By Tim Cox, Partner

Foreign investors face new financial and compliance hurdles following new regimes introduced by the 2017-18 Australian Federal Budget. These changes include foreign investors receiving reduced capital gains tax benefits, having annual levies imposed for any unoccupied or under-utilised residential real estate they own and developers being restricted on the number of residences in new developments they can make available for purchase by foreign investors.

Key changes

The key changes are:

Reduced Capital Gains Tax Benefits

• The capital gains tax main residence exemption will no longer apply to foreign and temporary tax residents when selling property in Australia.
• The foreign resident capital gains tax withholding rate has increased from 10% to 12.5% of the total amount paid for the real estate.
• The threshold amount for the capital gains tax withholding regime to apply to a sale has reduced from $2 million to a new threshold amount of $750,000.

Annual Charge for Unoccupied or Under-utilised Residential Real Estate

• Foreign owned residential real estate properties that are either unoccupied or unavailable to rent for six months or more each year will be subject to an annual charge which is anticipated to be at least $5,000. This will apply to all foreign investment applications submitted after 7.30pm on 9 May 2017.

New Developments – 50% Foreign Investment Approval Cap

• Foreign investment approval for the purchase of residences in new developments by foreign investors will be capped at 50% for all new applications for a New Dwelling Exemption Certificates submitted after 7:30pm on 9 May 2017.

Residential Application Fee Increase

• From 1 July 2017, the application fee for residential properties valued at less than $10 million purchased by foreign investor will increase by 10%.

Streamlining the Foreign Investment Framework

In addition, a number of amendments designed to streamline the process foreign investors to obtain approval. These amendments, which will come into effect from 1 July 2017, include:

• ‘standardising’ the three-tier application fees for acquiring interests in agricultural and commercial land, business securities and assets;
• introducing a new business exemption certificate, allowing foreign investors in securities to obtain pre-approval in multiple investment at one time;
• introducing two new residential exemption certificates to allow:
  • developers to re-sell properties that failed to settle and are technically considered ‘established’ to foreign persons; and
  • foreign persons considering a number of new residential properties to apply for an exemption on each property, with the intent of only purchasing one (this exemption certificate is currently only available for existing residential properties);
• amending the definition of ‘commercial residential premises’ to capture previously excluded properties such as student accommodation and aged care facilities;
• clarifying the treatment of solar and wind farms as commercial non-vacant land, to reduce unnecessary red tape;
• restoring the arrangement for companies with significant foreign custodian holdings so they are not subject to the notification requirements; and
• narrowing the scope of ‘low threshold’ non-vacant commercial land treated as sensitive to avoid inadvertently capturing land not designed to be treated as sensitive and further guidance will be provided on this amendment prior to 1 July 2017.