Foreign resident investors
Foreign tax residents and temporary tax residents will no longer be able to access the CGT main residence exemption. Grandfathering will be available until 30 June 2019 for properties held prior to 7.30 pm (AEST) on Budget night. This could have a significant impact on former Australian tax residents who always intended to return to Australia after their overseas stint as well as long term temporary residents. We await the finer details of this measure as we foresee a number of practical difficulties with implementing this in a manner which is fair.
The foreign resident CGT withholding regime introduced with effect from 1 July 2016 has been expanded. The measures currently apply a 10% withholding to sales of residential property by non-residents where that property is worth more than $2 million. It is proposed that from 1 July 2017 the threshold would be reduced from $2 million to $750,000 and the withholding tax rate would be increased to 12.5%.
The median house price in many Australian capital cities is likely to exceed this threshold and therefore any seller not subject to the rules will need to obtain an exemption certificate. The ATO will face a significantly increased volume of clearance certificate requests as a result. It will be important that the ATO is sufficiently resourced so that it can issue these clearance certificates promptly for the vast majority of Australian sellers who are not ultimately caught by the CGT withholding rules.
Foreign residents will have reduced choice in property acquisitions after the introduction of the 50% cap on foreign ownership in new housing developments. This cap will be implemented as part of the New Dwelling Exemption Certificate process and will apply to applications made after 7.30 pm AEST on Budget night.
Given many new developments have traditionally been marketed to overseas buyers, this measure may put the feasibility of some property developments at risk, particularly when combined with the impact of recent state tax changes such as the increase in stamp duty on off the plan purchases in Victoria. Any reduction in demand for new property developments would also place financial pressure on Australian property developers who constitute an important part of Australia’s economy. It remains to be seen whether this measure will positively impact on Australia’s new housing stock and indeed the economy as a whole.
Consistent with the theme of creating greater housing availability for Australian residents, the Budget proposes an annual levy of at least $5,000 on foreign owners of residential property where that property is not occupied or genuinely available on the rental market for at least six months of the year.
An integrity measure has also been proposed which would apply the principal asset test on an associate inclusive basis for foreign tax residents with indirect interests in Australian real property so that foreign tax residents cannot avoid a CGT liability by disaggregating indirect interests in Australian real property. This integrity measure would apply in calculating the value of the underlying Australian real property owned by an entity.
Changes to foreign investment framework
The Government proposes to introduce a range of amendments from 1 July 2017 to simplify Australia’s foreign investment framework with the intention of making foreign investor obligations clearer through a more efficient allocation of Foreign Investment Review Board screening resources to higher risk cases. The proposed changes include the introduction of a new exemption certificate for low risk foreign investors, legislating existing fee waiver arrangements and amending the treatment of residential land used for a commercial purpose.
Updates to the MAAL
The Budget proposes some retrospective changes to the multinational anti-avoidance law (MAAL) to expand its scope to non-corporate entities and structures. Broadly, the MAAL is designed to capture arrangements where entities seek to avoid a taxable presence in Australia in connection with sales to Australian customers by booking their revenue offshore.
Temporary working visas
In line with the push to prioritise Australian workers, the Government confirmed the 457 visa will be scrapped and replaced with the more restrictive Temporary Skill Shortage (TSS) visa. Costs will also increase with a new Skilling Australians Fund levy for employers as well as increases to visa application fees.
The Skilling Australians Fund levy will essentially replace benchmark training requirements currently imposed on employers of temporary workers. The levy will result in increased costs of $1,200 to $1,800 for TSS visa holders, although it comes with the removal of the requirement for employers to invest benchmark amounts into training. Employers may also find themselves bearing the burden of increased visa costs announced in the Budget.
Employers who continue to invest in training at benchmark levels will face increased costs overall, tempting businesses to reduce their training spend. In addition to increasing costs, sourcing staff may become more challenging as the new TSS visa has reduced skilled occupations, tighter eligibility requirements (language and work experience) and changes to eligibility for permanent residency.
Foreign property investors have borne the brunt of this Budget’s housing affordability measures. However Australian residents still need to exercise caution if they move overseas or seek to sell a home worth $750,000 or more. Multinational integrity measures, consistent with many recent Budgets, were not forgotten, but perhaps by now multinationals won’t be surprised that the risk management bar has been lifted again.