The 2017/18 Budget changes affecting investors in Australian property.
The 2017/18 Federal Budget introduced a number of changes and amendments affecting those looking to invest in the Australian property market. Some of the most significant impacts were aimed at transactions involving foreign investors – a key area of specialisation for the Hill Rogers Tax Team. There have also been a number of duty and land tax changes at the state level (Note: only changes affecting property transactions in NSW are mentioned in this article).
‘Doing Business in Australia’ Guidebook
Through our partnership with the Morison KSI network, Hill Rogers offers extensive expertise surrounding foreign investment in Australian property. This recently saw us proudly co-author an important new guidebook, ‘Doing Business in Australia’, to help explain the changing legislative and taxation landscape for investors, entrepreneurs and boards of Australian businesses. The guide is available, free of charge here, and outlines key considerations around Business Structures, Labour and Personnel, International Mobility, Taxation System, Banking and Finance, Reporting Requirements, Grants and Incentives and Agencies Providing Assistance.
In addition to those directly involved in foreign investment in Australian property, the guide will also be of use to existing property owners and first home buyers wanting to better understand how the 2017/18 Budget changes may affect them, either now or in the future.
Federal Budget 2017/18 – What changed?
A clear focus of this year’s federal budget and NSW state budget is to tackle the Australian housing affordability issue. It saw a number of amendments and new initiatives introduced, seven of which we summarise below.
As you will see, careful planning and consideration is a must for many property investors. For this reason it’s an excellent idea to take a moment to understand the changes and discuss the implications with an experienced advisor such as Hill Rogers.
- AMENDMENT – Deductions for property investors
From 1 July 2017, deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property are disallowed. Plant and equipment depreciation deductions are also limited to outlays actually incurred by residential property investors. The changes to depreciation deductions apply on a prospective basis, with existing depreciating assets grandfathered. However, deductions for capital works are not affected.
- AMENDMENT – Foreign resident capital gains withholding tax
From 1 July 2017, the foreign resident capital gains withholding tax rate increased from 10% to 12.5%, and the threshold was reduced from $2 million to $750,000.
If you are purchasing property in Australia with a market value above $750,000 then you must withhold 12.5% of the purchase price and remit that amount to the Commissioner of Taxation as a non-final withholding tax unless the vendor provides a valid clearance certificate confirming that they are not a foreign resident. Conversely, all Australian resident vendors selling property valued above $750,000 are required to obtain a clearance certificate from the Australian Taxation Office (ATO) to ensure there is no withholding tax retained by a purchaser on settlement.
- CHANGE – CGT main residence exemption removed for foreign and temporary residents
A major change to capital gains tax (CGT) affects both foreign and temporary residents who will no longer be able to access the main residence exemption for CGT purposes. Transitional measures are in place for existing properties until 30 June 2019. However, this change is likely to have a significant impact for property owner occupiers, particularly for Australian citizens and residents who have migrated overseas in recent years either temporarily or permanently.
- NEW – GST withholding on residential property transactions
On 7 November 2017, Treasury released exposure draft legislation with respect to proposed changes to Goods and Services Tax (GST) on real property transactions previously announced in the 2017-18 Budget.
From 1 July 2018, purchasers of new residential premises or new subdivisions of potential residential land will be required to withhold and remit 1/11th of the total price of the supply of residential premises directly to the ATO at settlement. Described in the Australian Financial Review as a ‘quantum change to the GST system’ (http://www.afr.com/real-estate/property-industry-caught-off-guard-in-quantum-change-to-gst-20170510-gw1kem) the new laws require that at settlement the purchaser must arrange for a cheque to be drawn in favour of the ATO and then remit the GST payment to the ATO on behalf of the developer. One of the potential challenges is that, historically, the GST paid on newly-constructed residential property has been calculated by developers using something known as the ‘margin scheme’, usually without the involvement of the purchaser. From 1 July 2018, developers will need to change the way they report GST liabilities to the ATO and claim GST withholding credits and refunds on their business activity statements.
A strict obligation will also be imposed on vendors to notify purchasers of their GST withholding obligations. Failure to comply will be considered a strict liability offence which could result in significant penalties for the vendor.
- Annual vacancy charge on foreign owners of underutilised residential property
On 9 May 2017, the Australian Government announced that it will introduce a charge on foreign owners of Australian residential property where the property is not occupied or genuinely available on the rental market for at least 6 months per year.
The charge will be levied annually and will be equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired by the foreign investor. The measure will apply to foreign persons who make investment applications for residential property on or after 9 May 2017.
- AMENDMENT – NSW foreign investor surcharges increased
From 1 July 2017, the foreign investor transfer duty surcharge doubled from 4% to 8%. Similarly, the foreign investor land tax surcharge of 0.75% increased to 2% p.a. from the 2018 land tax year. When setting up new discretionary trusts to hold NSW land, you need to be considering whether you have any foreign persons as potential beneficiaries. If so, your trust could be liable for the foreign investor surcharges if appropriate clauses are not included in the trust deed. For any existing discretionary trusts, the trust deed can potentially be amended to exclude foreign persons.
We also note that most of the other States around Australia have similar foreign investor surcharges on real property.
- NEW – NSW first home buyers exemption from stamp duty
A number of changes also came into effect for first home buyers in NSW. From 1 July 2017, first home buyers:
- Are exempt from paying stamp duty on the purchase of property with a purchase price of up to $650,000
- Receive a discount on their stamp duty for the purchase of property up to $800,000
- Are eligible for a grant of $10,000 towards buying a new home worth up to $600,000.
Builders are also eligible to receive a grant of $10,000 for building a new home worth up to $750,000.
Every property investment decision is unique and individual circumstances must always be carefully considered. To discuss your own situation and explore the potential opportunities and impacts from the 2017/18 Budget changes, please contact Andrew Lam.
This material is general commentary only. None of the material is, or should be regarded as, personal or financial product advice. Accordingly, no person should rely on any of the contents of this publication without first obtaining specific advice from Hill Rogers. Every effort has been made to ensure that the content is accurate, however it is not intended to be a complete description of the matters described. Hill Rogers, its Principals and agents accept no responsibility to any person who acts or relies in any way on any of the material without first obtaining such specific advice.