What is the proposed measure?
The Government will disallow deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property.
Who will it affect?
Taxpayers who own residential rental properties.
When will it apply?
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. However, this will not prevent investors from engaging third parties such as real estate agents for property management services. These expenses will still be deductible.
Investors who purchase plant and equipment for a residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset (as is the case under current law). However, subsequent owners of the property will be unable to claim deductions for the plant and equipment purchased by the previous owner.
Plant and equipment purchased on or before 9 May 2017 will continue to give rise to deductions for depreciation until either the investor (which may include a subsequent owner) no longer owns the asset, or the asset reaches the end of its effective life.
Rental property investors.
Contracts entered into after 7.30pm (AEST) on 9 May 2017.
This proposal is one of a suite of Budget measures intended to improve housing affordability for owner-occupiers.
While the Government has stopped far short of restricting negative gearing, by limiting the ability of residential property investors to claim depreciation deductions for plant purchased by a former owner of the property it is limiting the tax breaks enjoyed by investors.
Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.
Foreign and temporary tax residents will not be able to claim the main residence CGT exemption from 7:30pm (AEST) on 9 May 2017.
Non-residents and temporary residents who own Australian residential property that qualify as a main residence under the CGT rules.
From 7:30pm (AEST) on 9 May 2017.
Existing properties held before this date will be grandfathered until 30 June 2019.
Foreign and temporary residents may utilise the absence rule in the CGT main residence exemption provisions to claim the main residence exemption on an Australian property even if they are not residing in it.
They can use the rule for up to six years if they are renting out the property, or indefinitely if they are not deriving income from the property.
These taxpayers will now be subject to CGT on the sale of real property which they claim as their main residence. In other words, the CGT main residence exemption will not apply.
Any capital gains on properties that were already owned on 7:30pm 9 May 2017 will continue to be exempt from CGT under the main residence exemption until 30 June 2019.
Affected foreign and temporary residents may need to contemplate selling their property by 30 June 2019 if they wish to realise the increase in value without attracting Australian income tax.
What is the proposed measure?
The Government will make the following changes to the foreign resident CGT withholding rules:
Non-resident investors with real property interests in Australia and purchasers of such real property.
When will it apply?
Currently a non-final withholding tax applies to sales of real property by non-residents for tax purposes. The current withholding tax is at 10% of proceeds of sale and applies to real property transactions with a market value less than $2 million.
The Budget measure proposes to increase the withholding tax rate from 10% to 12.5% and lower the transaction value threshold from $2 million to $750,000.
The large reduction in the threshold will especially affect property vendors and purchasers in Australia’s large capital cities. The sales of many more family homes will be affected by the $750,000 threshold than by the current $2 million threshold.
Purchasers of these properties must withhold the relevant amount at settlement and pay it to the ATO without delay (the general interest charge may apply to late payments).
The penalty for failing to withhold is equal to the amount that was required to be withheld and paid. An administrative penalty may also be imposed.
It is also the responsibility of the purchaser to check whether a withholding obligation exists (ie. whether the vendor is likely to be non-resident). The reduction of the threshold will require many more buyers of family homes to play the role of tax collector.
A resident vendor needs to receive a clearance certificate from the ATO to ensure that withholding is to apply. Again, the reduction of the threshold creates extra administrative burden.
New rules will allow MITs to acquire, construct or redevelop property to hold for affordable housing. Such activities will be eligible for the existing MIT tax concessions.
MITs must hold, and make available for rent, affordable housing assets for at least 10 years.
Trustees of MITs and investors in MITs.
Non-resident investors will now be able to invest in affordable housing through concessionally taxed MITs.
Resident individual investors will be able to pool their money with others to invest in qualifying affordable housing and receive the CGT discount, including the additional 10% discount for investments in affordable housing.
Under the current law, the ATO has generally taken the view that MIT investment in residential property is active, with a primary purpose of delivering capital gains from increased property values. Therefore income is taxed at a 30% rate as it is not eligible for the MIT tax concessions that apply to passive investments only.
The new rules overcome this issue and allow access to tax concessions for MITs with investments in real estate used to provide affordable housing.
For resident investors, the MIT is a tax transparent entity and any income, including capital gains, flowing from it is taxed as if it were made by the resident investor.
For non-resident investors, the tax concessions include a concessional final withholding tax rate of 15% applicable to non-resident investors residing in countries with which Australia has a recognised exchange of information arrangement.
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