For builders and property developers, 01 July 2017 has brought in important changes to the investor/developer property tax regime. Further changes will follow from 01 July 2018.
It is essential that participants in buying, selling and investment of property in Victoria understand the impact these changes will have on their enterprises.
STAMP DUTY CHANGES – OFF-THE-PLAN
First, Section 21(3) of the Duties Act allows purchasers to receive considerable stamp duty reductions. Up until 01 July 2017, duty was calculated on the value of land as at the contract date and did not include the value of construction between the contract date and date of settlement.
Likewise, Section 21(4) of the Duties Act gave concessions on refurbished allotments up until 01 July 2017. Duty was calculated on the value of the allotment on the date of contract and did not include the value of refurbishment of that allotment between the date of contract and the date of settlement.
For contracts dated on or after 01 July 2017, the concessions under Section 21(3) and 21(4) are only available if the purchaser intends to live in the property. Essentially, the purchaser must qualify for the principal place of residence duty concession or the first home buyer duty concession. The State Revenue Office (“SRO”) will claw back duty if the purchaser does not live in the property a calendar year commencing within the first twelve months of settlement.
The effect of the changes means that the off-the-plan concession will only be relevant to determine the “dutiable” value for the purpose of:
The principal place of residence concession;
New first home buyer duty exemption; and
New first home buyer duty phase – in concession.
These changes operate for all contracts dated on or after 01 July 2017.
FIRST HOME BUYER EXEMPTION
Furthermore, first home buyers will be limited to Australian citizens, Australian residents and New Zealand special visa holders living in Australia and the concession will only apply if the dutiable value (both land and improvements) are up to $750,000.00. For non-first home buyers, purchasers must intend to live in the property as their principal place of residence and where the value of the property is up to $550,000.00.
The Victorian changes mean that the concessional stamp duty rate for principal place of residence transfers will only apply:
Where there is an intention to live in the home for a continuous period of at least one year starting within twelve months of settlement;
The property value is up to $600,000.00.
In relation to the principal place of residence concession, this applies for properties with a dutiable value between $440,000.00 and $550,000.00 with a duty saving of $3,100.00. For properties with a dutiable value between $130,000.00 and $440,000.00, the duty savings is 1% of the amount over $130,000.00 in duty.
Where the first home owner concession applies, there is a 50% saving on duty up to a dutiable value of $600,000.00.
Accordingly, for purchasers of commercial off-the-plan properties or for residential off-the-plan properties intended for investment, there are no stamp duty concessions for contracts of sale signed after 01 July 2017.
The off-the-plan stamp duty changes can be seen in the following two examples:
Life partners A & B buy a new apartment in an apartment block with land value of $200,000.00 with purchase price of $600,000.00. Construction has not commenced.
The value of land plus improvements at contract date is $200,000.00. This is the dutiable amount.
This is below the principal place of residence threshold of $550,000.00. Purchasers are eligible for the off-the-plan stamp duty concession. Duty is calculated on $200,000.00 not $600,000.00.
Principal place of residence concession also applies to reduce duty by 1% of $70,000.00 [$200,000.00 minus $130,000.00] or $700.00. Duty payable is $2,870.00 plus 5% of $70,000.00 equals $6,370.00.
Ms. C qualifies for first home owner grant and buys an apartment in a refurbished apartment block. Lot value is $650,000.00. Purchase price is $950,000.00. Refurbishment has not commenced.
Value of the lot plus improvements at contract date is $650,000.00. This is dutiable amount.
This is below the new first home owner threshold of $750,000.00. Ms. C is eligible for the refurbished lots stamp duty concession. Duty is calculated on $650,000.00 not $950,000.00.
New first home owner concession applies to reduce duty from $34,070.00 to $11,357.00 – a saving of $22,713.00.
Another important change regarding stamp duty operating from 01 July 2017 is the removal of the exemption for property transfers between spouses and de facto partners involving commercial or investment property. From 01 July 2017 onwards, the stamp duty exemption will only apply in relation to the principal place of residence for the transferor and the transferee.
FIRST HOME BUYER SCHEME CHANGES
There have also been changes to the first home buyer’s scheme.
For contracts entered into on or after 01 July 2017, stamp duty will be abolished for first home buyers for property with a dutiable value up to $600,000.00. Stamp duty will be reduced for first home buyers for property with a dutiable value between $600,000.00 and $750,000.00. There are no reductions in duty for value beyond $750,000.00. Concessions apply regardless of whether new or established homes are purchased. The new concessions applying from 01 July 2017 compare favourably with the earlier regime of 50% duty savings on dutiable value up to $600,000.00.
To qualify for the first home buyer concession, both the purchaser and his/her partner must qualify as first home buyers. The purchaser and the partner must be Australian citizens or permanent residents. Furthermore, the purchaser must use the residence as his/her principal place of residence for a continuous period of twelve months commencing within twelve months of possession.
Purchasers of housing in regional Victoria have had the first home owner’s grant doubled. Up until 01 July 2016, First Home Owners received a grant of $10,000.00. For contracts signed from 01 July 2017 to 30 June 2020, the grant doubles to $20,000.00 provided the purchase is in regional Victoria and relates to a new build property up to $750,000.00 in dutiable value. Regional Victoria is defined in Section 18(8) of the First Home Owners Grant Act to include the 48 municipal districts in Schedule 1 plus the alpine resorts. Essentially, these municipal districts are outside the Melbourne Metropolitan extended boundary.
The purchase must relate to a “new build property”. This includes:
A newly built home;
An existing property which is being sold for the first time as a new residential premises;
A land and building package;
Vacant land upon which a new home will be constructed.
The Victorian Government has also announced a 1% tax on the capital improved value for vacant residential property to commence from 01 January 2018. This tax is limited to the sixteen inner and middle Melbourne suburban council areas. The tax targets property vacant for more than six months in any calendar year. The tax will be levied on an annual basis like land tax. There are, however, exemptions for:
Holiday houses owned by persons with a principal permanent residence in Australia;
City units used for work purposes; and
Homes subject to legitimate temporary absences such as medical care or overseas appointments.
If you wish to know details of the local council areas affected, please contact us.
There have also been changes to CGT withholding tax.
For the purchase of any Australian real property by way of contract dated 01 July 2016, any purchaser must remit 10% of the purchase price to the ATO or is subject to penalty. There is an exemption if the vendor can establish they are not a foreign resident. The initial regime applied only to contracts worth $2 million or less. However, for contracts entered into dated 01 July 2017, the regime applies to the purchase of Australian real property of $750,000.00 or more and the compulsory remission of purchase price is now 12.5%.
The regime applies where the seller of taxable Australian real property is a foreign resident. Every vendor will be such a foreign resident unless a clearance certificate from the ATO is provided to the purchaser before settlement. Ideally, such a clearance certificate should be in the Section 32 Vendor Statement.
Taxable Australian real property (“TARP”) includes freehold or leasehold interests in Australia including mining, quarrying or prospecting rights. Furthermore, the $750,000.00 threshold will depend upon the GST status of the purchaser as the threshold is net of any GST input tax credit to which the purchaser is entitled.
The CGT withholding regime also applies to indirect taxable Australian real property. In other words, the regime catches non-portfolio interests of more than 10% in entities whose majority of assets consist of such property. There is no monetary threshold for these types of transactions unless they involve the transfer of a company title interest whereby the $750,000.00 threshold and other rules relating to the regime will apply. A purchaser will also not have to withhold 12.5% unless the purchaser has knowledge that the vendor is a foreign resident. The purchaser can therefore rely on the vendor declaration of Australian residency or that the interest is not an indirect acquisition of taxable Australian real property provided the purchaser does not know the declarations to be incorrect.
Options are also caught by the CGT withholding tax regime if they relate to direct or indirect taxable Australian real property. There is no monetary limit to the option. The withholding obligation can apply both on the grant of the option and on its exercise. Purchasers therefore need to be wary of options over real property. The purchaser will have an obligation to withhold if there is knowledge as to foreign residency of the vendor. The obligation will be to withhold to the nearest $1.00 – in other words, if an option is issued for $1.00, then the withheld amount would be $0.125 rounded down to nil.
Applications for clearance certificates must be made online to the ATO. Clearance certificates are valid for twelve months and cover any disposals made by the vendor during that twelve month period. The certificate must cover the date of the contract not necessarily the date of settlement. However, the ATO has an administrative practice to provide clearance certificates after the date of contract provided it is before settlement. The vendor declaration can either be that the vendor is an Australian or that the interests involved in the transaction are not indirect taxable Australian real property.
FOREIGN PURCHASER CHANGES
Foreign purchasers have also been affected by the new taxation changes.
Stamp duty surcharges were introduced from 01 July 2015 where land related interests in residential property were transferred to a foreign purchaser. A 3% surcharge operated for all transfers of real property between 01 July 2015 and 01 July 2016. After 01 July 2016, the surcharge was increased to 7%.
A foreign purchaser is deemed to include the trustee of a foreign trust. A foreign trust is a trust in which a substantial interest is held by a foreign corporation, foreign natural person or another person holding a substantial interest as a trustee of another foreign trust. A substantial interest is defined as a beneficial interest in more than 50% of the capital held by the foreign corporation or foreign natural person or foreign trustee. If the trustee has a discretion as to distribution of capital, then each beneficiary will be taken to have a beneficial interest which will be the maximum percentage of the capital of the trust estate which the trustee is empowered to distribute to that beneficiary.
For the purposes of the stamp duty surcharge rules, a foreign natural person is a natural person who is not:
An Australian citizen;
Holder of a permanent visa within Section 30(1) of the Migration Act; or
A New Zealand citizen who is the holder of a special category visa within the meaning of Section 32(1) of the Migration Act.
A foreign corporation is:
A corporation that is incorporated outside Australia; or
A corporation in which one of the following has a controlling interest:
A foreign natural person;
Any foreign corporation;
The trustee of a foreign trust.
Another twist in the GST rules is that in relation to newly constructed residential properties and new subdivisions from 01 July 2018, purchasers (rather than vendors) must remit the GST directly to the ATO as part of the settlement process. Whilst it is unclear, it would appear this obligation will relate not only to contracts signed on or after 01 July 2018 but also to settlements from 01 July 2018. It may well be that there are already in existence off-the-plan contracts which will settle from 01 July 2018 onwards. Such contracts are caught by the new tax now.
This proposal is very different from current GST rules under which only the vendor is liable for GST and passes on this cost to the purchaser as part of the purchase price.
There is little current detail about this proposal. A number of complex issues apply:
What happens if the purchaser fails to pay the GST? Will the vendor still be liable if the purchaser fails to pay the tax or is the purchaser only liable for the tax?
What is the stamp duty impact? If the GST liability is shifted to the purchaser, and the purchase price payable to the vendor excludes GST, this may reduce the stamp duty payable by the purchaser. The purchaser is liable for duty based on the GST inclusive price paid for the property. If the purchase price is reduced as a result of a shift in the GST liability, this may also result in lower duty.
How will the proposed rules work for margin scheme sales? Where applicable, the GST payable on the sale depends on a range of factors. Which party will be responsible for calculating the GST if the margin scheme does apply?
Will the vendor still need to issue a tax invoice? At present, vendors must provide this invoice to enable the purchaser to recover a GST payment in the next BAS. Under the new regime, vendors may refuse to issue such invoices in order to keep margins on the sale confidential. However, vendors may still need to disclose the GST payable on a margin scheme sale to the purchaser in order for the purchaser to remit the correct GST. This may be considerably lower than 10%.
What will be the GST obligation if other taxable supplies are made with the supply of new residential premises or subdivided residential land in the one contract? Developers may offer buyers a range of sales incentives involving goods, services, or other benefits. If these things are supplied with the real property under the one contract, will the purchaser have to pay GST on everything? Presumably, that is how the regime will operate.
Will vendors be entitled to GST adjustments for rental guarantee payments? Such guarantees are common sales incentives where a developer is targeting residential investors. Where rental guarantee payments are made to a purchaser, the vendor is entitled to a decreasing adjustment at present because the guarantee involves a refund of a part of the purchase price. However, where payment of a GST liability is shifted to the purchaser, will the vendor be entitled to such adjustments in the future?
The new GST withholding regime involves complex issues. The Federal Government has not yet released draft legislation. De Marco Lawyers will provide clients with further updates when this occurs.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from De Marco Lawyers and other relevant experts.