2017-2018 Federal Budget Expert Analysis - Property

Key points

  •  Measures aimed at foreign resident property owners
  • Restricting ownership by foreign ownership in new developments

  • GST integrity measure on property transactions

  • Limiting plant and equipment depreciation claim for property investors

  • Integrity measures regarding the Small business Capital Gains Tax (CGT) concessions will be introduced

The Government has decided to implement a suite of measures designed to protect and boost tax collected on property gains derived by foreign residents. This will be achieved via extending Australia’s foreign resident CGT regime via the following measures:

  • denying foreign and temporary tax residents access to the CGT main residence exemption from 7.30PM (AEST) on 9 May 2017, although existing properties held prior to this date will be grandfathered until 30 June 2019. The Budget Papers do not clarify how these grandfathering provisions will operate and further details are expected to follow in due course.

  • increasing the CGT withholding rate for foreign tax residents from 10.0 per cent to 12.5 per cent, and reducing the CGT withholding threshold for foreign tax residents from $2 million to $750,000, from 1 July 2017.

The Government will also improve the integrity of the foreign resident CGT regime by applying the principal asset test on an associate inclusive basis from 7:30PM (AEST) on 9 May 2017, for foreign tax residents with indirect interests in Australian real property. This is a technical amendment designed to ensure that foreign tax residents cannot escape a CGT liability by disaggregating indirect interests in Australian real property.

These measures demonstrate a significant tightening of the CGT rules and perceived tax leakage arising from foreign resident property transactions.

The Government will also introduce a 50 per cent cap on foreign ownership in new developments. The cap will be included as a condition on New Dwelling Exemption Certificates where the application was made from 7:30PM (AEST) on 9 May 2017.

The measure is designed to ensure that a minimum proportion of developments are available for Australians to purchase. This sends a clear message that the Government expects developments to increase the housing stock for Australian purchasers.

From 1 July 2018, the GST rules will be strengthened by requiring purchasers of newly constructed residential properties or new subdivisions to remit the GST directly to the Australian Taxation Office (ATO) as part of settlement. In other words, rather than remitting GST to the vendor as a component of the consideration paid, purchasers will be required to pay the GST to the ATO.

It is estimated that this measure will increase GST revenue by $660.0 million and associated payments to the States and Territories, net of administrative costs, by $1.6 billion over the forward estimates period. The difference is due to the timing of when GST is collected and recognised.

Commencing from 1 July 2017, depreciation claims for plant and equipment will only be available for outlays actually incurred by investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans.

This measure address concerns that some plant and equipment items are being depreciated by successive owners in excess of their actual value. Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.

These measures will apply prospectively, with existing investments grandfathered. Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30PM (AEST) on 9 May 2017) will continue to be eligible for deductions for depreciation until either when the investor no longer owns the asset, or the asset reaches the end of its effective life.

Property owners who acquire plant and equipment for their residential investment property after 9 May 2017 will be entitled to claim a deduction over the effective life of the asset. However, subsequent owners of a property will not be permitted to claim deductions for plant and equipment purchased by a previous owner of that property.

This is a material change to the existing capital allowance provisions and is likely to be complex from a compliance perspective.

The small business CGT concessions in Division 152 will also be amended to ensure concessions can only be accessed in relation to assets actually used in a small business.  From 1 July 2017, taxpayers will be prevented from rearranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.