Tax update - 2017

Budget  Significant Impact on Expatriates

  1. Capital gains tax changes – potential loss of main residence exemption
  2. Residential real estate – annual vacancy charge
  3. Loss of deduction for travel expenses to inspect a residential rental property
  4. Restricting depreciation claims on residential property
  5. No change to negative gearing as yet!
  6. Personal tax rates - residents
  7. Personal tax rates – foreign residents
  8. Removal of temporary budget deficit levy
  9. Medicare levy increases from 1 July 2019

 

1. Capital gains tax changes – potential loss of main residence exemption

The Federal Government is proposing to remove the main residence exemption for temporary and foreign resident taxpayers and subject these properties to Australian capital gains tax (CGT).

Under the existing six-year rule, a property can continue to be exempt from CGT if sold within six years of first being rented out. The exemption is only available where no other property is nominated as the main residence.

When the dwelling is reoccupied as the main residence, the six-year exemption resets. So another six years of exemption is available from the date it next becomes income producing.

The proposed changes are:

  • denying foreign and temporary tax residents access to the CGT main residence exemption from 7:30PM (AEST) on 9 May 2017;
  • existing properties held prior to this date will be grandfathered until 30 June 2019;
  • increasing the CGT withholding rate for foreign tax residents from 10.0 per cent to 12.5 per cent, from 1 July 2017; and
  • reducing the CGT withholding threshold for foreign tax residents from $2 million to $750,000, from 1 July 2017.

These rules will impact Australian citizens and permanent resident visa holders who are either on existing overseas assignment or are considering an overseas assignment as their family home may now become subject to Australian CGT. Given the capital growth experienced in the Australian residential property market over the last decade, this make act as a significant impediment for Australian nationals undertaking long term foreign assignments.

Equally, the potential impact will be felt by temporary residents employed in Australia. Under the new rules, any property purchased by a temporary resident (subject to the transitional rules above) will become subject to Australian CGT. Australia is viewed as an expensive location in respect of accommodation, this change together with the LAFHA changes introduced effective 1 October 2012 will make it harder to attract talent to Australia.

To compound the misery, temporary and foreign resident taxpayers no longer receive the 50% CGT discount on gains accruing post 8 May 2012, further magnifying the impact of these proposed changes.

Impact

  • How a subsequent sale of a main residence after returning to Australia and resuming Australian tax residency will be treated under these rules?
  • Will that part of the gain relating to the non resident period be subject to CGT?
  • Will the 50% CGT discount apply?
  • Do you need to obtain a market valuation as 30 June 2019 if you are living overseas in order to establish your CGT cost base for your existing main residence?

Stay tuned, the devil will be in the detail once the legislation is introduced.

 

2.    Residential real estate – annual vacancy charge

The proposed rules below will only apply to foreign persons i.e. persons who are not Australian citizens or permanent visa holders. The charge will apply to foreign persons who make a foreign investment application for residential property after 7.30 pm (AEST) on 9 May 2017. Foreign persons who are purchasing in a development which has a New Dwelling Exemption Certificate will be subject to the annual charge where contracts were entered into after 7.30pm (AEST) on 9 May 2017.

A property that is vacant for at least six months per year is under‑used. A property is considered to be “used” where it is rented out, used as a residence or otherwise occupied. The annual liability is assessed based on the date of settlement of the property.

The person who purchased the property does not have to be the person who uses or occupies the property. For example, a friend, relative or some other person can be the occupant and it is not a requirement that a rental agreement is in place.

Please note that this charge is in addition to recent state based land tax and stamp duty changes in respect of foreign owners.

These changes will cause additional confusion as they apply to foreign persons (i.e. not Australian citizens or permanent resident visa holders), whereas the CGT changes in section 1 above apply to temporary and foreign resident taxpayers.

For additional information see - http://firb.gov.au/resources/guidance/gn48/

 

3.    Loss of deduction for travel expenses to inspect a residential rental property

From 1 July 2017, the Government will disallow deductions for taxpayers for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property.

This measure will not prevent taxpayers from engaging third parties such as real estate agents for property management services. These expenses will remain deductible.

 

4.    Restricting depreciation claims on residential property

From 1 July 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties.

These changes will apply to a taxpayer’s main residence that is rented out as a result of an expatriate assignment as well as investment properties.

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.

 

5.    No change to negative gearing as yet!

No changes were announced to negative gearing despite considerable press chatter.

We are aware that the ATO is actively looking at a number of negative gearing scenarios and looking for test cases to challenge the existing status quo.

 

6.    Personal tax rates - residents

The Australian resident tax rates from 1 July 2017 will be as follows:

Taxable income Tax on this income
0 – $18,200 Nil
$18,201 – $37,000 19c for each $1 over $18,200
$37,001 – $87,000 $3,572 plus 32.5c for each $1 over $37,000
$87,001 – $180,000 $19,822 plus 37c for each $1 over $87,000
$180,001 and over $54,232 plus 45c for each $1 over $180,000


7.    Personal tax rates – foreign residents

The Australian foreign resident tax rates from 1 July 2017 will be as follows:

Taxable income Tax on this income
0 – $87,000 32.5c for each $1
$87,001 – $180,000 $28,275 plus 37c for each $1 over $87,000
$180,001 and over $62,685 plus 45c for each $1 over $180,000


8.    Removal of temporary budget deficit levy

The 2% Budget deficit levy (tax) on incomes over $180,000 was removed as at 30 June 2017.

 

9.    Medicare levy increases from 1 July 2019

The Government will increase the Medicare levy by half a percentage point from 2.0 to 2.5 per cent of taxable income from 1 July 2019 to ensure the National Disability Insurance Scheme (NDIS) is fully funded. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased. Medicare Levy Surcharge and Private Health Insurance Rebate

 

Questions

If you have any questions, please contact Michael van Schaik at:

E: mvanschaik@lzr.com.au
T: 61 418 844 105
L: https://www.linkedin.com/in/michael-van-schaik-44b45713/

 

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AMANDA TINNER

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+61 (0) 409 969 525

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Berry Treffers

Berry.Treffers@hica.com.au

+61 (0) 434 485 331

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Michael van Schaik

MichaelV@lzr.com.au

+61 (0) 418 844 105

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