There have been recent changes to:
- the tax treatment associated with residential rental properties (eg travel deduction and depreciation changes);
- withholding tax obligations for purchasers of property:
- 12.5% CGT withholding applies on the sale of any property for $750,000 or more, unless the vendor has a tax clearance certificate evidencing the vendor's Australian tax residency;
- 10% GST withholding applies on the sale of new residential premises (from 1 July 2018);
- superannuation measures impacting home ownership (eg the first home super saver scheme and the superannuation downsizer incentive); and
- stamp duty and land tax issues – note that these are different in each state.
There is also a proposal to abolish the main residence CGT exemption for taxpayers who are no longer Australian tax residents. If it is enacted, the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Bill 2018, which passed the House of Representatives without amendment and is before the Senate at the time of writing, will change the tax law so that any individual vendor that is a non-resident (for tax purposes) at the time they sign a contract to sell their home will no longer qualify for the full or partial main residence exemption, regardless of how long the home has actually been used as a main residence. This is causing some serious concerns. The time from which this measure would apply depends on the time when the home was acquired.
Furthermore, foreign investors need permission from the Foreign Investment Review Board (FIRB) before purchasing residential properties (excluding some new dwellings) or agricultural land in Australia.
From 1 July 2017, individuals, discretionary trusts and self managed superannuation funds (SMSFs) will no longer be able to claim travel expenses (eg motor vehicle expenses, taxi or car hire costs, airfares or public transport costs, or costs for meals and accommodation related to the travel) incurred to inspect residential rental properties. Such disallowed travel deductions will also not be included in the cost base or reduced cost base of the rental property.
However, taxpayers may still claim travel expenses to inspect commercial premises and residential premises used to carry on a business (eg premises used as a retirement village). Property management expenses paid to real estate agents (which may involve real estate agents incurring travel expenses to inspect the residential rental property) will still be deductible.
Also from 1 July 2017, the depreciation on plant and equipment (eg washing machines and refrigerators) in residential rental units will be severely limited depending on whether:
- the plant and equipment was acquired before or after 9 May 2017;
- the plant and equipment have been previously used;
- the plant and equipment have been used in the taxpayer's residence before; or
- whether the plant and equipment is installed in new residential premises.
Taxpayers who owned a rental property, or entered into a contract to purchase their rental property before 7.30pm on 9 May 2017, can continue to claim depreciation deductions for assets that were in the rental property before that date. It doesn't matter whether the depreciating asset installed in the property was new or used, or whether the property was new. However, if a rental property was purchased at or after 7.30pm on 9 May 2017, the taxpayer cannot claim deductions for second-hand or used depreciating assets, whether they are bought with the property or separately. They also cannot claim depreciation deductions if they have used an asset for private purposes before installing it in the rental property.
Where a taxpayer buys a newly built property, or buys a property that has been substantially renovated, they will be entitled to claim depreciation deductions for new depreciating assets if no one previously claimed any depreciation deductions on the asset and either:
- no one lived in the property when the taxpayer acquired it; or
- if anyone lived in the property after it was built or renovated, the taxpayer acquired it within six months of the property being built or renovated.
For the 2018 income tax year, a 12.5% non-final withholding tax applies when a non-resident sells property in Australia for more than $750,000 (in 2017 the CGT withholding rate was 10% and the sale price benchmark was $2 million). Therefore, in 2018, a non-resident vendor will only be paid 87.5% of the sale price, because 12.5% must be withheld by the purchaser and paid to the ATO as a prepayment of tax on behalf of the foreign vendor.
This measure will result in extra compliance requirements (eg tax resident vendors will also be subject to these rules unless they obtain ATO tax clearance certificates), but carve-outs from this rule are available (eg for purchases of Australian real property valued at less than $750,000 in 2018).
Tax resident vendors who are able to obtain ATO tax clearance certificates can avoid application of the 12.5% withholding rule when they sell a residential property for $750,000 or more. A tax clearance certificate – basically an ATO certificate confirming that the vendor is an Australian tax resident – provided to the purchaser before the settlement date would enable such a vendor to receive 100% of the purchase price from the purchaser.
If more than one vendor is involved, each vendor must apply separately for a tax clearance certificate. If any of the vendors fails to provide such a tax clearance certificate to the purchaser, the purchaser must withhold 12.5% of the purchase price (in proportion to each vendor's interest in the property).
For the 2018 income tax year, purchasers of new residential premises pay a GST-inclusive amount to the seller (ie GST is included in the purchase price, so the purchaser pays GST to the seller and the seller must remit the GST to the ATO).
However, from 1 July 2018, under a recently enacted law, purchasers of new residential premises will have to pay the GST component of the purchase price directly to the ATO:
- For sale contracts signed on or after 1 July 2018, the purchaser will be required to withhold and pay 10% GST to the ATO on the day the consideration is provided (ie at instalment dates or at settlement if there is a lump sum at settlement).
- For sale contracts signed before 1 July 2018, the 10% GST withholding rule will only apply to payments made on or after 1 July 2020 (ie GST withholding will not apply to consideration provided in this two-year transitional period).
This new GST withholding regime does not apply to the sale of used (ie not new) residential properties or the sale of new or used commercial premises.
First home super saver scheme
From 1 July 2017, a first home buyer can salary sacrifice a maximum of $15,000 a year to save for a deposit to buy a first home. The maximum amount that can be saved in such a way is $30,000. Provided the buyer's partner does not already own their first home, the couple can put in a maximum of $60,000 ($30,000 × 2) to buy a first home.
These salary sacrificed amounts will count towards the annual $25,000 concessional contributions limit. Individuals need to take care not to breach the cap when making use of the first home super saver scheme.
Money saved in this way can only be withdrawn from the superannuation fund from 1 July 2018, with strict rules applying for the use of the withdrawn amount – for example, the ATO must be notified and the taxpayer must buy a home within a certain period after the withdrawal.
Super downsizer incentive available from 1 July 2018
The superannuation downsizer incentive only applies from 1 July 2018, but we include the following information because taxpayers who will qualify may decide not to sell their homes before 30 June 2018.
Broadly, under this incentive, an individual aged 65 or above may make a $300,000 non-concessional contribution (and with a spouse, the total contribution can be $600,000) from the proceeds of selling their home, provided the home was owned for the last 10 years up to the date of disposal and would have qualified for either a full or partial main residence CGT exemption.
Individuals need not buy a replacement residence or satisfy the "work test" (ie working for at least 40 hours over 30 consecutive days) to be able to make a downsizer contribution to their superannuation fund. Each person will only be able to access this incentive once.
The biggest drawcard here is that non-concessional contributions made under this incentive will not be subject to the $1.6 million total superannuation balance cap. Therefore, individuals that already have more than $1.6 million in superannuation may use the super downsizer incentive to contribute an additional $300,00 ($600,000 for couples) to superannuation.
Currently, any individual (regardless of their tax residency status) who sells their home can qualify for either:
- the full main residence CGT exemption – if the residence has been used as a main residence throughout the whole ownership period, whether through actual use or imputed use (various main residence extension rules, such as the six-year absence rule, impute main residence use to taxpayers for certain periods where a home was not used as a main residence); or
- the partial main residence CGT exemption – if the residence has been used partly as a main residence and partly for income-producing purposes during the ownership period.
However, if the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Bill 2018 is enacted, any individual vendor who is a non-resident (for tax purposes) at the time they sign a contract to sell their home will no longer be able to qualify for the full or partial main residence exemptions, regardless of how long the home has actually been used as a main residence.The main residence exemptions will not be available for non-residents signing a contract of sale to sell their home:
- after 9 May 2017, for homes acquired after 9 May 2017; and
- after 30 June 2019, for homes acquired on or before 9 May 2017.
Assuming the Bill becomes law in its current format, a non-resident who disposes of their main residence in the 2018 income tax year will not qualify for the main residence exemption if the dwelling was purchased after 9 May 2017.