Housing affordability has been one of the major components of this year’s Federal Budget, which featured a comprehensive package of tax and superannuation measures aimed at increasing housing availability and improving affordability. The government has also reigned in tax breaks enjoyed by many residential property investors in the hope of providing Australians with confidence that tax concessions are correctly targeted. These measures will be complemented by a number of supply-side initiatives including the release of Commonwealth land and housing supply targets.
While most experts agree there is no single “magic-wand” solution, only time and experience will tell whether these measures will produce notable improvements to Australia’s housing issues.
Capital Gains Tax (CGT) Main Residence Exception
Rules will be strengthened to reduce the ability for foreign investors to avoid paying CGT in Australia. As of Budget night, foreign and temporary tax residents will be denied access to the CGT main residence exemption. They will therefore be subject to CGT on the sale of property that they claim as their main residence.
Foreign resident CGT Withholding
The foreign resident withholding tax rules (which apply to property sales by non-residents) will be broadened by:
- lowering the threshhold from $2 million to $750,000, thereby significantly Increasing the number of house sales to which the tax will apply, and
- increasing the rate from 10% to 12.5%.
In addition, the purchaser will now be responsible for checking whether a withholding obligation exists (i.e. whether the vendor is likely to be a non-resident), withholding the amount and paying it to the ATO. This is an unfortunate additional burden on the purchaser.
50% cap on foreign ownership
A 50% cap on pre-approved foreign ownership in new developments was also announced. This should improve opportunities for Australian residents to purchase newly developed residential property.
Annual charge on foreign owned, unoccupied property
An annual charge will be applied to foreign owners who leave residential property unoccupied or not available for rent for 6 months or more each year. This is intended to encourage foreign owners of residential property to make their properties available for rent when they are not used as a residence, thereby increasing the availability of houses for Australians to live in.
Encouraging investment in affordable housing
In order to encourage investment in affordable housing and improve outcomes in social housing and homelessness, the government announced:
- From 1 January 2018, individuals who invest in affordable housing will be entitled to a CGT discount of 60% (as opposed to the current rate of 50%).
- Investors in qualifying Managed Investment Trusts (MITs) will receive concessional tax treatment for investing in affordable housing.
Rental property depreciation deductions
The Government will reign in “plant and equipment” (e.g. air conditioning, cooking appliances) depreciation deductions in residential real estate. While the original purchaser will still be entitled to depreciate the plant and equipment over the life of the asset, the allowance will no longer be available to subsequent owners for plant and equipment purchased by the previous owner.
Rental property travel expense deductions
Tax deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed from 1 July 2017. The measure aims to address concerns that deductions are often claimed without correctly apportioning costs, or were travel was actually for private purposes.
Note, however, that expenses related to engaging third parties (e.g. real estate agents) for property management and related services will continue to be deductible.
Superannuation housing measures
The superannuation system has also come into play in the suite of housing measures. For better or worse, the system will be used to:
- assist first home buyers to build a deposit inside superannuation; and
- allow older Australians to contribute downsizing proceeds into superannuation.
These measures are outlined in detail here: Government continues to tinker with Superannuation rules
More about the 2017-18 Federal Budget:
- Economic outlook, infrastructure and development
- Personal taxes largely unchanged; Medicare levy increased
- Businesses will benefit from planning
- Government continues to tinker with Superannuation rules
- Read about the key Federal Budget announcements we think will matter most to our readers in our full Federal Budget Wrap-Up