Australian tax changes affecting non-residents – increasing the cost of buying, holding and selling
Addressing housing affordability is a stated priority for the current Australian Government. However, enabling home and property ownership for Australian residents has resulted in, among other things, increased taxes and costs for foreign resident property owners.
Consequently, Australia has implemented several tax changes that affect foreign residents particularly those investing in or owning residential property in Australia. The Federal Budget handed down on 8 May 2018 adds to the mix a proposed change of law to deny tax deductions for holders of vacant land.
These changes affect foreign resident individuals and entities, such as companies and trusts, that are substantially controlled by foreign residents.
Snapshot of changes
1. 2018-2019 Federal Budget announces denial of tax deductions for holders of vacant land
The Federal Budget handed down on 8 May 2018 proposed that from 1 July 2019, tax deductions will not be allowed for expenses associated with holding vacant land (such as interest/borrowing costs, council rates) and these will also not be able to be carried forward to later years, although they may be included in “cost base” for CGT purposes when the asset is sold. There will be exceptions for land held for commercial development. At this stage, this is a proposal which will still need to be detailed in draft legislation and passed by both Houses of Parliament before it becomes law.
2. Stamp duty surcharge
Stamp duty is a State-based tax which is levied on transactions involving land or interests in land. The rates of tax vary from State to State and can be up to 7%.
Most States have now implemented an additional surcharge duty on purchases of residential property made by foreign residents, which effectively imposes an additional 3% to 8% duty.
3. Land tax surcharge
Land tax is a State-based tax, levied annually on owners. Foreign resident landowners will be subject to a land tax surcharge of up to 2%. This is applied on top of 1.6% to 2% ordinary land tax.
In addition, Victoria and Queensland have implemented an “absentee land tax” which applies to individuals who own land (not only residential property) at the rate of 1.5%.
4. Removal of CGT exemption on sale of main residence – proposed to apply to sales that occurred after 9 May 2017
Foreign residents previously enjoyed a full exemption from CGT on the sale of their main residence in Australia. Legislation currently before the Senate will, when passed, impose CGT on foreign residents who sell their Australian main residence. There are some transitional provisions for foreign residents who already own property as at 9 May 2017 whereby those individuals may still be entitled to the exemption.
These rules are also extended to deceased estates and therefore will affect non-resident decedents and non-resident beneficiaries.
This measure, together with the removal of the 50% CGT discount for non-residents several years ago (for assets purchased after 8 May 2012), potentially means CGT payable by non-residents on the sale of their main residence without further reduction.
5. Associates are included in real property ownership tests for CGT purposes
The same proposed legislation that proposes to remove the CGT exemption also proposes to implement an “associate inclusive” test to disposals by foreign residents of their indirect interests in real property. That is, the interests of the foreign resident and their associates are taken into account to determine whether that foreign resident has an interest that is “taxable Australian property” and is therefore subject to CGT.
6. Non-residents selling property – all buyers (regardless of residency) have withholding tax obligations
Buyers of property (or interests in property) from a non-resident vendor are required to withhold tax at the rate of 12.5% (of the purchase price, generally) and pay this to the Australian Taxation Office. Non-resident vendors should consider whether they should apply for a rate variation.
Action items for foreign residents
Work out if you are a “foreign resident” in the relevant State where you (or your controlled entities) own property and work out if you are a non-resident for CGT purposes – note that these two tests are slightly different
Foreign residents should check their land tax compliance and carefully consider stamp duty implications of purchasing property in Australia
Foreign residents should explore any planning opportunities and understand how the changes to the CGT regime for non-residents will affect them
Foreign residents who own property should ensure that their estate plans have considered the tax implications for their estate and the beneficiaries who will inherit their property - often, it is best to have a separate will dealing with Australian assets
We advise and help foreign residents to understand how these changes may affect them, their property holdings and their tax and estate plans.
Information contained herein is general in nature and should not be treated as advice. Australian laws are complex and will depend on your personal circumstances.
Evora Legal are Tax and Private Client Lawyers based in Sydney, Australia. We provide legal advice to foreign resident clients with personal or business interests in Australia. We would be delighted to hear from you. Please contact us to discuss how we can help you.