Foreign Capital Gains Tax Withholding Obligation for Purchasers
As of 1 July 2017, all purchasers of real estate entering into a Contract of Sale with a market value of $750,000 or more must withhold 12.5% of the purchase price, unless they are provided with Clearance Certificate(s) by the vendor.
The foreign capital gains tax (CGT) withholding is designed to ensure that any unjust capital gains made by foreign residents do not escape Australian shores. The vendor would need to provide valid Clearance Certificate(s). The certificates are only granted to Australian residents for tax purposes.
In the event that Clearance Certificate(s) are not obtained, a purchaser must withhold 12.5% of the purchase price and pay this amount to the Australian Taxation Office at settlement. Failure to do so will trigger significant penalties. Late payments may also be subject to general interest charges. Contract of Sale must include updated special conditions in relation to the 12.5% CGT withholding, to ensure that both the vendor and purchaser are legally protected and compliant.
If you are the purchaser of a property with market value of $750,000 or more, please contact your solicitor to make sure this tax withholding obligation is being dealt with before settlement.
If you are the vendor selling a property for $750,000 or more , it is suggested that you apply for the clearance certificate(s) and have them ready. You can do it yourself or ask your solicitor/accountant.
Denying access to the main residence exemption for foreign and temporary residents
The Government will amend the law to prevent foreign and temporary tax residents from claiming the main residence CGT exemption when they sell a property in Australia. This measure will apply from 7.30pm (AEST) on 9 May 2017. However under grandfathering rules, existing properties held prior to this time will remain eligible for the main residence exemption until 30 June 2019.
Limiting depreciation for residential rental property
The Government has announced that it will limit depreciation deductions on plant and equipment (e.g. hot water systems or dishwashers) to outlays actually incurred by investors in residential real estate properties from 1 July 2017. This means that when an investor purchases residential property which includes items of depreciable plant and equipment, they will not be able to claim depreciation deductions. Instead the cost of items of existing plant and equipment will be reflected in the cost base for CGT purposes. However, there is no change to the existing rule for capital work deduction.
Existing investments will be grandfathered such that 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.
Denying deductions for travel expenses on residential rental property
From 1 July 2017, investors will no longer be able to claim tax deductions for travel expenses related to inspecting, maintaining or collecting rent on a residential rental property. This measure will affect all taxpayers – resident and non-residents – who receive assessable rental property income. Property management fees paid to third parties such as real estate agents will remain tax deductible.