WHO SHOULD READ THIS
- Foreign investors who hold Australian residential property or seeking investment opportunities in Australia.
In the highly anticipated Federal Budget for 2017-18 the Government has taken aim at the favourable capital gains tax treatment on the sale of a principal place of residence, and increased restrictions on foreign investors looking to purchase property in Australia.
Capital gains tax changes for foreign investors
From 7.30pm on 9 May 2017 the availability of the capital gains tax (CGT) main residence exemption on the sale of principal place of residence will be limited for foreign and temporary tax residents as follows:
- for a residence acquired before 7.30pm on 9 May 2017 the exemption will be available if the property is disposed of by 30 June 2019, but not if the disposal occurs after that date;
- for a residence acquired after 7.30pm on 9 May 2017 the exemption will not be available, regardless of when it is sold.
From 1 July 2017 foreign tax residents will be subject to:
- an increased CGT withholding rate of 12.5% (up from 10%); and
- a reduced CGT withholding threshold of $750,000 (down from $2 million).
In addition, for determining when this CGT withholding is to apply to acquisitions of indirect interests in Australian real property or mining tenements, a technical loophole that previously existed has now been closed, ensuring that the test is applied on an associates inclusive basis.
FIRB restrictions on foreign ownership in new developments
A developer can seek pre-approval for the sale of new dwellings in a large development (50 dwellings or more) to foreign investors. This is known as a 'New Dwelling Exemption Certificate'. Effectively it means that the investors are not required to obtain their own FIRB approval for the acquisition. For several years, these pre-approvals have been available for 100% of the dwellings in the relevant development, but following the Budget announcement any New Dwelling Exemption Certificate applied for after 7.30pm on 9 May 2017 will be issued subject to a condition that it will only apply to the sale of a maximum of 50% of the dwellings in the development to foreign buyers.
Annual charge for underutilised residential property
Foreign owners of residential property may be liable for an annual charge where the property is not occupied or 'genuinely' available on the rental market, for at least six months per year. The charge will be equal to the relevant FIRB application fee which was payable at the time the property was acquired and will apply to foreign persons who make a foreign investment application for residential property after 7:30PM (AEST) on 9 May 2017.
Streamlining foreign investment framework
From 1 July 2017 the Government will introduce a range of amendments aimed at reducing red tape and simplifying Australia's foreign investment framework for low risk investments. These amendments include:
- changing the types of developed commercial property that are subject to the lower $55 million threshold by removing certain categories of land that are not sensitive in practice from the definition of 'sensitive land';
- introducing a new category of exemption certificate to allow developers to re-sell off-the-plan dwellings that failed to settle and would be technically considered 'established', to foreign persons;
- amending the treatment of residential land used for commercial purposes such as student accommodation and aged care facilities;
- introducing a new business exemption certificate which allows pre-approval for multiple acquisitions of securities in one application, rather than requiring separate applications for each; and
- simplifying the fee framework by aligning the application fees for acquisitions of interests in agricultural land, commercial land, business securities and assets.
More specific information on these proposed changes is still to be released and they are intended to take effect from 1 July 2017.