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FEDERAL BUDGET 2017: Housing

Travel expenses relating to residential rental properties

The government will disallow deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property. The measure is to apply from 2017-18.

This seems to be an integrity measure put in place by the ATO to address concerns that many rental property owning taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that in reality were for private travel purposes.

However this measure will not prevent property investors from engaging third parties such as real estate agents for property management services and other related services. These expenses will still be deductible as is the position now

Restricting rental property depreciation deductions

Currently, investors who purchase plant and equipment for a residential investment property are able to claim a deduction over the effective life of the asset. However under this measure subsequent owners of the property will be unable to claim  deductions for the plant and equipment purchased by the previous owner.

Plant and equipment purchased on or before 9 May 2017 will continue to give rise to deductions for depreciation until either the investor (which may include a subsequent owner) no longer owns the asset, or the asset reaches the end of its effective life. But contracts entered into after budget night (specifically 7.30pm (AEST) on 9 May 2017) fall under the new rules.

This proposal is one of a suite of budget measures intended to improve housing affordability for owner-occupiers. While the  government has stopped far short of restricting negative gearing, by limiting the ability of residential property investors to claim depreciation deductions for plant purchased by a former owner of the property, it is limiting the tax breaks enjoyed by investors.

Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes
for subsequent investors.

Foreign and temporary residents – main residence exemption

Foreign and temporary tax residents will not be able to claim the main residence CGT exemption from budget night (that is, from 7:30pm AEST on 9 May 2017). Existing properties held before this date will be grandfathered until 30 June 2019.

Foreign and temporary residents may currently utilise the absence rule in the CGT main residence exemption provisions to claim the main residence exemption on an Australian property even if they are not residing in it. They can use the rule for up to six years if they are renting out the property, or indefinitely if they are not deriving income from the property.

These taxpayers will now be subject to CGT on the sale of real property that they claim as their main residence. In other words, the CGT main residence exemption will not apply.

Affected foreign and temporary residents may need to contemplate selling their property by 30 June 2019 if they wish to realise the increase in value without attracting Australian income tax.

Foreign resident CGT withholding

The government will make the following changes to the foreign resident CGT withholding rules:

  • the withholding rate will increase from 10% to 12.5% from 1 July 2017, and
  • the withholding threshold will be lowered from $2 million to $750,000 from 1 July 2017.

Currently a non-final withholding tax applies to sales of real property by non-residents for tax purposes. The current withholding tax rate is 10% of proceeds of sale and applies to real property transactions with a market value of $2 million or more.

The budget measure proposes to increase the withholding tax rate from 10% to 12.5% and lower the transaction value threshold from $2 million to $750,000.

The large reduction in the threshold will especially affect property vendors and purchasers in Australia’s large capital cities. The sales of many more family homes will be affected by the $750,000 threshold than by the current $2 million threshold.

Purchasers of these properties must withhold the relevant amount at settlement and pay it to the ATO without delay (the general interest charge may apply to late payments). The penalty for failing to withhold is equal to the amount that was required to be withheld and paid.

It is also the responsibility of the purchaser to check whether a withholding obligation exists (that is, whether the vendor is likely to be non-resident). The reduction of the threshold will require many more buyers of family homes to play the role of tax collector.

A resident vendor needs to receive a clearance certificate from the ATO to ensure that withholding is to apply. Again, the reduction of the threshold creates extra administrative burden.

Please contact TNR with any queries on the above information.