We made the 2022 AFR BOSS Best Places to Work list! Click here to learn more

What does the 2017 budget mean for property transactions? June 2017

The 2017 budget announcement has raised many questions around property transactions for foreign and Australian residents. Partners Legal summarise the key proposed changes you need to understand.

State Budget – Victoria only

Earlier this year the Victorian government announced the following proposed changes:

1. Stamp duty exemptions
For contracts of sale entered into from 1 July 2017, first home owners who are Australian citizens or permanent residents that purchase a property with a dutiable value up to $600,000 will not be required to pay stamp duty. The property can be a new or established home but must be used as the purchaser’s principal place of residence. A concession on stamp duty will be applied on a sliding scale if the property is valued between $600,001 and $750,000.

2. First home owner grant (FHOG)
The FHOG will be increased to $20,000 for contracts of sale entered into between 1 July 2017 and 30 June 2020 (inclusive) for new homes built in certain regional council areas and valued up to $750,000. The FHOG for first home buyers of new homes in metropolitan Melbourne and Cardinia Shire Council will continue to be eligible for the $10,000 FHOG.

3. Transfers of property between spouses
A transfer of property from one spouse or de facto partner to another is currently exempt from stamp duty. However, from 1 July 2017, the exemption will only apply to a transfer of principal places of residence between spouses, and transfers of property following a relationship breakdown.

4. Off the plan (OTP) concession
Stamp duty is assessed on the dutiable value of a property. When purchasing a property OTP, the dutiable value is determined by, generally, deducting the (balance of) construction/refurbishment costs which occur on or after the contract date from the contract price. The proposed changes mean that for contracts entered into from 1 July 2017, the concession will only apply to properties purchased to be a principal place of residence with a dutiable value no more than $550,000 (or $750,000 for first home buyers). It is not confirmed whether nominations after 1 July 2017 will affect the availability of the concession.

5. Vacant Residential Property Tax
From 1 July 2018, some property owners will pay an annual tax of 1% (calculated on the capital improved value of the property) if their property is unoccupied for more than a total of 6 months in a calendar year.

The tax will only apply to properties located in the council jurisdictions of Banyule, Bayside, Boroondara, Darebin, Glen Eira, Hobsons Bay, Manningham, Maribyrnong, Melbourne, Monash, Moonee Valley, Moreland, Port Phillip, Stonnington, Whitehorse and Yarra.The government is still consulting with the property sector to determine which properties will be exempt from the tax. Some examples include holiday homes (owned by those with a principal place of residence in Australia), city units for work purposes, properties in deceased estates, and homes subject to legitimate temporary absences (e.g. medical care, overseas appointments).

The state government’s primary reason to introduce this tax is to incentivise the reduction of the high number of vacant houses and apartments in the inner and middle ring of Melbourne, decreasing pressure on house and rental prices. As the impost is reliant on self-reporting by property owners, the Treasurer also announced that the State Revenue Office will receive funding to undertake extra compliance and monitoring activity.

When will we know if these changes have been approved?

It is important to remember that currently none of the above proposed changes have been approved by Parliament. The State Revenue Office is expected to provide an update later this month. In the meantime, it is vital that your clients are cautious making decisions solely on the proposals. If they are unsure, we recommend seeking advice from a Partners Legal expert.

Federal Budget

As previously reported in Partners Outlook, the 2017 Federal Budget includes proposals that could have a significant impact on the housing market. This includes the following proposed changes to property transactions:

1. Using superannuation for deposit
From 1 July 2017, first home buyers will be able to make voluntary superannuation contributions of $15,000 a year and a total of $30,000 to be applied towards a deposit for contracts of sale entered into from 1 July 2018.

2. Contributing downsizing proceeds to super
From 1 July 2018, individuals aged 65 or over will be able to make a non-concessional contribution to super of up to $300,000 from the proceeds of selling their home, that they have owned and resided in for at least 10 years. These contributions will not count towards the non-concessional contribution cap and the individual making the contribution will not need to meet the existing maximum age (cannot make contributions if aged over 75), work or $1.6m balance tests for contributing to super. You will need to consider the effect of the proceeds on any means-tested pension.

3. CGT withholding tax
A CGT withholding tax regime already exists whereby generally, purchasers (of property over $2m) who entered into contracts of sale from 1 July 2016 were required to withhold and remit 10% of the purchase price to the Commissioner of Taxation unless the vendor can provide to the purchaser a clearance certificate issued by the Commissioner that the vendor is not a foreign entity. The proposed changes mean the regime will apply to contracts of sale entered into from 1 July 2017 where the purchase price is $750,000 and above and the withholding tax rate will be 12.5%.

4. Main residence CGT exemption for foreign and temporary tax residents
Foreign and temporary tax residents who enter into a contract of sale after 7.30pm on 9 May 2017 cannot claim the main residence capital tax gains exemption when they sell the property. Foreign and temporary tax residents who hold property on 9 May 2017 can continue to claim the exemption until 30 June 2019.

5. Foreign ownership in new developments
Vendors can apply for a New Dwelling Exemption Certificate to sell new dwellings in a development to foreign persons. This means that individual foreign investors are not required to seek their own foreign investment approval to purchase a new dwelling in that development where the vendor holds an exemption certificate. In order to apply for the exemption certificate, the development must be multi-storey and have at least 50 dwellings.Applications for New Dwelling Exemption Certificates that are received from 7.30pm (AEST) on 9 May 2017 which are approved will be subject to a condition that the developer may only sell a maximum of 50% of the total dwellings in the development to foreign persons. This condition will not apply to existing approvals, or applications which were received before that time but are still to be processed. The Federal Government wants to ensure that dwellings in new developments in Australia are kept available for Australians.

6. Annual charge for foreign owners of vacant residential properties
The Treasurer has announced that an annual vacancy charge will apply to foreign persons who make a foreign investment application for residential property from 7.30pm (AEST) on 9 May 2017 and leave the property unoccupied or unavailable to rent for at least six months in each year.

When will we know if these changes have been approved?

Although some of the above changes are proposed to apply retrospectively, until the legislation is enacted, caution should be exercised when making decisions based on the proposals. In response to previous budget announcements, we have seen people make decisions based on a proposal that never became legislation.

To speak with our property team, please call us today on (03) 8508 7800.

This article is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal and financial advice before applying the information contained in this article to specific issues or transactions.