Latest Update: 5th December 2019 – Unfortunately today the Federal Government passed the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 into law without amendment, resulting in the scrapping of the main residence exemption for non-resident Australian expats.
To read more about this disappointing turn of events click here: Death of the Main Residence Exemption for Australian expats
Original article below:
Expat Tax Services’ 2017 Australian Federal Budget Update
Australia’s Federal Treasurer, Mr Scott Morrison, handed down his second Budget at 7.30 pm (AEST) on 9 May 2017 and in short . . . it’s a horrible budget for Aussie expats and non-resident Australians working overseas.
Although Morrison said the Budget is focused on boosting the economy and households, so that “we live within our means and can return the Budget to balance in 2020/21”, it’s clear that the Federal government also seeks to target Australian expats and non-residents specifically, as evidenced by many measures introduced overnight.
Impact on Expats and Non-residents
In every budget, there are winners and losers, but sadly Aussie expats and non-resident Australians living and working overseas are the clear losers!
The budget seeks to impose a number of was no different.
For several years now we have witnessed the introduction of legislation targeted towards foreign residents and Australian expats
Continuing the Federal government’s trend of punitively targeting Aussie expats and non-resident Australians living and working overseas, the budget handed down last night, goes even further than before to punish Aussie sadly, clear losers under this budget!
The Positives (there’s not many)!
- A limited amount of an individual’s superannuation contributions made from 1 July 2017 may be withdrawn from 1 July 2018 onwards for a first home deposit.
- A person aged 65 or over can contribute up to $300,000 from the proceeds of the sale of their home as a non-concessional contribution (non-deductible contribution) into superannuation, from 1 July 2018.
- Foreign and temporary tax residents will be denied access to the CGT main residence exemption.
- Deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed from 1 July 2017.
- Plant and equipment depreciation deductions will be limited to outlays actually incurred by investors in residential real estate properties from 1 July 2017
- An annual levy of at least $5,000 will be imposed on foreign owners of under-utilised residential property.
- The foreign resident CGT withholding rate will be increased to 12.5% and will apply to Australian real property and related interests valued at $750,000 or more.
- A 50% cap on foreign ownership in new developments will be introduced through a condition on new dwelling exemption certificates.
- A new set of repayment thresholds and rates under the higher education loan program (HELP) will be introduced from 1 July 2018.
- The Medicare levy will be increased from 2.0% to 2.5% of taxable income from 1 July 2019. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased.
The Positives – in detail
Access to super for first home deposit
The Government will encourage home ownership by allowing first homebuyers to ‘build a deposit’ inside their superannuation fund, as follows:
- Individuals will be able to make voluntary contributions into their superannuation of up to $15,000 per year and $30,000 in total, to be withdrawn subsequently for a first home deposit.
- The contributions can be made from 1 July 2017 and must be made within an individual’s existing contribution caps.
- From 1 July 2018 onwards, the individual will be able to withdraw these contributions and their associated deemed earnings for a first home deposit. The withdrawals will be taxed at an individual’s marginal tax rate, less a 30% tax offset.
Under this new first home super saver scheme, both members of a couple can take advantage of this measure to buy their first home together. The scheme is intended to provide an incentive to enable first home buyers to build savings faster for a home deposit, by accessing the tax advantages of superannuation.
Source: Budget Paper No 2, p 30; Treasurer’s media release “Reducing Pressure on Housing Affordability”, 9 May 2017.
Super contributions from downsizing
A person aged 65 or over can make a non-concessional contribution into superannuation of up to $300,000 from the proceeds of selling their principal residence.
To qualify, they must have owned their principal residence for at least 10 years. This measure will apply from 1 July 2018 and is available to both members of a couple for the same home.
These contributions are in addition to existing rules and caps and are exempt from the age test, work test and the $1.6m total superannuation balance test for making non-concessional contributions.
Source: Budget Paper No 2, p 28.
The Negatives – in detail
Non-residents to lose the main residence capital gains tax exemption
Non-residents to lose the main residence capital gains tax exemption
Individuals who are foreign residents (or temporary tax residents of Australia) will no longer have access to the CGT main residence exemption from 7.30pm (AEST) on 9 May 2017.
Existing properties held before this date will be grandfathered until 30 June 2019.
Unfortunately, the detail is a little sparse on this measure however we take this to mean that from 30 June 2019, the main residence exemption that many expats are entitled to via the 6 year temporary absence rule, will no longer apply from that date.
This measure is bad enough but when combined with the 2012 budget changes that caused non-residents to lose the 50% discount on capital gains made on the disposal of property, it is highly likely that 100% of the capital gain made (from 30 June 2019) by a non-resident would be fully taxable at Australian non-resident tax rates of up to 45%.
Note: The 6-year temporary absence rule applies as follows. If a taxpayer lived in their main residence, and if that taxpayer was required to move away from that main residence temporarily, so long as they did not have any other main residence, the property would remain their main residence for a period of temporary absence of up to 6 years and therefore would remain eligible to be exempt from CGT under the main residence exemption.
Source: Budget Paper No 2, p 27.
Travel expenses related to residential rental properties disallowed
Deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed from 1 July 2017.
This is an integrity measure to address concerns that many taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private travel purposes.
This measure will not prevent investors from engaging third parties such as real estate agents for property management services. These expenses will remain deductible.
What this means for expats is that airfares and other costs to travel back to Australia to inspect their property/ies will no longer available from 1st July 2017.
Since this measure does not begin until 1st July 2017 there is a small window of opportunity to claim some deductible travel costs prior to this date. If you to return home within the next month and a half to inspect your investment properties an element of your costs will be deductible however this will be the last opportunity to do this before the deduction is disallowed.
Source: Budget Paper No 2, p 29.
Depreciation deductions limited for residential rental properties
Plant and equipment depreciation deductions will be limited to outlays actually incurred by investors in residential real estate properties from 1 July 2017.
Plant and equipment items are usually mechanical fixtures or those which can be “easily” removed from a property such as dishwashers and ceiling fans. This is an integrity measure to address concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value. Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.
These changes will apply on a prospective basis, with existing investments grandfathered. Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30pm (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.
Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property.
Unfortunately, we don’t have any more details than the above at this stage but we believe that this will impact purchasers of relatively new properties (i.e. newly constructed properties that have previously been purchased from a developer and which are subsequently being sold to a new purchaser).
Ordinarily, where a client had purchased a relatively new property from a vendor, depreciation legislation allowed a purchaser to engage a quantity surveyor to inspect the property and estimate the depreciable value of all the fixtures and fittings contained within the property. The new purchaser was then able to claim depreciation deductions on all fixtures and fittings and in so doing reduce the taxable profit (and subsequent taxes payable) attributable to the property.
Based on our reading of the Budget Paper No. 2, we believe that deductions of fixtures and fittings already present in a property purchased after 9 May 2017 will be disallowed. Accordingly depreciation deductions will only be allowed for items of plant and equipment actually purchased by the property owner from that date going forward.
Source: Budget Paper No 2, p 30.
Annual Levy on foreign-owned vacant residential properties
Foreign owners of vacant residential property (includes expats whom are non-residents for Australian taxation purposes), or property that is not genuinely available on the rental market for at least six months per year, will be charged an annual levy of at least $5,000.
The annual levy will be equivalent to the relevant foreign investment application fee imposed on the property when it was acquired.
The measure will apply to persons who make a foreign investment application for residential property from 7.30pm (AEST) on 9 May 2017. Our reading of this is that non-resident owners of Australian property will not be subject to this charge for existing property held prior to 9 May 2017.
Instead we expect this to apply to new property acquisitions that require the purchaser to make a foreign investment application after that date.
We understand that 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 so as to increase the number of properties available for Australians to live in.
Source: Budget Paper No 2, p 27; Treasurer’s media release “Reducing Pressure on Housing Affordability”, 9 May 2017.
Expansion of foreign resident CGT withholding regime
Prior to the introduction of this budget measure, a 10% non-final withholding tax obligation applied to the purchaser of certain Australian real property and related interests where that property was acquired from a foreign resident vendor.
This obligation required that 10% of the purchase price be withheld and paid to the Australian Taxation Office upon settlement of the property.
Under this budget measure, the CGT withholding rate that applies to foreign tax residents will be increased from 10% to 12.5% from 1 July 2017.
Currently, the foreign resident CGT withholding obligation applies to Australian real property and related interests valued at $2m or more.
In addition to an increase in the withholding tax rate, this threshold will be also be reduced to $750,000 from 1 July 2017, thus substantially increasing the range of properties and interests that will come within this obligation.
Source: Budget Paper No 2, p 27.
Foreign ownership in new developments restricted to 50%
A 50% cap on foreign ownership in new developments will be introduced through a condition on new dwelling exemption certificates. The cap will be included as a condition on new dwelling exemption certificates where the application was made 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 dwellings in a specified development to foreign persons (without each foreign purchaser seeking their own foreign investment approval).
The current certificates do not limit the amount of sales that may be made to foreign purchasers. Therefore, this measure will ensure that a minimum proportion of developments are available for Australians to purchase.
If you are a non-resident expat wishing to purchase a property in a new development, this measure may impact whether you are able to make such a purchase in the new development or not.
Source: Budget Paper No 2, p 31.
New HELP repayment thresholds and rates to be introduced
In the 2015 Federal Budget the Australian Government brought in measures requiring expat Australians (who are living overseas and earning above the HELP debt repayment threshold) to repay their HELP debts.
Following on from those measures, the government now seeks to reduce the HELP debt repayment thresholds, greatly increasing the number of expats that will be required to repay their HELP debts.
Under this budget measure, the government has proposed that a new set of repayment thresholds and rates be introduced from 1 July 2018.
A new minimum repayment threshold of $42,000 will be established with a 1% repayment rate. Currently, the minimum repayment threshold for the 2017/18 year is $55,874 with a repayment rate of 4%.
A maximum threshold of $119,882 with a 10% repayment rate will also be introduced. Currently, the maximum repayment threshold for the 2017/18 year is $103,766 with a repayment rate of 8%.
Source: Budget Paper No 2, p 83.
Medicare levy to increase from 2.0% to 2.5%
The Medicare levy will be increased from 2.0% to 2.5% of taxable income from 1st July 2019. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased.
Low income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place.
This measure is estimated to have a gain to tax revenue of $8.2b over the forward estimates period (across all heads of revenue, not just the Medicare levy).
All revenue generated by the Medicare levy will be used to support the National Disability Insurance Scheme (NDIS) and to guarantee Medicare.
For example, $9.1b will be credited over the forward estimates period to the NDIS Savings Fund Special Account when it is established.
Source: Budget Paper No 2, pp 24–25; and Budget 2017–18 Glossy: Budget overview, p 16.
Want to learn how these changes may affect you?
If after reading the above, you’d like to learn more about how these (and earlier) budget proposals may affect you based on your circumstances, reach out to us at firstname.lastname@example.org or chat to our team at Expat Tax Services today.
References: All research and content contained within this blog post was sourced and referenced from Wolters Kluwer’s “Federal Budget 2017-18 Expanded edition”.