The following tax and superannuation related measures were announced as part of the Government’s comprehensive housing package:
As expected, no changes were announced to limit negative gearing.
Below, we have provided additional details on the key tax and superannuation aspects of this package.
From 1 January 2018, resident individual taxpayers will be granted an additional 10 per cent CGT discount for investments in qualifying affordable housing. This means that individuals investing in such properties will be entitled to a 60 per cent CGT discount (up from the existing 50 per cent discount). This benefit will also flow through MITs to resident investors as outlined below. The current one-third CGT discount for superannuation funds remains unchanged.
Whilst it is expected that the Government will consult further on the implementation of this policy, it has indicated that a property will qualify as “affordable” housing if rent is charged at below market rate and it is made available for eligible tenants on low to moderate incomes. Tenant eligibility will be based on household income and household consumption.
To qualify for this additional discount, the housing must also be managed through a registered community housing provider, and held as affordable housing for a minimum period of three years.
Furthermore, the Government has indicated that current investments in affordable housing through the National Rental Affordability Scheme (NRAS) will not be entitled to the 60 per cent CGT discount because NRAS providers already receive an annual financial incentive to supply affordable housing. In order to benefit from the additional 10 per cent CGT discount, investors will need to wait until their investments cease to be covered by NRAS.
Finally, the additional discount will not be limited to investments in new affordable housing but will also apply to existing properties if investors supply their property for affordable housing. In this context, if an individual rents out their property from 1 January 2018 as affordable housing, provided the investment meets the eligibility requirements, the 60 per cent CGT discount should be applicable from 1 January 2021.
In a welcome move, the Government will seek to encourage private sector and foreign investment in affordable housing by allowing MITs to acquire, construct or redevelop property to hold for affordable housing from 1 July 2017.
Much of the detail of this proposal is lacking, however it appears that the Government intends to amend the tax law to ensure that the acquisition, construction or redevelopment of affordable housing is an “eligible investment business”, attracting flow through taxation for resident investors (and thereby allowing them to access the CGT discount) and the concessional MIT withholding rates for foreign investors.
To be eligible for the concessional MIT withholding rates, the MIT must hold, and make available for rent, the affordable housing asset for at least ten years. Where the property is held for rent as affordable housing for less than ten years, certain foreign investors will still have access to the concessional 15 per cent withholding rate on investment returns, but will be subject to 30 per cent final withholding rate on the distribution of the capital gain from sale of the property.
As an additional integrity measure, up to 20 per cent of the income of the MIT may be derived from other eligible investment activities permitted under the existing tax law. If this 20 per cent threshold is breached in any income year, foreign investors will be subject to 30 per cent withholding tax on investment returns for that income year.
Resident individual investors will be able to take advantage of the increased CGT discount for affordable housing (see above), for eligible properties held via MITs. To access the increased discount, the property will only need to be held as affordable housing for three years rather than the ten years required for foreign residents to benefit from the 15 per cent withholding rate.
As noted above, the Government has indicated it will consult further on the implementation of this policy, including what property will qualify as “affordable” housing for the purposes of this measure and the increased CGT discount discussed above. The Government may also need to consider whether GST changes are required to allow input tax credits to be claimed for properties that are to be held for rental in order to support this policy initiative.
The Government has announced a “ghost house tax” for foreign investors who leave residential properties unoccupied or not genuinely available for rent for at least six months of each year. The charge, which will apply to foreign persons who make a foreign investment application for residential property from 7.30pm (AEST) on 9 May 2017, will be levied annually and will be equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired by the foreign investor. Treasurer Scott Morrison indicated in his Budget speech that this annual charge would be at least $5,000 per property.
No information has been provided as to how this new annual charge will interact with existing state based taxes. For example, the Victorian Government recently announced plans to impose a Vacant Residential Property Tax on dwellings that are vacant for more than a total of six months in a calendar year, from 1 January 2018.
A number of changes have been announced to the foreign resident CGT regime. Foreign residents are broadly subject to CGT only on the disposal of taxable Australia property, which includes real property in Australia and indirect Australian real property interests. Broadly, a share in a company or an interest in a trust is an indirect Australian real property interest where the investor holds at least ten percent of the company or trust (known as the portfolio interest test) and real property in Australia comprises at least 50 per cent of the underlying assets in the company or trust (known as the principal asset test). The Government has indicated that it will amend these rules so that, with effect from 7.30pm (AEST) on 9 May 2017, the “principal asset test” will be applied on an associate inclusive basis.
There are also proposed amendments to the current foreign resident CGT withholding regime, which came into effect from 1 July 2016. Under the current regime, where a foreign resident disposes of certain taxable Australian property, the purchaser is required to withhold ten per cent of the purchase price and pay this amount to the Australian Taxation Office (ATO). The foreign resident vendor is then entitled to claim a credit in the tax return for the amount withheld. Certain transactions, including real property transactions with a market value under $2 million, are excluded.
From 1 July 2017, the withholding rate under this regime will be increased from ten per cent to 12.5 per cent. In addition, from 1 July 2017 the threshold for exempt real property will be decreased from $2 million to $750,000.
Whilst the Government’s aim is to reduce the risk that foreign residents avoid paying a CGT liability they owe in Australia, as a result of these proposed amendments, a much larger number of transactions will be potentially caught by this regime. Resident vendors are not unaffected by this regime - under the current law, a resident vendor is required to get a clearance certificate from the ATO confirming they are an Australian resident when they dispose of real property that would otherwise be subject to withholding. The original $2 million threshold for real property was intended to carve out the majority of residential house sales. Assuming the current clearance certificate process remains in place, the proposed decrease to $750,000 will have a huge impact on residential housing sales going forward.
The Government will amend the law to prevent foreign and temporary tax residents from claiming the main residence CGT exemption when they sell a property in Australia. This measure will apply from 7.30pm (AEST) on 9 May 2017. However under grandfathering rules, existing properties held prior to this time will remain eligible for the main residence exemption until 30 June 2019.
Referred to as the “first home super saver scheme”, the Government will amend the superannuation law to allow first home buyers to withdraw future voluntary concessional and non-concessional contributions to superannuation for a first home deposit.
Under this proposed measure, from 1 July 2017, first home buyers can contribute up to $15,000 per year (and up to $30,000 in total) to superannuation, within the existing contribution caps (i.e. for concessional contributions, the cap is $25,000 per year from 1 July 2017). These amounts, plus associated earnings, can then be withdrawn from 1 July 2018. Withdrawals of concessional contributions will be taxed at marginal rates less a 30 per cent offset. When non-concessional amounts are withdrawn, they will not be taxed.
A couple can effectively double these limits by both taking advantage of the measure to buy their first home together. All first home buyers should be able to take advantage of this new measure, including those that are self-employed, due to the recent law amendments that will allow deductions for personal superannuation contributions from 1 July 2017.
From 1 July 2018, the Government will allow a person aged 65 years or over to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home.
These contributions will be in addition to those currently permitted under existing rules and caps and they will be exempt from the existing age test, work test and the $1.6 million balance test for making non-concessional contributions.
This measure will apply to the sale of a principal residence owned for the past ten or more years and both members of a couple will be able to take advantage of this measure for the same house.
From 1 July 2017, investors will no longer be able to claim tax deductions for travel expenses related to inspecting, maintaining or collecting rent on a residential rental property. This measure will affect all taxpayers - resident and non-residents - who receive assessable rental property income. Property management fees paid to third parties such as real estate agents will remain tax deductible.
The Government has announced that it will limit depreciation deductions on plant and equipment (e.g. hot water systems or dishwashers) to outlays actually incurred by investors in residential real estate properties from 1 July 2017. This means that when an investor purchases residential property which includes items of depreciable plant and equipment, they will not be able to claim depreciation deductions. Instead the cost of items of existing plant and equipment will be reflected in the cost base for CGT purposes.
Existing investments will be grandfathered such that plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30PM (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.
Partner, PwC Australia
Tel: +61 2 8266 3497