Elimination of principal place of residence exemption
Foreign investors will not be able to treat the sale of a property as being exempt from CGT under the principal place of residence exemption from budget night, 9 May 2017. This measure will be grandfathered to 30 June 2019 for existing property owners.
This may also affect Australian citizens who live overseas, particularly on a long-term basis.
Increase in withholding rate – foreign resident capital gains tax (“CGT”) withholding regime
Purchasers of Australian real estate will be required to withholding and remit 12.5% of the purchase price of a property to the Australian Taxation Office where the value of that property is over $750,000, and the vendor does not provide:
- A clearance certificate (for direct purchasers of real property/company title property); or
- A declaration that they are an Australian resident or that they are a foreign resident but do not have an indirect interest in Taxable Australia Real Property (for indirect interests in property held through a company or a trust, but not company title property).
This constitutes a greater compliance burden on purchasers of property given that the average price of a house in major cities like Sydney is now over $1 million.
Foreign buyers who leave a property vacant for 6 months will be subject to a fee
Foreign purchasers who leave a property they purchase vacant for more than 6 months in a year will be subject to a fee equal to their foreign investment application fee.
Foreign resident capital gains tax exemption tightened
Presently, foreign resident investors are exempt from capital gains tax apart from where they own:
- real property directly; or
- through an entity in which they have a 10% or more interest, where more than half the value of the entity is Australian real estate (“the principal asset test”).
The government proposes to tighten this exemption so that the interests of associates, along with the interests of the entity disposing of a company that owns real property, are taken into account in determining whether the principal asset test is satisfied.
Multi-national Anti-Avoidance Legislation (“MAAL”) extended to partnerships
The government will introduce integrity measures to prevent certain inbound investors avoid Australia’s so-called “Google Tax”.
The government is concerned about a practice where a foreign group inserts a partnership between itself and its Australian customers by using an Australian company as a corporate limited partner in that partnership, albeit having a minority interest in the partnership. The partnership is an Australian resident, and it is the entity that makes supplies to Australian customers.
The ATO considers these arrangements to be highly artificial and likely to fall afoul of Part IVA. However, the government is making changes to the MAAL to ensure these arrangements will be subject to the MAAL.