Recent Australian tax changes targeting foreign persons
- 15 September 2017
Recent Australian tax changes targeting foreign persons
Australian governments, both at the Federal and state level continue to target foreign individuals and other foreign investors in a range of ways. This has been the case for several years and has included such measures as introducing a higher basic tax rate for non-resident individuals as well as removing the 50% discount that would otherwise apply to capital gains crystallised on assets owned for more than 12 months.
Most recently, 2017 has seen legislation at both the Federal and state levels which will introduce new provisions apply to foreign and non-resident persons or will extend laws already in place. In May 2017, the Treasurer announced several measures targeted specifically at foreign residents in the 2017-18 Australian Federal Budget.
The recent Federal budget changes will have the following impacts:
- The loss of the main residence exemption for non-residents selling their homes
- Limiting the benefits for non-resident investors of the newly introduced tax incentive for investments in afforable housing
- Restricting foreign ownership in new housing developments; and
- Introducing an annual charge on foreign owners of underutilised residential property
Following the Federal Budget, the list of key issues tht apply to property transaction for non-residents has grown to include:
- The loss of the main residence exemption;
- Capital gains tax (CGT) withholding tax;
- A $5000 Vacancy Tax;
- The loss of the 50% CGT discount;
- Stamp duty surchage with implications for trusts;
- Land tax surchage with implications for trusts; and
- The implications of the stamp duty surcharge and the land tax surchage for trusts.
Some of these provisions are in federal legislation and so apply to all Australia. Others were introduced by state or territory governments. These will apply only to a particular state or territory and may apply differently to similar provisions in other states.
This article addresses the measures applying at the Federal level, and we will address recent changes at the State level in a separate article.
Federal Budget 2017-18 measures introduced
Capital Gains Tax changes for foreign investors
The Government will extend Australia’s foreign resident CGT regime. Under the proposed changes foreign and temporary tax residents can no longer access the CGT main residence exemption from 7:30 pm (AEST) on 9 May 2017. Under transitional arrangements, existing properties held prior to this date will still be eligible for the exemption until 30 June 2019.
From 7:30 pm (AEST) on 9 May 2017
- foreign and temporary tax residents will no longer be able to access to the CGT main residence exemption. However, existing properties held immediately before this date will still be eligible for the exemption until 30 June 2019;
- the principal asset test is applied on an associate inclusive basis for foreign residents with indirect interests in Australian real property. This is intended to ensure foreign residents cannot avoid CGT by disaggregating their interests in Australian real property;
From 1 July 2017, the following changes to the foreign resident capital gains withholding rules will increase the number of taxpayers the rules apply to. The changes include:
- increasing the rate of withholding from 10 per cent to 12.5 per cent; and
- reducing the de minimis threshold from $2 million to $750,000 for taxable Australian real property and indirect Australian real property interests providing a company title interest.
Expanding tax incentives for investments in affordable housing
Although the CGT discount will be increased from 50% to 60% for individuals who elect to invest in qualifying affordable housing from 1 January 2018, the discount will apply only to resident individuals. Non-residents will continue to be ineligible for the discount.
To qualify for the higher rate of CGT discount the property must be:
• provided low to moderate income tenants, with rent charged at a discount below the private rental market rate;
• the affordable housing must represent at least 80 per cent of the MIT’s assessable income;
• managed through a registered community housing provider; and
• held for a minimum period of three years.
Resident investors will be taxed at their marginal rates, with capital gains remaining eligible for the CGT discount. Where the resident individual invests in qualifying affordable housing through a Managed Investment Trust (MIT), and the property has been held for a minimum of three years, the higher discount will flow to the individual. However, a non-resident individual who invests in eligible affordable housing through a MIT will not receive any CGT discount. Nevertheless, they will generally be subject to a 15 per cent final withholding tax rate (rather than 30 per cent) on capital gains on disposal of assets held for the qualifying investment period of 10 years.
However, if the 10 years holding period isn’t met, the non-resident investor will be subject to final withholding tax of 30 per cent on any capital gains. However, they will still receive the concessional 15 per cent withholding tax on investment returns. But if the MIT’s income from affordable housing falls below the 80 per cent requirement, all investment returns will be subject to the final withholding tax rate of 30 per cent.
Restriction on foreign ownership in new housing developments
To ensure that a minimum proportion of new housing developments are available for Australians to purchase, the Government has introduced a 50 per cent cap on foreign ownership in new housing developments. This will be achieved through a new condition on New Dwelling Exemption Certificates where the application is made from 7:30 pm (AEST) on 9 May 2017.
These certificates are granted to property developers and act as a pre-approval and allows the sale of new dwellings in a specified development to foreign residents without each foreign purchaser seeking their own foreign investment approval. The current certificates do not limit the amount of sales that may be made to foreign purchasers.
Annual charge on foreign owners of underutilised residential property
The Government will introduce an annual charge, equivalent to the foreign investment application fee, on foreign owners of residential property that is not occupied or available for rent - or genuinely available on the rental market - for at least six months in each year. The annual charge applies to foreign persons who make a foreign investment application for residential property from 7.30 pm (AEST) on 9 May 2017.
The measure is intended to encourage foreign investors to make their properties which are not used as a residence available for rent, thereby increasing the number of dwellings available for Australians to live in. It is proposed that the charge will be:
• levied annually; and
• equivalent to the relevant foreign investment application fee imposed on the property at the time it is acquired by the foreign investor, and will therefore be at least $5,000.
The wider implications for non-residents and foreign persons
Taken with other legislation introduced in the past 5 years by the federal and state governments, the 2017-18 Federal Budget changes the tax landscape faced by non-residents and foreign individuals is very different from that faced by Australian resident individuals. Some of the changes are considered below in more detail.
Loss of the CGT discount
Taxpayers are entitled to a 50 per cent discount in calculating capital gains on a CGT event, such as a sale, happening to assets they have held for at least 12 months. However, this CGT discount was removed for foreign and temporary residents in the 2012-13 Federal Budget with effect for assets disposed after 8 May 2012.
For disposals of assets acquired on or before 8 May 2012, the tax payer may be entitled to the full discount or a discount based on an apportionment of days, or the gain may be calculated based on market value. In summary:
• If the taxpayer is an Australian resident at the time of sale then, to determine the extent to which a discount might apply they will need to consider whether:
o they were a temporary resident and became an Australian resident before 8 May 2012 and had no further changes to residency; or
o they were a temporary resident and became an Australian resident before 8 May 2012 and had changes to their residency; or
o they were a temporary resident and became an Australian resident after 8 May 2012 and/or has had other changes in residency after that date.
• If the taxpayer is a non-resident or a temporary resident at the time of sale, the calculation of any discount will depend on whether they were an Australian resident, non-resident or temporary resident on 8 May 2012.
CGT Withholding Tax
Non-residents who disposed of direct and indirect interests in Australian real property have been subject to a non-final withholding tax on the disposal since 1 July 2016. The withholding is based on the CGT asset’s cost base just after the acquisition (i.e. the purchaser’s cost base). As mentioned previously, the rate increases from 10 per cent to 12.5 per cent from 1 July 2017 because of the recent Federal Budget announcement.
The withholding tax must be paid to the Australian Taxation Office on or before the date of settlement which is the day you became the CGT asset’s owner. This tax is creditable against the foreign vendor’s income tax liability for the year. However, the tax is imposed on the purchaser and the failure to withhold, where withholding is otherwise required, will result in a penalty equal to the amount that should have been withheld PLUS the withholding itself.
Although this is commonly known as CGT withholding, the rules are not actually within the CGT provisions, and the reference to CGT withholding is misleading. The provisions do refer to terms found in the CGT provisions but there is no requirement for a CGT event nor a resultant capital gain. Simply put, any CGT exemptions or concessions are irrelevant to the provisions. As a result, they apply to assets held on revenue account, not just those on capital account. The withholding applies to disposals of the following:
• Real property in Australia – land, buildings, residential and commercial property;
• Lease premiums paid for the grant of a lease over real property in Australia;
• Mining, quarrying or prospecting rights;
• Indirect interests in the above such property or interests held through Australian entities whose majority assets consist of them; and
• Options or rights to acquire the above property or interest.
The legislation refers to ‘relevant foreign investors’. This term is widely defined to ensure that each holder of such an interest will be treated as a non-resident in the first instance, including all Australian resident taxpayers. A clearance certificate must be issued by the tax authorities to the purchaser before settlement if the vendor is to be treated as an Australian resident vendor and not subject to this withholding tax. This therefore, places the onus on the vendor to prove to the purchaser they are not subject to the withholding tax.
In addition to the clearance certificate which is valid for 12 months, there are several other exemptions which can be applied including:
• The withholding tax rules do not apply to a direct interest in Australian real property (or company title property interest) where the market value of the property is less than $750,000. This threshold was reduced from $2 million with effect from 1 July 2017 thereby bringing significantly more transactions into the scope of the withholding tax. It is important to be aware that this exemption threshold only applies to direct Australian real property (and company title property) interests and it does not apply to indirect interests in Australian real property.
• The vendor provides a declaration to the purchaser (for indirect Australian real property interests only) that states that the interest is not an indirect Australian real property interest or that the vendor is an Australian resident. However, the declaration is considered invalid if the purchaser reasonably suspects the declaration to be false.
• The transaction is on an approved stock exchange or conducted through a broker-operated crossing system.