Foreign land tax surcharges bring litigation risks for accountants, RSM warns

Earlier this month, the High Court passed down its judgment on Stott v The Commonwealth of Australia, ruling that New Zealand citizen Francis Stott was liable to pay Victorian foreign resident land tax surcharges despite inconsistencies between Australian state and Commonwealth laws stemming from an Australia-New Zealand tax treaty.

The treaty, ratified under Commonwealth Australian law, stipulated that New Zealand citizens should not be subject to “more burdensome” taxes than an Australian citizen in the same circumstance. Victorian foreign resident land tax surcharges breached this principle.

However, in April 2024, the Commonwealth law was amended to exclude state taxes that were payable from 1 January 2018 from the treaty arrangements. The High Court determined that this amendment was constitutionally valid, and that it applied retrospectively.

Sam Mohammad, RSM’s national head of tax services, said that this rare retrospective decision had affirmed that land tax surcharges for foreign buyers were here to stay.

With state land tax surcharges affirmed by the High Court, Mohammad urged accountants and lawyers to be aware of tax and litigation risks when determining whether a particular person or company was foreign for state tax purposes.

“[Lawyers and accountants are] usually at the front line of determining whether a particular person or company is foreign and should be affected by these surcharges. There are times that advisers get it wrong,” Mohammad said.

He warned that incorrectly classifying a foreign buyer as a domestic one could lead to unexpected tax liabilities for clients and litigation risks for advisers.

“A lot of insurance claims, particularly for lawyers, are because they're just not doing enough work to get it right around whether their particular client is foreign or not and is affected by these surcharges,” Mohammad warned.

“There are advisers who are getting sued because they just didn't do enough work to get the right answer.”

The risk of getting it wrong was more pronounced when complex trust and company structures were involved, Mohammad acknowledged.

“I have a lot of sympathy for advisers who try their best and may get it wrong, but it's a strict liability offence. You don't get out of paying the tax simply because you tried your best. You're either right or you're wrong,” Mohammad said.

Mohammad added he did not expect retrospective legal changes to become more common following this decision, noting that the High Court had upheld the retrospective amendment to reinstate what the law initially intended to achieve.

“Generally speaking, retrospective law changes are not something that we want in Australian law. Because you want to know that the acts that you're doing right now, whatever they might be, are valid based on today's law. You shouldn't be judged on a law that has changed into the future for an act today.”