Budget 2017-18: Crackdown on Foreign Investors

If you weren’t intently waiting for the budget to be handed down on 9 May 2017 (thrilling, I know) – you may have missed some new measures that are aimed at reducing the pressures of housing affordability, namely limiting foreign ownership in new developments, changing tax concessions for foreign investors and charging foreign investors who leave their properties vacant.

It seems the Government has heeded concerns outlined by researchers from UNSW’s City Futures Research Centre, who last year estimated that up to 90,000 residential properties were vacant, most of them in the city’s most desirable suburbs. Researchers Bill Randolph and Laurence Troy said vacancies were due to taxation loopholes and benefits for investors, describing the situation as “…taxation lunacy and a national scandal.”

Limiting foreign ownership in new developments

Currently, ‘New Dwelling Exemptions Certificates’ are granted to developers to allow the sale of dwellings to foreign purchasers without the need for each foreign purchaser to seek individual approval, and do not cap the number of dwellings that can be sold to foreign investors.

The Government will introduce a 50 percent cap on foreign ownership in new developments through ‘New Dwelling Exemption Certificates’, to ensure that Australian buyers will have access to a larger pool of homes to purchase.

Developments that will be affected by this are those that are multi-storey with at least 50 homes.

Changing tax concessions for foreign investors

It is believed that foreign investors buy up in Sydney’s most sought-after areas to grow the value of their properties, and use the losses incurred by not renting the properties to their advantage through tax incentives like negative gearing and capital gains concessions.

The budget has reduced the threshold for foreign resident capital gains tax (CGT) withholding to $750,000 from the current $2 million. Considering it is very difficult to purchase property under the $750,000 price mark, many more properties will now be captured. The CGT rate has also increased from 10% to 12.5%. These changes will apply from 1 July 2017.

Charging foreign owners that leave their residential properties vacant

The UNSW City Futures Research Centre mentioned that according to the 2011 census Sydney’s “emptiest” neighbourhoods were Haymarket and The Rocks, where one in seven dwellings was vacant. The 2016 Census results have not yet been released, so we do not know whether this figure has changed much.

However, thinking about one in seven homes being left vacant long-term is astounding. With less supply of homes, prices will naturally rise. Further, with fewer properties available to lease, the rental market becomes more competitive.

To discourage this behaviour, the Government has again targeted foreign owners by charging an ‘annual vacancy charge’ when the property is not occupied or available to rent for at least six months of the year. The charge will be at least $5,000 per year (the current Foreign Investment Application Fee) and will be administered by the ATO. However, the charge will only apply to foreign buyers who will make an application from 9 May 2017, which means the measure does not appear to tackle the current issue of vacancies.

There are also questions as to how the ATO will decide which properties are vacant for the purpose of the levy. Water and electricity usage will be hard to monitor.

Unfortunately, there may already be loopholes for foreign investors in the form of short-term letting (Yes, more Airbnb-ers in your complex!). A short-term letting management business andchill.com.au recently launched a page “Avoid the Australian Ghost Tax,” encouraging investors to short-term let their property to avoid the charge.

We look forward to seeing just how effective these measures will be.

You can read the ATO’s factsheet about the measures here.

Posted in LCOR