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Latest changes in Federal and State Taxes and Duties – Impact on foreign property investors
Following the latest release of the state and federal budgets, new rules are set to be implemented which will affect Australia’s property ownership landscape and in particular foreign owners, developers and foreign investors of Australian real estate. We highlight a few recent measures in this article.
Compulsory federal tax withholding regime - foreign resident
In an attempt to curb tax avoidance and evasion, the federal government has introduces the new foreign resident CGT withholding payment regime.
All sales of Australian property interests valued at $2m or more on or after 1 July 2016 are captured by the new regime, with some limited exceptions. The measures are very wide and will apply to all purchasers, whether Australian or foreign residents.
Under the foreign resident CGT withholding tax, any Purchaser of an Australian real estate is required to withhold and remit to the ATO 10% of the purchase price (more accurately the first element of the asset’s cost base) if it is a purchase under the type of contract noted above.
The practical implication of this new law is that all vendors of property with a value of $2 million and above will need to apply and obtain a clearance certificate from the ATO to prove they pay tax in Australia. The vendor must provide a clearance certificate to the Purchaser no later than the day of settlement to avoid the Purchaser withholding 10% of the sales price and paying it to the ATO. The estimated time frame for the ATO to issue a clearance and/or variations certificates currently is around seven business days.
Heavy administrative penalties apply for non-compliance. If acting for a Purchaser it is important to ensure that a clearance certificate is provided prior to or at settlement, or in the absence of an appropriate clearance certificate or declaration the compulsory withholding tax must be quarantined for submission to the ATO. Failure to pay the non-final withholding tax will render the purchaser liable to penalties and interest. The directors of any purchaser who fails to pay may also be liable to penalties.
Having said that, because the tax is only a non-final withholding tax, it is the vendor who is liable for the CGT on the disposal of the asset and as such must lodge an income tax return and pay any amount assessed by the ATO (but will be entitled to a credit for the amount of non-final withholding tax paid by the purchaser). To this end, the purchaser must also notify the ATO in the approved form of any payment of non-final withholding tax. The approved form contains information that allows the amount to be credited to the appropriate vendor and may include the vendor's tax file number.
A more detailed article on the foreign resident CGT withholding tax can be read here.
New rules are set to be implemented for foreign purchasers of residential property from 1 October 2016 with a duty surcharge of 3% of the purchase price or consideration value to be implemented. Development companies will be affected by this new duty, as most development companies will have some foreign purchasers and investors involved.
At present, the duty surcharge does not apply to commercial premises or commercial residential premises (hotels, motels, serviced apartments, student accommodations, etc). Queensland is not the first state to implement such foreign ownership surcharges, with Victoria and New South Wales having enacted similar measures.
From 21 June 2016 onward, foreign purchasers of residential property in NSW will have to pay additional stamp duty of 4% on transactions. Further, foreign investors will no longer be entitled to the 12-month deferral for the payment of stamp duty for off-the-plan purchases of residential property.
A 0.75% land tax surcharge will apply on residential real estate, including on a principal place of residence, owned by foreign persons commencing in the 2017 land tax year (from 1 January 2017). In addition foreign land owners will lose the tax-free threshold for the land tax surcharge.
From 1 July 2016, foreign purchasers will pay 7% additional stamp duty on residential property purchases, increased from the 3% stamp duty surcharge for foreign investors introduced in Victoria which commenced on 1 July 2015.
Absentee owner surcharge will be increased from 0.5% to 1.5% on 1 January 2017. This will be a land tax surcharge applying to land owned by an absentee owner in Victoria.
Some practical impacts
The Real Estate Institute of Queensland's (REIQ) latest suite of standard contracts (12th edition for Houses and Residential Land, and 8th edition for Residential lots in a CTS) have now been updated to include provisions for the federal compulsory foreign resident CGT withholding tax to document the taxation obligations of the parties to the transaction. It is important that practitioners are aware and that clients are advised of the the requirements to avoid delays at settlement and contractual defaults.
With the additional state surcharges now being levied on top of the new federal government charges, a duties assessor would also need to take extra precautions and be aware of their obligations under the state regimes. Clients will need to be advised and file handlers must make enquiries or satisfy themselves of the client’s residency to avoid penalties being rendered after the completion of the transaction. At this stage, it is uncertain how significant the practical impacts of these new rules will be.
The following table provides an overview of the relevant foreign investor surcharges and other measures applying in each of the three states:
|Commencing from 1 October 2016||This measure is also referred to as additional foreign acquirer duty or AFAD.|
|Foreign investors will no longer be entitled to the 12-month deferral for the payment of stamp duty for off-the-plan purchases of residential property.
No tax-free threshold for land tax, even if occupied as principal place of residence.
|For all contracts, transactions, agreements and arrangements entered into on or after 1 July 2016, the additional duty rate is increased from 3% to 7%.|