The Government is very keen for private investors – including large scale investors and superannuation funds – to be a part of the solution to Australia's housing affordability crisis.
Date of effect From 1 January 2018
The Capital Gains Tax (CGT) discount will be increased for individuals who choose to invest in affordable housing. The current 50% discount will increase by 10% to 60% for resident individuals who elect to invest in qualifying affordable housing. Non-residents are no longer eligible for the CGT discount.
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 3 years.
The additional 10% discount will be pro-rated for periods where the property is not used for affordable housing purposes. The higher discount would also flow through to resident individuals investing in qualifying affordable housing held by Managed Investment Trusts.
Date of effect Income years starting on or after 1 July 2017
Managed Investment Trusts (MIT) will be able to set up to acquire, construct or redevelop property to hold as affordable housing. In order for investors to receive concessional taxation treatment through a MIT, the affordable housing must be available for rent for at least 10 years.
MITs allow investors to pool their funds to invest in primarily passive investments and have them managed by a professional manager. The MIT will be able to:
- Acquire, construct or redevelop the property but must derive at least 80% of its assessable income from affordable housing
- Qualifying housing must be provided to low to moderate income tenants, with rent charged at a discount below the private rental market rate.
- Non-resident investors are generally subject to a reduced rate of tax if they are a resident of a country with which Australia has an effective exchange of information treaty. Non-resident investors are generally subject to a 15% final withholding tax rate on fund payments from the MIT. Resident investors are taxed at their marginal tax rates, with capital gains remaining eligible for the capital gains tax discount.
Up to 20% of the income of the MIT may be derived from other eligible investment activities permitted under the existing MIT rules in the income tax law. If this is breached, or less than 80% of the MIT's income is from affordable housing in an income year, the non-resident investor will be liable to pay withholding tax at 30% on investment returns for that income year.
Properties held for rent as affordable housing for less than 10 years will be subject to a 30% withholding tax rate on the net capital gains arising from the disposal of those assets.
Date of effect From 1 July 2017
The days of writing-off the costs of travel to and from your residential investment property are about to end. The Government has moved to disallow deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property. It seems that policing this area to ensure taxpayers apportion expenses correctly (and don't claim a deduction for their holidays) just got too hard.
From 1 July 2017. Grandfathering from 7:30pm, 9 May 2017
The Government is concerned that some plant and equipment items in residential rental properties are being depreciated by successive investors in excess of their actual value.
This integrity measure will limit plant and equipment depreciation deductions to outlays actually incurred by residential rental property owners. Acquisitions of existing plant and equipment items will be reflected in the cost base for CGT purposes for subsequent investors.
Investors who directly purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim depreciation deductions over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property. The portion of the purchase price that reflects the value of these items will simply form part of the cost base of the property and will reduce capital gains made on future disposal of the property.
These changes apply on a prospective basis, with existing investments grandfathered. Plant and equipment forming part of residential investment properties at 9 May 2017 (including contracts already entered into) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.
Plant and equipment items are usually mechanical fixtures or those that can be 'easily' removed from a property such as dishwashers and ceiling fans.
Effective from 7:30PM (AEST) on 9 May 2017
Foreign owners of residential Australian property will incur a charge if their 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 charge imposed is expected to be at least $5,000.
This measure will apply to foreign persons who make a foreign investment application for residential property from the Budget announcement, 7:30PM (AEST) on 9 May 2017. This suggests that the new rules do not appear to apply to existing properties.
The Government has announced a series of changes to how the Capital Gains Tax regime applies to foreign and temporary tax residents.
Main residence exemption no longer applies to foreign and temporary residents
From 7:30PM (AEST) on 9 May 2017
Foreign and temporary residents will be excluded from the main residence exemption. The main residence exemption excludes private homes from capital gains tax.
Generally, a full exemption should be available if the following conditions are met:
- The taxpayer is an individual who is selling a dwelling or an ownership interest in a dwelling;
- The dwelling has been the taxpayer's home for the entire ownership period;
- The dwelling has not been used to produce assessable income; and
- The dwelling is situated on land that is 2 hectares or less.
The exemption is currently available regardless of the residency status of the vendor or whether the property is located in Australia or overseas. These new measures change the position to prevent foreign and temporary residents from accessing the main residence exemption.
Existing properties held prior to 9 May will be grandfathered until 30 June 2019, however, it remains to be seen whether partial relief will be available to those who have been residents of Australia for part of the period they owned the property and whether this change will apply to Australian residents who were classified as a foreign resident for part of the ownership period.
Foreign resident CGT withholding rate increased and threshold reduced
Date of effect From 1 July 2017
When someone buys Australian real property (i.e., land and buildings) they are currently required to remit 10% of the purchase price directly to the ATO as part of the settlement process unless the vendor provides a certificate from the ATO indicating that they are an Australian resident. These rules do not currently apply if the property is worth less than $2 million.
From 1 July 2017 the CGT withholding rate under these rules will increase by 2.5% to 12.5%. The CGT withholding threshold for foreign tax residents will also reduce from $2 million to $750,000, capturing a much wider pool of taxpayers and property transactions.
Australian property held through companies and trusts
From 7:30PM (AEST) on 9 May 2017
When a non-resident or temporary resident sells shares in a company or units in a trust this is not generally subject to Australian CGT unless:
- The taxpayer and their associates hold at least 10% of the shares in the company or units in the trust; and
- More than 50% of the total market value of the company or trust's assets is attributable to land and buildings in Australia and certain mining, quarrying or prospecting rights relating to Australia (the principal asset test).
The principal asset test will be changed to take into account assets held by associates of the company or trust rather than only considering assets held by the company or trust. This will ensure that foreign residents cannot avoid an Australian CGT liability by splitting indirect interests in Australian real property.
The change will apply from the Budget announcement (7:30PM (AEST) on 9 May 2017).
Foreign ownership in new dwellings restricted
From 7:30PM (AEST) on 9 May 2017
A 50% cap will be imposed on foreign ownership in new developments. In effect, any new development will need to ensure that less than 50% of the purchasers are foreign residents.
The cap will be a condition of New Dwelling Exemption Certificates from the night of the Budget announcement (7:30PM (AEST) on 9 May 2017). New Dwelling Exemption Certificates are granted to property developers and act as a pre-approval allowing the sale of new dwellings in a specified development to foreign persons without each foreign purchaser seeking their own foreign investment approval.
Foreign investment framework changes
From 1 July 2017
The Government intends to make a series of changes to Australia's foreign investment framework, including:
- Refining the type of developed commercial property subject to the lower $55 million threshold by removing low sensitivity applications from the meaning of sensitive land;
- Improving the treatment of residential applications by allowing failed off-the-plan purchases to be considered as 'new'; overcoming limitations with the existing exemption certificate system for individual residential real estate purchases and amending the treatment of residential land used for a commercial purpose;
- Streamlining and simplifying foreign investment business application fees, including legislating existing fee waiver arrangements;
- Introducing a new exemption certificate that applies to low risk foreign investors;
- Clarifying the treatment of developed solar and wind farms; and
- Restoring the previous arrangement where companies with significant foreign custodian holdings (that is, legal rather than equitable interest holders) are not subject to notification requirements.
In general, the changes should streamline the rules.
More from Budget 2017
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.