A couple of weeks ago, the Australian federal government handed down its 2017 budget, and there were a number of implications for Australian property investors and Australian expats. In this article, we review the budget implications for Australian property investors.
The key tax and other implications for Australian property investors coming from the 2017 Australian Federal Budget can be summarised as :
- Changes to tax deductions related to travel expenses and depreciation of residential investment property
- Changes to the Capital Gains Tax exemption rules for temporary Australian tax residents and foreign tax residents
- Changes to the Capital Gains Tax withholding rates for foreign investors when selling Australian property
- Additional fees on properties left vacant by foreign investors
- Cap on the number of foreign investors in new property developments
Tax Deductions for Australian Property Investors
From 1 July 2017, the Government has announced they will no longer allow people to claim travel expenses for inspecting, maintaining or collecting rent for a residential investment property as a tax deduction. No longer can you take a weekend trip to the Gold Coast to “inspect” your investment property and claim it as a tax deduction.
The government has said Australian property investors can still engage third parties (eg. a property manager), and these expenses will remain deductible.
The 2017 budget included some changes to the treatment of depreciation of residential investment property.
Firstly, there was no change to the depreciation of the “building” or “capital works” portion of the residential investment property so you can still claim this as normal. However, the depreciation treatment of “plant and equipment” (that forms part of a residential investment property that is purchased after 7.30pm AEST on 9 May 2017) will be impacted.
Plant and equipment items are usually fittings that are easily removed from a property such as a dishwasher.
Under the government’s proposed changes, residential investment property owners will only be able to claim depreciation deductions on items that were specifically purchased by the investor (and not items that were purchased or installed by the vendor). This has a large impact on the potential tax deductions of Australian property investors.
Our friends at Washington Brown Quantity Surveyors show the potential impact on depreciation deductions in each year of ownership in this table.
How are the changes to depreciation likely to impact your property investing approach?
In my mind there are a few implications from the changes to depreciation rules.
- Investors should be incentivised to hold their existing property investments longer to ensure they capture the full depreciation benefit from plant and equipment, as any replacement investment property is likely to have a lower depreciation benefit
- The attractiveness of new apartment investments is likely to reduce as a significant factor in the attractiveness of new and off the plan apartments is the high amount of depreciation benefit available in the first few years after purchasing. (as shown in the table above from Washington Brown).
- You will still need to obtain a depreciation report to maximise your tax deductions as you will still need a quantity surveyor to value the “building” or “capital works” component of the property you have purchased. The Australian Expat Investor has negotiated a special discount with Washington Brown – more details here.
Capital Gains Tax
The Government will extend Australia’s foreign resident capital gains tax (CGT) regime by making changes to the CGT exemption rules and CGT withholding rates:
The Government will now deny foreign and temporary tax residents access to the CGT main residence exemption from 7:30PM (AEST) on 9 May 2017, however existing properties held prior to this date will be grandfathered until 30 June 2019.
Depending on how this is worded in the government legislation this potential has a huge impact on Australians that temporarily move abroad. Up until now, Australians that move abroad temporarily for work were able to continue to recognise their home as their primary residence for up to six years before any capital gains were subject to CGT. We will wait and see what the legislation says (and update this article accordingly), but this is likely to encourage more Australians to sell their home when temporarily leaving Australia.
Update 3 August 2017 – the government has issued draft legislation relating to changes to the CGT exemption on the main residence for Australian expats. This has significant ramifications for Australian expats which we review here.
CGT Withholding Rate
Prior to the 2017 Australian federal budget, a CGT withholding tax was introduced to apply to foreign residents. Generally, where a foreign resident disposes of certain assets or property in Australia, the purchaser is required to withhold an amount from the purchase price and pay that amount to the Australian Taxation Office (ATO).
In the 2017 Australian federal budget, the withholding rate has been increased and the value threshold at which this tax applies has been lowered.
• the CGT withholding rate for foreign tax residents will increase from 10.0 per cent to 12.5 per cent, from 1 July 2017; and
• the CGT withholding threshold for foreign tax residents will reduce from $2 million to $750,000, from 1 July 2017.
The Government will introduce a charge on foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months per year. The charge 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. We assume foreign owners does not include Australians living overseas, but we will await the legislation to be sure.
The government says this measure is intended to encourage foreign owners of residential property to make their properties available for rent where they are not used as a residence and so increase the number of dwellings available for Australians to live in.
Cap on Foreign Investors in New Property Developments
The Government will introduce a 50 per cent cap on foreign ownership in new developments through a condition on New Dwelling Exemption Certificates from 7:30PM (AEST) on 9 May 2017. New Dwelling Exemption Certificates are granted to property developers and act as a pre-approval allowing the sale of new units in the nominated development to foreign investors without every foreign purchaser needing to seek their own foreign investment approval.
The measure is designed to ensure that a minimum proportion of developments are available for Australians to purchase.
Whilst there are a few tax hits to property investment in Australia coming out of the Federal Budget, Australian property still has many attractive features as an investment for Australian Expats. We review these benefits in our article on the benefits of investing in Australian property whilst living abroad.
Start Building Your Australian Residential Property Portfolio
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Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way.