The premise of the Budget as it affects the property market appears to be an attempt to balance the need to provide for affordable housing solutions (particularly for first home buyers) with the promotion of economic growth. The Federal government has targeted foreign investors to relieve local affordability issues, however if foreign investors are dissuaded from deploying capital in Australia for residential investment, this may lead to an unwanted reduction in development due to the impact on the feasibility of development projects. This inevitably may lead to a reduction in jobs in this sector. The Federal government has sought to balance this possibility in a number of ways, including by:

  • promoting investment in affordable housing by offering tax concessions at the developer and resident investor level
  • implementing a Commonwealth Property Register, allowing the private sector to submit proposals for the high end development of parcels of Commonwealth land (including for housing development)
  • releasing surplus Commonwealth property for sale and development, starting with 127 hectares of (contaminated) land 10 kilometres from the Melbourne CBD
  • working with the New South Wales government and eight relevant local government areas on a "Western Sydney City Deal" to implement planning reforms, which is anticipated to be completed in late 2017
  • unlocking developable land by establishing a $1 billion National Housing Infrastructure Fund over five years, which will provide local governments with a variety of concessional loans, equity investments and grants to be used to finance critical infrastructure

There has also been a commitment for improved social housing investment through the establishment of the National Housing Finance and Investment Corporation which will aim to provide cheaper and longer-term financing for community housing providers, as well as a further commitment to work with all State and Territory governments to deliver affordable housing through a new National Housing and Homelessness Agreement.

Foreign ownership in new developments restricted to 50%

A 50% cap on foreign ownership in new developments will be introduced through a condition on new dwelling exemption certificates (NECs), where the application for the certificate was made after 7.30pm (AEST) on 9 May 2017.
NECs are granted to property developers and act as a pre-approval allowing the sale of new dwellings to foreign buyers without each foreign buyer having to seek their own foreign investment approval. Prior to the Budget announcement, there was no limit on the amount of sales that may be made to foreign buyers, provided a new dwelling exemption certificate was obtained and the project was marketed to local buyers as well.
This change may impact the number of sales a developer is able to achieve from foreign buyers. In Victoria, this may be further impacted by the changes announced in last week's Victorian State budget which removes the off-the-plan transfer duty concession from non-owner/occupiers and investors.

Annual charge on foreign owners of vacant residential property

Foreign owners of residential property that is not occupied or genuinely available on the rental market for at least six months per year will be subject to an annual charge equal to the relevant foreign investment application fee imposed on the property at the time it was acquired by the foreign owner (ie at least $5,000). This measure will apply to foreign persons who make a foreign investment application for residential property after 7.30pm (AEST) on 9 May 2017.

This is in addition to the recently announced vacant residential property tax (VRPT) in Victoria announced last week in the Victorian State budget. The VRPT will impose an annual tax on owners of vacant residential property in certain metropolitan areas of Melbourne of 1% of the capital improved value of each taxable property from 1 January 2018.

Capital gains tax (CGT) changes for foreign investors

Foreign investors will be subject to the following changes in Australia’s CGT regime:

  • Removal of main residence exemption - Individuals who are foreign and temporary tax residents will be unable to access the CGT main residence exemption from 7.30pm (AEST) on 9 May 2017, although properties held before this date will be grandfathered until 30 June 2019. The sale of a main residence by such persons will now be subject to CGT
  • Extension of CGT withholding regime - CGT withholding of 10% currently applies to foreign and resident investors with real property valued at $2 million or more, unless an exemption applies. The application of the regime will be extended by reducing the valuation threshold from $2 million to $750,000 and the withholding rate will also be increased from 10% to 12.5%. Both changes apply from 1 July 2017
  • Capital gains tax exemption - The foreign resident capital gains tax exemption currently allows foreign residents to disregard capital gains from disposals of non-portfolio membership interests in entities, provided that their underlying value is not principally derived from taxable Australian real property. This test will now be applied on an associate inclusive basis to ensure that foreign residents cannot avoid CGT liability by disaggregating indirect interests in taxable Australian real property. These changes will apply from 7.30pm (AEST) on 9 May 2017

Purchasers of new residential properties to remit GST

From 1 July 2018, purchasers of newly constructed residential properties or new subdivisions will be required to remit GST directly to the Australian Taxation Office as part of settlement. We query how this will apply in practice, particularly where the margin scheme has been used to calculate the GST liability. Contracts may need to require the seller to disclose the calculation of GST to the purchaser.

Investment by Managed Investment Trusts (MITs) in affordable housing

Under the MIT tax regime, foreign 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. Foreign 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.
The MIT will be able to acquire, construct or redevelop property if it satisfies the following conditions:

  • the MIT must derive at least 80 per cent of its assessable income from affordable housing
  • the affordable housing must be provided to low to moderate income tenants
  • rent must be charged at a discount below the private rental market rate
  • the affordable housing must be available for rent for at least 10 years

This measure will apply from 1 July 2017.

60% CGT discount for resident individuals investing in affordable housing

From 1 January 2018, resident individuals who invest in qualifying affordable housing will be eligible for a 60% CGT discount instead of the current 50% CGT discount.

The conditions to access the 60% CGT discount are:

  • the affordable housing must be provided to low to moderate income tenants
  • rent must be charged at a discount below the private rental market rate
  • the affordable housing must be managed through a registered community housing provider
  • the investment must be held for a minimum period of three years

The higher discount will also flow through to resident individuals investing in affordable housing through MITs.

Changes to foreign investment framework

A range of amendments will be introduced with effect from 1 July 2017, to clarify and simplify Australia’s foreign investment framework by:

  • 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
  • restoring the previous arrangement whereby companies with significant foreign custodian holdings (that is, legal rather than equitable interest holders) are not subject to notification requirements

Other changes

Superannuation non-concessional contribution

  • persons aged 65 or over will be able to make a non-concessional contribution to their superannuation of up to $300,000 from the proceeds of sale of their home from 1 July 2018 provided the home has been owned for at least 10 years

First home buyers voluntary contributions

  • first home buyers will be able to make voluntary contributions of up to $15,000 per year and $30,000 in total to superannuation to fund the deposit to purchase their first home from 1 July 2017

Changes to tax deductions for residential property owners

  • deductions for travel expenses relating to inspecting, maintaining or collecting rent for a residential rental property will not be available from 1 July 2017
  • plant and equipment depreciation deductions will be limited to outlays actually incurred by investors in residential real estate properties from 1 July 2017. This change will apply on a prospective basis, with existing investments grandfathered

Closing thoughts - the balancing act 

The Federal government has attempted to reduce the involvement of foreign investors in Australia's residential property market by implementing a range of new restrictions and taxes. To increase supply it will be releasing infrastructure and land release packages, which in turn, may lead to some relief in housing affordability.

The provision of critical infrastructure and the timely resolution of development applications at the local government level will be crucial elements in balancing any detrimental effect the newly announced measures to the foreign investor regime may have on the property development industry, which may (if too pronounced) lead to a reduction in projects and ultimately - jobs. It therefore remains to be seen if the Federal government will achieve the desired level of equilibrium for the property industry with this Budget.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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