Tax Reforms Impacting Property Ownership
by Glen Bower
There has recently been significant media coverage on potential tax reforms impacting property ownership in Australia. Although the Australian Labor Party’s proposed changes to negative gearing and capital gains tax (CGT) are now off the political agenda for at least the next three years following the recent federal election, there have already been some significant changes to taxation laws pertaining to real property in recent years, both at a state and federal level. These changes impact on all types of real property (i.e. residential, commercial and industrial) and property owners (i.e. home owners, investors and developers).
Below is a summary of some of the key changes to property-related taxation laws along with further reforms recently announced by the federal government that are now expected to be finalised and implemented within the short-term:
NSW Surcharge Purchaser Duty & Surcharge Land Tax
Commencement Date: 21 June 2016
Foreign purchasers of residential land in NSW are liable for Surcharge Purchaser Duty of 8% on the dutiable value (the price you paid or market value, whichever is higher) of the property, in addition to any transfer duty (increased from 4% for agreements entered into on or after 1 July 2017). Further, foreign owners of residential land in NSW are liable for Surcharge Land Tax of 2% on the taxable value of all NSW residential land held as at 31 December each year, in addition to any general land tax (increased from 0.75% from the 2018 land tax year).
The definition of a ‘foreign person’ for the purpose of these surcharges can be complicated, in particular in respect to entities such as companies and trusts.
Similar surcharges have recently been introduced by most other Australian states.
Foreign Resident Capital Gains Withholding
Commencement Date: 1 July 2016
Foreign resident capital gains withholding (FRCGW) of 12.5% (non-final) applies to foreign resident vendors disposing of the below assets:
- Taxable Australian real property with a market value of $750,000 or more (residential and commercial);
- Indirect Australian real property interests (i.e. shares / units); or
- Options or rights to acquire any of the above asset types.
From 1 July 2017, the withholding rate increased from 10% and the market value threshold decreased from $2 million.
Commencement Date: 1 July 2017
Limit on deductions for the decline in value (depreciation) of certain second hand depreciating assets in residential investment properties (i.e. furniture, hot water systems, floor coverings, whitegoods etc) acquired after the 9 May 2017 or used for any private purposes prior to the 2018 financial year.
Commencement Date: 1 July 2017
Travel expenses relating to residential investment properties are not deductible and cannot be included within the cost base of the property for CGT purposes (even when incurred to inspect or maintain rental properties or to collect rental income).
Purchaser GST Withholding
Commencement Date: 1 July 2018
Purchasers of new residential premises, and potential residential land, are required to withhold and remit the GST component of the purchase price directly to the Australian Taxation Office (ATO) on or before settlement. Transitional arrangements apply to contracts entered into prior to 1 July 2018 where any consideration, other than the deposit, is provided prior to 1 July 2020.
Main Residence Exemption for Foreign Residents
This change is not yet law (legislation was introduced into federal parliament in February 2018)
Commencement Date: 9 May 2017 (refer below for transitional arrangements)
Foreign residents no longer entitled to claim the main residence exemption when they dispose of residential property in Australia. For properties held prior to the 9 May 2017, the exemption will only be able to be claimed for disposals that happen up until 30 June 2019 and only if they meet the requirements for the exemption. For disposals that happen from the 1 July 2019, foreign residents will no longer be entitled to the exemption.
For properties acquired after 9 May 2017, the exemption will no longer apply to disposals from that date.
This change is not yet law (exposure draft legislation was released for consultation in October 2018)
Commencement Date: 1 July 2019
Tax deductions denied for expenses associated with holding vacant land (i.e. interest, rates), even if the intention is to construct a building / dwelling to derive assessable income. Non-deductible expenses are unable to be deducted in later years but can be included within the cost base of the property.
Other Changes / Developments
- First Home Loan Deposit Scheme: Recently announced initiative from the Liberal Party to support eligible first home buyers to purchase a house with a deposit of at least 5%.
- Additional CGT discount for ‘Affordable Housing’: Additional CGT discount of up to 10% for dwellings, used to provide affordable housing for at least 3 years.
- First Home Super Saver Scheme: Saving mechanism via superannuation to support the acquisition of first homes.
- Superannuation ‘Downsizer’ Contributions: Individuals aged 65 years or over can make a one-off contribution of up to $300k from the proceeds of selling a home, subject to satisfying applicable eligibility criteria.
As highlighted above, property ownership in Australia can be impacted by many complicated and evolving taxation laws. Further, the recent royal commission into the banking industry has had a noticeable impact on the ability to obtain finance. It is increasingly important to seek specialist advice from a qualified tax professional when considering property acquisitions or disposals.
Take this opportunity to get in touch with our experienced team at BLG Business Advisers to arrange an appointment online or by calling (02) 4229 2211.