By Andrew Logan, Partner, Patrick Thaung, Partner and Mitchell Spurge, Senior Associate
With the announcement of the 2017/18 Federal Budget, Mills Oakley has taken the opportunity to analyse and provide the following summary and commentary on the Federal Budget’s implications on the property industry.
1 Measures that take effect on and from 9 May 2017
1.1 No CGT main residence exemption for foreign investors
Foreign and temporary tax residents will no longer have access to the CGT main residence exemption from 7.30pm AEST on 9 May 2017. However, any currently owned properties will be grandfathered until 30 June 2019.
1.2 Tightening of foreign resident CGT principal asset test
The Government will apply the CGT principal asset test on an associate inclusive basis from 7.30pm AEST on 9 May 2017 for foreign tax residents with indirect interests in Australian real property. This has been described as an integrity measure to ensure foreign residents cannot avoid a CGT liability by disaggregating their interests.
1.3 Increased fees for foreign investment approvals
The number of fee categories for FIRB approvals have been limited to three broad categories. The new fee categories now include not only developed commercial land, but also vacant commercial land. Currently vacant commercial land attracts a flat fee of $10,100 for all vacant land irrespective of the value. The changes in the Budget will raise FIRB approval fees for vacant commercial land greater than $10 million.
- Category 1 – FIRB Fees for transactions of $10 million or below – Reduced fees for transactions of $10 million dollars and below to $2,000 (reduced from $25,300 currently).
- Category 2 – FIRB Fees for transactions of above $10 million – Flat fee of $25,300. No change to fees for transactions above $10 million and up to $1 billion for developed commercial land. However, this represents a fee increase for vacant commercial land (increased from $10,100).
- Category 3 – FIRB Fees for transactions of above $1 billion – Increased fees for transactions above $1 billion to a flat fee of $101,500 (increased from $25,300 currently).
1.4 Restrict foreign ownership in new developments to 50%
The New Dwelling Exemption Certificate will be amended to cap foreign ownership in new developments at 50%. This condition will be applied to applications made from 7:30pm AEST on 9 May 2017.
1.5 Annual charge on foreign home owners who leave property vacant
The Government will introduce an annual charge on foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months per year. The charge will be equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired, which starts from $5,000. The measure will apply to the properties the subject of foreign investment applications lodged from 7.30pm AEST on 9 May 2017.
2 Measures that take effect on and from 1 July 2017
2.1 Changes to foreign investment rules
Following consultation with industry, the Federal Government has announced a range of amendments to the foreign investment regime which will have effect from 1 July 2017. Importantly, this includes:
- refining the type of developed commercial property subject to the $55 million threshold by removing low sensitivity applications;
- improving the treatment of residential applications by allowing failed off the plan purchases to be considered as ‘new’;
- streamlining and simplifying foreign investment business application fees; and
- introducing a new exemption certificate for low risk foreign investors.
2.2 Managed Investment Trusts investment in affordable housing
From 1 July 2017, Managed Investment Trusts will be able to acquire, construct or redevelop property subject to the MIT meeting certain affordable housing criteria. For example, the MIT must derive at least 80% of its assessable income from affordable housing in an income year, the housing must be provided to low to moderate income tenants, the rent must be at a discounted rate and the housing must be available for rent for at least 10 years.
2.3 Expansion of capital gains tax withholding regime
The capital gains tax withholding regime, which was introduced in 1 July 2016, will be extended from 1 July 2017 by:
- increasing the withholding tax rate from 10% to 12.5%; and
- lowering the threshold from $2 million to $750,000.
This measure will result in a significant extension of the number of properties subject to the regime.
2.4 Trimming Deductions for housing investors
The Government will remove deductions for depreciation of plant and equipment to outlays actually incurred and travel to inspect, repair or collect rent from residential investment properties. Expenses incurred through an appointment of a property manager will not be affected by this measure.
2.5 Limit plant and equipment depreciation outcomes
The Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate.
2.6 First home super saver scheme
From 1 July 2017, first home buyers can salary sacrifice up to $15,000 per year to a total of $30,000 to their superannuation (effectively $60,000 for a couple) and redraw it, along with any associated earnings, to buy a first home from 1 July 2018.
3 Measures that take effect on and from 1 January 2018
3.1 CGT discount for affordable housing
The CGT discount will be increased from 50% to 60% for Australian resident individuals who invest in affordable housing which meets specific qualifying criteria. To qualify for the higher discount, housing must be provided to low to moderate income tenants, with rent charged at a discount below the private rental market rate. The affordable housing must be managed through a registered community housing provider and the investment held for a minimum period of three years.
4 Measures that take effect on and from 1 July 2018
4.1 GST and residential property transactions
GST is currently payable on newly constructed residential properties. This is ordinarily paid by the seller to the developer, and the developer is required to remit the GST to the ATO. The Government has stated that some developers are currently failing to remit the GST to the ATO. From 1 July 2018, purchasers of newly constructed residential properties will be required to remit the GST directly to the ATO as part of settlement.There has been no mention of a change to the calculation of GST, so the GST will presumably remain 1/11th of the contract price or 1/11th of the margin, if the margin scheme is employed.
4.2 Contributing the proceeds of downsizing to superannuation
A person aged 65 or over will be permitted to make a non concessional contribution of up to $300,000 (or $600,000 for a couple) from the proceeds of selling their home from 1 July 2018, provided they have owned it for 10 or more years. These contributions will be in addition to those currently permitted under existing rules and caps and they will be exempt from the existing age test, work test and the $1.6 million balance test for making non concessional contributions.
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