The regulation by the Foreign Investment Review Board (FIRB) of the purchase of Australian property by foreign persons has already created a restrictive regime that makes purchasing property in Australia by foreign persons both costly and a challenge.
In the 2017/18 Federal Budget, the Australian Government has once again targeted foreign persons who are purchasing or selling real estate in Australia. While FIRB has increased its application fees by 10% and set a 50% cap on the number of dwellings that a developer can sell to foreign persons, the more impactful changes appear to be mostly related to the treatment of capital gains.
Some of the recently implemented or proposed changes which will impact foreign persons are listed below:
- Foreign and temporary residents will now have to pay Capital Gains Tax (CGT) when they sell their family home in Australia. The main residence exemption which previously operated to exempt CGT no longer applies to property owned by foreign and temporary residents. There is some good news however, as foreign and temporary residents who held Australian property at 7:30pm (AEST) on May 9, 2017 will still have access to the exemption if the property is disposed of prior to June 30, 2019.
- When a foreign resident (or even an Australian who has not obtained a clearance certificate from the ATO) sells Australian property, the purchaser is required to withhold an amount of the purchase price as a capital gains withholding tax (CGWT), which will then be paid to the ATO. The CGWT rate has increased from 10% to 12.5%, while the threshold above which CGWT applies has decreased from $2 million to $750,000.
- Foreign residents generally have their capital gains disregarded, except for capital gains made in respect of Taxable Australian Property (TAP). For membership interests in an entity, a CGT event in relation to the membership interest will only be TAP where the foreign resident holds 10% or more in the entity and where more than 50% of the entity’s value is made up of TAP. Whether more than 50% of value is TAP will now be an “associate inclusive test,” meaning that relatives and other associates of the entity will be used to determine whether the 50% threshold is met. This has the potential to bring more membership interests into TAP and the CGT regime.
- Property that is not occupied, rented or genuinely available for rent for at least 183 days of the year will be subject to an annual vacancy charge (which in most cases will be equivalent to the FIRB application fee for the property).
The State Governments have also targeted foreign persons who are purchasing or selling real estate in their 2016/17 and 2017/18 Budgets. Some of these changes which will impact foreign persons are listed below:
- A purchaser of Australian property is required to pay stamp duty on the purchase of the property in New South Wales, with the rate varying from 1.25% to 4.5% for property valued up to $1 million, 5.5% for amounts above $1 million, and a premium rate of 7% on amounts above the $3 million threshold. Foreign persons are also subject to an additional surcharge purchaser duty in New South Wales, which is calculated based on the dutiable value of the property and has increased from 4% to 8%. The result is that for a foreign person purchasing property in New South Wales, each dollar over the premium threshold will see a 15% duty payable on it. Other States have also imposed similar surcharges, with Victoria having a 7% surcharge, Queensland and South Australia having a 4% surcharge and Western Australia expecting to adopt a 4% surcharge from 1 January 2019.
- Land owned at midnight on 31 December in New South Wales each year will be subject to land tax, with the owners of the land receiving the assessment to pay the tax at a rate of $100 + 1.6% of the value of the land above the $549,000 threshold, or at a premium rate of 2% for amounts over the $3,357,000 premium threshold. Foreign persons are also subject to an additional land tax surcharge in New South Wales, which is calculated on the value of the land and has increased from 0.75% to 2%. The result is that for a foreign person owning property in New South Wales, each dollar over the premium threshold will see a 4% land tax payable on it. Other States have also introduced or raised their own land tax surcharge, with Victoria increasing it from 0.5% to 1.5% and Queensland introducing it at a rate of 1.5%.
- Stamp duty in New South Wales can no longer be deferred for “off the plan” purchases unless the Commissioner is satisfied that the property will be your principal place of residence for at least 6 months within the 12 months after completion of the sale.
Discretionary Trusts – a word of warning
The recent changes in New South Wales now mean that an Australian resident discretionary trust can be treated as a foreign person for the purposes of the surcharge purchaser duty and the land tax surcharge. This is because a trust can be treated as a foreign person if any of its beneficiaries who are foreign residents have an interest of at least 20% in the income or property of the trust, and in the case of a discretionary trust each beneficiary can be deemed to have the maximum percentage interest in the income or property of the trust that may be distributed to them. Therefore, just one actual or potential foreign person beneficiary can make the trust fall into the definition of a foreign person for surcharge purposes. The recent changes have retrospective effect from 21 June 2016, however the Minister has granted a window that will allow discretionary trustees to amend their deeds and irrevocably exclude all foreign persons.
The Ageis team have comprehensively reviewed these new rules and are here to help. If you are acquiring or currently own Australian property, or are the trustee of a trust which is acquiring or currently owns Australian property, please contact a Director of Ageis to assist you with advice.