Announced last month in May, the Australian Federal Budget contains a number of changes that will affect foreign investors in the future.
The majority of changes in the latest Federal Budget focus on Capital Gains Tax (CGT), limitations on foreign investments and clarification of Australia’s foreign investment framework.
- Capital Gains Tax (CGT) changes for foreign investors
Effective immediately, the Government will no longer allow foreign and temporary tax residents an exemption on paying CGT on their main residence.
However, all existing properties purchased prior to 9 May 2017 will also have their CGT exemption removed by 30 June 2019.
The Principal Asset Test will be applied immediately on an associate inclusive basis for foreign tax residents with indirect interests in Australian real property. This will ensure that foreign tax residents cannot avoid a CGT liability by disaggregating indirect interests in Australian real property.
2. Charge on foreign owners on empty residential properties
Under the new Federal Budget, the Government will introduce penalty of at least $5,000 on foreign owners of residential property where the property is left empty or genuinely unavailable on the rental market for at least six months per year. This penalty is effective immediately.
The penalty will be levied annually and will be equivalent to the relevant investment application fee imposed on the property at the time it was acquired by the foreign investor up to $5000.
The reason for introducing this penalty is to encourage foreign owners of residential property to make their properties available for rent where they are not used as a residence. This will help alleviate the housing shortage crisis and increases the number of houses available for Australians to live in.
- Restricting foreign ownership in new developments to 50%
The introduction of a 50% cap on foreign ownership in new developments is being implemented immediately to ensure there is a minimum proportion of developments available to Australians to purchase.
Effectively immediately, the Government has introduced a new condition on New Dwelling Exemption Certificates. The current certificates do not limit the amount of sales that may be made to foreign purchasers. The 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.
- Changes to the Foreign Resident CGT Withholding rate (FRCGW)
The Government will extend Australia’s FRCGW regime by increasing the CGT withholding rate for foreign tax residents from 10.0% to 12.5% from 1 July 2017.
The Government will also reduce the CGT withholding threshold for foreign tax residents from $2 million to $750,000 from 1 July 2017.
- Streamlining and enhancing the foreign investment framework
Effective from 1 July, the Government will introduce a range of amendments to clarify and simplify Australia’s foreign investment framework. This will make foreign investor obligations clearer, and allow for more efficient allocation of Foreign Investment Review Board screening resources to higher risk cases.
The amended framework will allow Australia’s foreign investment framework to operate more efficiently by facilitating business investment and reducing unnecessary bureaucracy.
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