Prior to the Federal Budget 2017, investors could claim deductions for all plant and equipment items in the property at the time of acquiring the asset, according to each item’s effective life.

After budget night, the rules are being tightened around what can be claimed, specifically travel expenses and depreciation deductions.

The foreign resident capital gains tax withholding regime imposes a withholding obligation on a purchaser who acquires taxable Australian property from a foreign resident.

Beginning on July 1 2017, the foreign resident capital gains tax withholding rate will be increased from 10 per cent to 12.5 per cent. The threshold at which this kicks in will be dropped from $2 million to $750,000.

Changes to Depreciation Deductions with Investment Properties

Exemptions to the Above Changes to Depreciation Deduction

• GRANDFATHER PROVISION – Investment properties purchased by the investor before 9th May 2017 will be grandfathered (i.e. exempt from the change)
• NEWLY BUILT – Investors who purchase a newly-built investment property as the property’s first owner.
• PPR CONVERSION – Investors who move out of their principal place of residence, and convert it to an investment property.
• COMMERCIAL – The property is a commercial investment property

Changes to Travel Deductions Relating to Rental Property

• From 1 July 2017, all travel deductions relating to inspecting, maintaining, or collecting rent for a rental property will be disallowed.
• This is to address taxpayers have been claiming travel deductions without correctly apportioning costs.

Capital Gains Tax Withholding on Assets Sold by Foreign Residents

The changes to the foreign resident capital gains tax regime will apply to contracts entered into on or after 1 July 2017:

• Reduction of the capital gains tax withholding threshold for foreign tax residents from $2 million to $ 750 000
• the foreign resident capital gains withholding tax rate will be increased to 12.5% from 10%.

If you are a purchaser of property for more than $750,000 then you must withhold unless the vendor shows you a clearance certificate or a variation certificate.

Exemptions to CGT Withholding on Assets

• AMOUNT – Property value is less than the threshold of $750,000
• WRITTEN DECLARATION – A declaration the purchaser is an Australian tax resident
• CLEARANCE CERTIFICATE – Vendor provides the purchaser with a copy of clearance certificate obtained from ATO to ensure they don’t incur the 12.5% non-final withholding. It is the vendor’s responsibility to obtain the clearance certificate and provide it to the purchaser at or before settlement.
• VARIATION NOTICE – Vendor provides the purchaser with a copy of variation notice obtained from ATO. The effect of the variation may be to reduce the withholding required to nil or some other amount. Vendors can apply for a variation where:
  • they’re not entitled to a clearance certificate
  • a vendor’s declaration is not appropriate
  • 5% withholding is too high compared to the actual Australian tax liability on the sale of the asset.

Does the vendor still need to lodge an income tax return?

The foreign resident vendor must lodge a tax return at the end of the financial year declaring their Australian assessable income, including any capital gain from the disposal of the asset. The vendor will claim a credit for any withholding amount in their tax return.

If an Australian tax resident vendor had withholding taken from their sale proceeds (for example, because they didn’t provide the purchaser with a clearance certificate), they will be able to claim a credit for that amount when they lodge their tax return.

Contact us at 1300 82 84 86 for Variation Notice & Clearance Certificate Applications or an Obligation Free Consultation