Until recently, foreign buyers, including expatriate Australian citizens, essentially had the same issues to deal with as Australian investors when it came to buying residential property. Following a number of recent changes, foreign buyers must carefully consider how best (and where) to buy property in order to minimise unexpected costs.
For example, we’ve seen a number of expatriates being advised to simply acquire property in companies as a means to cap the tax rate on income at 30 per cent (rather than potentially 47 per cent). Taking such a simplistic approach may overlook numerous issues such as;
- Non-residents can personally earn up to $87,000 in Australia before they may be paying more tax than a company
- It precludes the potential for an individual to access the Capital Gains Tax (CGT) discount in the future if they become a resident
- A company usually costs more and requires a resident Director or agent
- An Australian company may still incur additional transaction costs in buying the property if it is foreign controlled.
Only after assessing the specific circumstances of the person, can an informed decision be made on how to go about acquiring a residential property.
Snapshot of Federal changes
Aside from the removal of the 50 per cent CGT discount for non-residents from May 2012, there have been a number of changes that have recently occurred at a Federal level affecting foreign buyers of residential premises including:
- A 12.5 per cent withholding tax obligation on buyers acquiring properties from non-residents worth more than $750,000 from July 2017.
- No tax deduction for travel relating to the property for individuals and trusts from July 2017.
- No depreciation deductions on goods acquired with an existing property (unless it is ‘new’) for individuals and trusts from July 2017.
- An annual $5,000 vacant property tax (requiring an annual return) on Foreign Investment Review Board (FIRB) buyers that do not have their property available for rent for at least half the year from May 2017.
- The recently announced budget proposal to deny tax deductions on holding costs of vacant land until a residence is built from July 2019.
It is noted that the proposal to remove the CGT exemption for properties that are ‘main residence’ when sold by a non-resident, after July 2019, appears to now be on hold and will be subject to further consultation. Given many Australian expatriates are currently able to access this concession, the final decision on this measure will be keenly awaited.
Snapshot of state changes
The recent changes at the state level will have the greatest cost impact to a foreign buyer. These changes include:
- Additional transaction costs (up to 8 per cent duty) on the purchase;
- Additional land tax (up to 1.5 per cent of land value) payable annually; and
- Local vacant property taxes for parts of Victoria.
The state implications are complicated because the definition of a foreign buyer varies between states. For example, an expatriate Australian citizen may not be a foreign buyer, but their spouse might be, depending on the state. Additionally, the states have different rules that extend these taxes to Australian companies or trusts, depending on the level of foreign ownership or control.
The consequences of the above, is that, depending on which state the residential property is acquired in, a $650,000 unit bought by a foreign buyer could cost between $20,000 to $45,000 more than what is paid by an Australian buyer.
What does this mean for purchasing decisions?
In assessing where and how to buy residential property in Australia, some important factors that should be considered are:
- The person’s citizenship and tax status (including spouse if co-investor);
- Location of property and whether it is ‘new’;
- Whether the property is to be rented, used by family, or both;
- Expectation of property generating tax profits or losses (including if borrowing to generate deductions);
- Whether the buyer(s) have other Australian income;
- The tax treatment in the buyer’s foreign location;
Whether the buyer will return to Australia before the property is sold (including if they intend to live in it); and
Ease of using an entity in Australia (i.e. who will be the local representative) and costs of administering it.
Only after assessing these factors can the foreign buyer be properly informed on the consequences of a foreign buyer acquiring residential property. Just focusing on one factor, rather than taking a holistic approach, may result in the overall costs being greater than expected.
(1) These comments do not consider the application of the FIRB rules to foreign buyers. Generally speaking, Australian citizens (and their spouses if co-owners) are not restricted in buying residential property, whereas non-citizens are limited to buying new residential premises. Consideration of the FIRB provisions is also necessary in any investment decision.
(2) These comments do not touch on the potential changes to property investment rules (such as CGT discounts or negative gearing) that might occur following the next Federal election if there is a change of Government.
If you require any more information on this topic, please contact your adviser.
Partner - Tax Advisory