounts, and accordingly permits the states to retain money that they might otherwise have no legal right to.
Section 10 of the Racial Discrimination Act 1975 (Cth)
9. As pointed out in the 15 February comment above, the Act also does not, and cannot, address the potential risk that arises under s 10 of the Racial Discrimination Act 1975 (Cth), which is discussed in https://www.liv.asn.au/Web/Law_Institute_Journal_and_News/Web/LIJ/Year/2023/08August/Are_various_state_and_territory_property_taxes_on_foreigners_constitutionally_unsafe.aspx.
Once again, income tax treaty non-discrimination clauses have nothing to do with other taxes, charges, fees, rents or royalties.
The mediaeval distinction between land as the natural source of Crown territorial revenue versus mere statutory impositions such as the 1799 income tax et al has a lot to be said for it.
The ancient legal maxim “The Crown should live off its own” is not a bad principle of public finance
Perhaps have a look at the actual articles themselves (along with the provision of the OECD Model Tax Convention upon which they are based)?
I couldn’t find the non-discrimination clause in the version of the South African DTA you cited. Has this DTA been modified since original signing?
Do you know of any similar discriminatory taxes imposed on Australian nationals living in the UK and resident for tax purposes?
Can you postulate any reason why the UK chose not to include the “taxes of every kind and description” clause from their DTA with Australia, thereby imposing land and stamp duty surcharges on its nationals? Do you think that this could be added to the DTA simply by an exchange of Notes if the UK desired it?
The UK DTA with Australia embodies the clause you have identified:
“Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.”
This clause also appears in the other cited countries’ DTAs.
The term: “any taxation or any requirement therewith” is ambiguous since the word “any” is all encompassing. How is this to be interpreted in a DTA and especially in comparison with the also included term “taxes of every kind and description” in the cited countries’ DTAs?
The official versions of the treaties may be found here: .
Not aware of similar issues in the UK.
However, the lawfulness of such taxes in the USA and in Canada has also been considered … with quite opposite results being arrived at, seemingly due to different constitutional settings. See, eg, Andrew Hayashi and Richard Hynes, ‘Protectionist Property Taxes’ (2021) 106 Iowa Law Review 1091 and Li v British Columbia [2022] 1 WWR 443.
A good guide to the clauses (such as the tax non-discrimination one) that may be found in the OECD Model Tax Convention, is the OECD Model Commentaries, recourse to which may be had pursuant to arts 31(2) or 32, or both, of the Vienna Convention on the Law of Treaties.
[LINK DIDN’T APPEAR IN PREVIOUS POST]
The official versions of the treaties may be found here: https://treasury.gov.au/tax-treaties/income-tax-treaties.
Not aware of similar issues in the UK.
However, the lawfulness of such taxes in the USA and in Canada has also been considered … with quite opposite results being arrived at, seemingly due to different constitutional settings. See, eg, Andrew Hayashi and Richard Hynes, ‘Protectionist Property Taxes’ (2021) 106 Iowa Law Review 1091 and Li v British Columbia [2022] 1 WWR 443.
A good guide to the clauses (such as the tax non-discrimination one) that may be found in the OECD Model Tax Convention, is the OECD Model Commentaries, recourse to which may be had pursuant to arts 31(2) or 32, or both, of the Vienna Convention on the Law of Treaties.