Foreign investors have done well out of the Australian residential property market, thanks to its extended bull run, remarkable stability, and resilience compared with other global markets. They have also, until recently, enjoyed relatively beneficial tax concessions from federal and state governments keen for their investment dollars.
However, with governments coming under increasing pressure to do something about the ongoing housing affordability crisis, and the perception that foreign investors are responsible for the unrestrained rise in property prices, this scenario is likely to change.
Government closes capital gains tax loopholes
The federal government announced major reforms to the tax structure for foreign investors of real estate in the May 2017 Budget, which came into effect on July 1, 2017.
According to a Budget Fact Sheet, the reforms are designed to reduce capital gains tax (CGT) avoidance and make housing available to more Australian citizens.
The changes effectively stop foreign and temporary tax residents from claiming the main residence CGT exemption when they sell Australian residential property. However, foreign and temporary tax residents who held property at the time of the May announcement can continue to claim the exemption until June 30, 2019.
The government has also bolstered foreign resident CGT on property withholding laws by increasing the rate from 10% to 12.5%, and reducing the tax threshold from $2 million to $750,000. The reduced threshold means the tax will now apply to more properties, especially in capital cities such as Sydney and Melbourne, where the median house prices are rapidly approaching $750,000.
Additionally, the government introduced an annual charge for foreign owners of residential properties if the property is not occupied, or made available to rent, for at least six months a year. Designed to ease the current rental situation – particularly in cities – the charge will encourage foreign investors to make their investment properties available for rent if they have no intention of living there.
The changes are expected to result in a total revenue gain of $620 million over the next four years.
NSW bumps up land tax and stamp duty
The NSW government also announced changes to foreign investment in residential property in its Budget earlier this year.
Under the changes, which also came into effect on July 1, the Foreign Investor Surcharge (FIS) (stamp duty on property purchases) has risen from 4% to 8%, while the annual land tax surcharge for foreign buyers has increased from 0.75% to 2%.
Under the terms of residential property ownership law, a foreign person can be:
- An individual
- A corporation
- A trustee of a trust
- A beneficiary of a land tax fixed trust
- A government
- A government investor
- A partner in a limited partnership
According to the NSW government, the measures are expected to raise almost $2 billion over the next four years, which will be used to fund the first homebuyer’s concession by abolishing stamp duty on existing and new homes up to the value of $650,000. For properties valued at between $650,000 and $800,000, the duty concession will be gradually reduced.
Since its introduction in the 2016–17 Budget, the FIS alone has collected $150 million from 3,000 foreign investors.
Contracts dated prior to the start date of these reforms will continue to be eligible for the same grants, concessions, and conditions to which they were previously entitled.
Layers of complexity and exemptions
Conveyancers and tax practitioners preparing contracts of sale for foreign property investors will need to assess whether the CGT withholding rate applies based on the reduced $750,000 threshold, and take into account increased state surcharges, ensuring both taxes are paid correctly to avoid settlement delays.
The Foreign Investment Review Board (FIRB) is responsible for applications from foreign nationals to buy Australian residential and commercial property. Anyone who is not an Australian citizen is considered a foreign national.
Exceptions to the rule include New Zealand citizens and permanent residency visa holders. They are exempt from seeking FIRB approval and are subject to the same tax arrangements as Australian citizens if they are residing in Australia. Likewise, the spouses of Australian citizens, New Zealand citizens, and holders of Australian permanent visas do not require foreign investment approval if they want to invest in real estate as joint tenants.
Foreign nationals who are permitted to buy Australian property will also need to determine their tax residency status, which can be complicated considering it’s not the same as their residency status. This means that you may be treated as a tax resident for income tax purposes, but not as a permanent resident under immigration laws.
As a temporary resident, most of your foreign income is not taxed in Australia, but you will be subject to tax on income derived from your Australian property and CGT derived from the sale of that property.
Foreign investors have been slugged hard by the federal and NSW governments in an effort to rein in burgeoning property prices. Whether these moves have any real effect, or whether other Australian states will follow NSW’s lead, remains to be seen.
To read more about tax changes affecting your investments, check out these helpful resources.