The changing tax landscape of Australian Property Ownership

24/10/2017

The last 5 years have seen some significant changes to the taxation of Australian property owned by foreign-resident taxpayers, but the 2017 Federal Budget marked a step-change. If the measures announced in the 2017 Budget are implemented, they will result in a very different tax landscape for foreign- resident owners of Australian real estate.

Budget 2017 Housing Affordability Measures

The budget included a suite of tax changes aimed at foreign-resident owners of Australian real estate, with a policy aim of improving housing affordability by increasing supply of housing to the market.

The measures include:

  • Removal of main-residence exemption on disposals by foreign-residents of Australian real estate
  • Increase in the rate of Foreign Resident CGT Withholding (FRCGTWH) on sales of Australian real estate by foreign-resident taxpayers from 10% to 12.5%, coupled with a reduction of the threshold at which this applies
  • Introduction of an annual tax charge for new acquisition of under-utilised residential property owned by foreign-residents and
  • Restriction of foreign investment in new development to 50%

Many Australians currently living overseas still own their home (or other investment properties) in Australia. The above measures suggest a need to re-evaluate this ongoing ownership.

The Two Key Measures in More Detail

Removal of Main-Residence Exemption:

For properties held at Budget Day (9 May 2017) to remain eligible for main-residence exemption the owner will need to either:

  • Return to Australia and become Australian-resident prior to selling the property or
  • Sell the property as a foreign-resident no later than 30 June 2019

Disposals of properties acquired after 9 May 2017 by foreign-residents will not attract main-residence exemption.

The original announcement applied the measure to both foreign residents and temporary-residents. However, the draft legislation released for a recent consultation applied only to foreign-residents. We are currently awaiting the feedback from the consultation and it is possible that we will see further changes to the draft legislation before it passes into law.

Increase in FRCGTWH Rate and Lowering of the Threshold:

FRCGTWH was introduced at 10% of the sales proceeds for sales of Australian real estate for $2m or more by foreign-residents from 1 July 2016. For sales contracts from 1 July 2017 it will apply to sales for $750k or more at a rate of 12.5%.

Unless the taxpayer has successfully applied for a FRCGTWH variation, 12.5% of the sales proceeds will be deducted on completion of the sales contract and paid over to the ATO. Foreign-resident taxpayers will then need to file their Australian Income Tax return for the year of the sale to claim back any over-deduction of tax.

Summary

Whilst the imposition of FRCGTWH is merely a temporary cash-flow disadvantage, the loss of main-residence exemption (coupled with the loss of CGT discount for foreign-residents) may result in a much higher Australian tax rate on the sale of Australian real estate by foreign-residents. Action now could reduce that negative tax impact.

For more information or advice please contact Joanne Lamberth at lamberthj@tax.uk.com

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