The 2017/18 Federal Budget introduced additional financial and compliance requirements to foreign investors acquiring a real property in Australia. Now there is a limit on foreign ownership in new developments, having annual charge imposed on foreign owners who acquire residential property and leave it vacant for certain amount of time and the foreign investor tax integrity rules are tightened to reduce avoidance of capital gains tax on Australian property. These measures seek to reduce the pressure on housing affordability for Australians.
- Cap on foreign ownership in new developments
The new Federal Budget limits the number of properties that can be sold to foreign investors and all new approvals will be subject to a condition that the developer may only sell a maximum of 50 per cent of the total dwellings in the development to foreign investors.
This is applicable to all new developments which comprises of one or more multi-storey buildings that will, or have been built under one development approval (with 50 units or more) and does not include townhouses, house and land packages and greenfield developments.
New Dwelling Exemption Certificates (“the Certificate”) issued by Foreign Investment Review Board (“FIRB”) to property developers act as pre-approval allowing the sale of new dwellings in a specified development to foreign persons without each foreign purchaser seeking their own foreign investment approval.
Previously, the Certificate did not limit the number of dwellings that may be sold to foreign investors, meaning 100% of apartments could be sold to overseas purchasers.
This cap will be imposed on all new applications which are applied for on and from 9 May 2017 and it is intended to increase the housing stock for Australian buyers.
- Annual vacancy charge
An annual charge on foreign owners of residential real estate will be applied where Australian residential property is not occupied or genuinely available on the rental market for at least six months per year.
The charge will be equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired, minimum amount being $5,000. The annual liability is assessed based on the date of settlement of the property as the start date for each year.
The annual vacancy charge will apply to foreign persons who make a foreign investment application for residential property from 9 May 2017.
This is intended to ensure that foreign investment in Australian residential real estate contributes to the actual supply of residential property available for use in Australia.
Moreover, foreign owners must report annually about the use of their residential property for the previous year and may be required to provide evidence that the residential property was used:
- where it is rented out, used as a residence or otherwise occupied;
- where it has genuinely been made available for rent, including by advertising the residential property, engaging a leasing agent and setting the rent at a market rate; or
- during the construction period for the building of new dwellings or redeveloping of existing dwellings.
The person who occupies or uses the residential property does not need to be the person who purchased the residential property and there is no requirement for a rental agreement to be in place and the six month period in which the property must be used does not need to be six consecutive months.
- Increased fees for FIRB applications
Application fees for foreign purchases of residential properties valued at less than $10 million will increase by 10 per cent on the current fees, effective 1 July 2017.
The number of fee categories for FIRB approvals have been limited to three broad categories and new fee categories now include not only developed commercial land, but also vacant commercial land.
- Reduced Capital Gains Tax (CGT) benefits
The Government will stop foreign and temporary tax residents from claiming the main residence capital gains tax exemption when they sell property in Australia. Foreign and temporary tax residents who hold property on 9 May 2017 can continue to claim the exemption until 30 June 2019.
The CGT principal asset test will also be applied on an associate inclusive basis from 9 May 2017 for foreign tax residents with indirect interests in Australian real property.
The Government will also strengthen the foreign resident CGT withholding regime by:
- increasing the withholding rate from 10 per cent to 12.5 per cent
- increasing the number of foreign residents caught by the regime by reducing the threshold from $2 million to $750,000.
These changes will apply from 1 July 2017 and will reduce the risk that foreign residents avoid paying a capital gains tax liability they owe in Australia.
- Improving housing affordability across NSW
The Government also introduced new measures to provide affordable housing to home buyers in NSW by increasing grants and concessions available to first home buyers and regulating foreign investors with increased stamp duty, which will take effect from 1 July 2017.
Stamp duty relief
The stamp duty is abolished on all homes up to $650,000 for first home buyers. For properties valued at between $650,000 and $800,000, the duty concession will be gradually reduced.
First Home Owners Grant (New Homes)
First home buyers building a new property will be entitled to a $10,000 grant on homes worth up to $750,000 and for those purchasing a new property worth up to $600,000 will also be entitled to a $10,000 grant. This policy aims to provide assistance to first home buyers and stimulate the construction of new dwellings.
The $5,000 New Home Grant Scheme, which was available to other buyers including foreign investors will no longer be available.
Insurance duty on lenders’ mortgage insurance abolished
The removal of insurance duty on lenders’ mortgage insurance (set at 9 per cent of the premium) will save money for all home buyers including first home buyers if are subject to LMI.
Foreign investors to pay higher duties
Foreign investors will pay higher surcharges when they purchase residential real estate:
- surcharge on stamp duty doubled from 4% to 8%
- surcharge on land tax from 0.75% to 2%
The surcharge is in addition to the duty payable on the purchase of residential property and foreign developers will be exempt from the increased surcharges.
No more stamp duty deferral for foreign investors
The Government is abolishing the 12-month deferral of duty for residential off-the-plan purchases by foreign investors.
Australian buyers including first home buyers who plan occupy their purchase of off-the-plan property will still be entitled to a 12-month delay in the payment of stamp duty, deferring payment from 3 to 15 months after settlement.
- Other implications
The following measures which affect superannuation could also assist with reducing pressure on housing affordability.
First Home Super Saver Scheme
The First Home Super Saver Scheme will help first home buyers to save funds at a discounted tax rate by making additional contributions to their superannuation from 1 July 2017. These additional contributions, and earnings made on them, can then be withdrawn to be used as a home deposit.
The new Scheme provides an incentive for first-home buyers to save any concessional contributions and earnings withdrawn will be taxed at the marginal tax rate, less a 30 per cent offset. First home buyers can make voluntary contributions into superannuation of up to $15,000 per year, up to $30,000 in total (effectively $60,000 for a couple) and withdrawals are allowed from 1 July 2018.
A previous First Home Savers scheme required potential home buyers to set up a special account with a financial institution, however the new Scheme avoids this requirement.
New downsizing cap – contributing proceeds into super
This measure is designed to encourage people aged 65 and over to downsize from homes that no longer meet their needs and free up housing stock for young families.
From 1 July 2018, people aged 65 and over will be able to make a non-concessional contribution into their superannuation of up to $300,000 from the proceeds of selling their principal place of residence which has been held for at least 10 years. Couples can take the advantage of contributing $600,000 to their super fund through the downsizing cap.
The new downsizing cap is in addition to the existing voluntary contribution rules (i.e. work test, no contributions for those 75 and over) and restrictions on non-concessional contributions for people with balances above $1.6 million.