2017 Federal Budget and its changes to the Law of Conveyancing

Published 31 May 2017
Dominic Maley

The ever developing law of conveyancing has now been affected in many ways by the in by 2017 Federal Budget. Some of these important changes are as follows:

1. ATO Clearance Certificate: change in threshold from $2million down to $750,000, and an increase to the remittance percentage.

2016 saw the imposition of a system whereby 10% of the purchase price of each property sold for $2million or over would be remitted directly to the ATO by the Purchaser, unless the Vendor provides the Purchaser with an ATO Clearance Certificate which confirms the Vendor's Australian tax residency and exempts the Purchaser from having to pay the 10% direct to the ATO.

The 2016 standard form contract was updated to include provisions relating to this new system, with clause 31.2.1 requiring the ATO Clearance Certificate to be served by the Vendor on the Purchaser at least 5 days before the completion date of the sale.

From 1 July 2017 there will be two significant changes to this system:

A. The threshold for mechanism to take effect will drop from $2million down to $750,000; and

B. The withholding tax rate will increase from 10% to 12.5%.

With house prices as they are, far more transactions will fall within the scope of this mechanism.

A foreign resident can apply for a Variation Notice, which will reduce the amount required to be remitted to the ATO, depending on the circumstances (where, for example, the foreign resident will be incurring an overall capital loss). In some cases, the circumstances will require the amount required by the ATO to be varied down to nil.

Clearance Certificates are valid for 12 months.

2. Other impacts for Foreigner Residents

From 9 May 2017, foreigners will:

• Not be able to claim the CGT exemption for principal place of residence (although if purchased prior to 9 May 2017, the foreigner will have until 30 June 2019 so seek the exemption from the sale); and

• have to pay $5,000 per year for residential properties left vacant for 6 months or more in that year.

Developers will not be able to sell more than 50% of the properties in the development to foreign purchasers.

3. First Home Buyers

From 1 July 2017 the new First Home Super Saver Scheme will be introduced, whereby a first home buyer can salary sacrifice (with applicable tax advantages) up to $15,000 a year, to a maximum of $30,000 in total, in order to save for a deposit for a house.

From 1 July 2018, they will be allowed to withdraw from their Super.

4. The Elderly

From 1 July 2017, individuals 65 and over will now be able to put up to $300,000 of the proceeds of the sale of their home into their super, provided they have held their house for 10 years or more.

5. Changes to investments in Affordable Housing

a. Additional Capital Gains Discount for Affordable Housing investment properties

As of 1 January 2018, Australian individuals who are investors in applicable affordable housing will be able to claim an additional 10% CGT discount for that investment. The CGT discount in those circumstances then will go from 50% to 60%.

This additional 10% discount will only be applicable, however, if the property is held for at least 3 years.

b. Managed Investment Trusts (MITs)

The current view of the ATO is that residential property is an "active" (rather than "passive") investment for MITs, and accordingly is currently taxed at an income rate of 30%.

As of 1 July 2017, non-resident investors in MITs (from certain applicable countries which have an exchange of information agreement with Australia) will be given a concessional tax rate of 15% including income from capital gains.

Resident MIT investors on the other hand will be taxed at their marginal tax rate, with the income from capital gains given the increased 60% discount.

These concessions will only be available if the housing affordable asset is held for 10 years. If not, non-resident investors will still be given the 15% discounted final rate on returns, but have a 30% withholding rate on capital gains.

Further exceptions apply.

The above advice is general in nature. For matter-specific legal advice on conveyancing and the law generally, contact Maclarens Lawyers on 96823777.