The Federal Budget presented on 9 May 2017 contained several taxation-related matters that will impact on, or otherwise interest, NFPs. Some matters will be relevant to all NFPs and others will have a more limited audience.
(a) Matters for all NFPs to Note
(i) Foreign Resident Capital Gains Withholding Changes
The parameters governing application of Foreign Resident Capital Gains Withholding will change from 1 July 2017.
The Budget proposes two changes:
- Most Importantly: The withholding threshold (at which the scheme commences) will reduce from $2m to $750,000 for contracts entered into on or after 1 July 2017. Under this more modest threshold, one might expect that most transactions will be caught.
Note: We understand that for contracts made prior to 1 July 2017 and settled on or after this date, the existing threshold of $2m will apply.
- The amount to be withheld will also increase from 10% to 12.5%, with effect from 1 July 2017.
These changes warrant more detailed comment and are dealt with in a separate article in this month’s newsletter.
(ii) First Home Saver Scheme (FHSS)
All employers should be aware that an employee may seek to salary sacrifice amounts for payment into the employee’s superannuation fund for the purpose of accumulating an amount as a deposit on a first home.
We have provided a briefing for employers in a separate article in this month’s newsletter.
(b) Matters of more specialised interest
(i) GST Change – Purchasers of new residential properties to remit GST
The Federal Government proposes that from 1 July 2018, purchasers of newly constructed residential properties or new subdivisions will be required to remit GST directly to the ATO as part of the property settlement process. (Note: It is not contemplated that remittance process will involve any payment through the purchaser’s BAS. The payment will be made to the ATO as a settlement activity in much the same way as other debts of a vendor in respect of a property are paid to the vendor’s creditor on settlement.)
At present vendors who are liable to pay GST are responsible for remitting this, with remittance being required at times determined by whether the vendor accounts for GST on a cash or accruals basis.
While this measure will be likely to affect organisations as purchasers, they should experience minimal impact given the use of solicitors or other conveyancing professional attending to settlement of property purchases. However, we recognise that some of our readers will be affected as vendors.
At a practical level, the change will have adverse cash flow implications for vendors. Under the current regime they have the use of the GST component of settlement moneys in the period between settlement and the due lodgement date of their BAS for the tax period that includes the settlement date.
It is understood that purchasers will not only be expected to remit GST where this is calculated on the normal basis of 1/11th of the price, but also where the vendor is applying the margin scheme. At present, purchasers would not be aware of the quantum of GST in the latter situation and arrangements to obtain the information will be needed. One might expect the legislation will provide for vendors to disclose this amount in addition to a general authorisation for purchasers to withhold and remit the GST to the ATO from the moneys otherwise payable at settlement.
It will also be interesting to see the manner in which the legislation deals with instalment contracts, where the vendor is expected to account for GST on instalments made prior to settlement. In this scenario, one might expect that either GST would have been paid in whole (e.g. vendors accounting for GST on the accruals basis) or in part (vendors accounting for GST on the cash basis) prior to settlement. For instance, will vendors who have failed to account be subject to full withholding by the purchaser on settlement (necessitating some form of clearance certificate akin to the Foreign Residents Capital Gains Withholding Tax system)?
(ii) GST Change – removing double taxation of digital currency such as Bitcoin
At present, a person using digital currency (such as Bitcoin) is subject to GST twice when it is used to make acquisitions.
Firstly, supply of digital currency can be a taxable supply, with the result that GST may be paid on its purchase. Secondly, when digital currency is used to purchase a thing, GST may be charged on the purchase.
While GST is not problematic for readers who are able to claim input tax credits in relation to the relevant purchases, this will not be case for all digital currency users. It is proposed from 1 July 2017 that the purchase of digital currency will no longer be subject to GST.
For organisations that use digital currency and can claim ITCs for its purchase, the key point is to monitor the implementation of the proposed change and to recognise that ITCs will not arise on purchase.
(iii) Measures contributing to Housing Affordability
We recognise that some of our readers work in fields where housing affordability is particularly important and want to be aware of matters that affect such affordability.
The Budget proposes several measures directed to making housing more affordable:
- Measure encouraging investment in affordable residential housing (proposed commencement 1 January 2018) – Australian resident taxpayers who invest in qualifying affordable housing will be entitled to a greater CGT discount of 60% rather than the standard discount of 50%. In effect such taxpayers will be able treat 60% (rather than 50%) of any capital gain as not subject to tax. At present only limited detail of the concept of qualifying affordable housing is available – the property must be:
- provided to low to moderate income tenants, with rent charged at a discount below private rental market rate;
- managed through a registered community housing provider; and
- held for a minimum of 3 years.
- Measure encouraging investment in affordable residential housing (proposed commencement FY 2017-18) – Managed Investment Trusts (MIT) will be authorised to invest in affordable housing and to treat this as a passive investment, with associated application of the CGT regime. More particularly, investors in an MIT will be able to access tax concessions where:
- the MIT makes the housing available for rent for at least 10 years;
- the housing is provided to low to moderate income tenants, with rent charged below the private rental market value; and
- the MIT derives at least 80% of its assessable income from affordable housing in an income year.
MIT investors who are resident taxpayers will be taxed at their marginal rates with capital gains remaining eligible for the CGT discount (discount to rise to 60% from 1 January 2018). Non-resident investors will be subject to a final withholding tax of 15% (rather than 30%).
- Measure restricting the level of foreign ownership in new housing developments (proposed to apply to applications for New Dwelling Exemption Certificates made after the budget night announcement) – The Federal Government proposes to limit the extent to which foreign residents can compete with Australian residents in purchasing housing in new housing developments.
- It will do this by only giving developers pre-approval to sell 50% of housing in new developments to foreign residents.
- (For the technically-minded, this will be done by imposing the 50% limit as a condition in New Dwelling Exemption Certificates issued after the budget night announcement. New Dwelling Exemption Certificates are issued to developers and act as pre-approval for sales of new dwellings to foreign residents – they remove the need for foreign residents to seek their own foreign investment approval. Prior to the budget, such certificates did not impose a cap on sales to foreign residents.)
- Measure encouraging foreign residents to make residential property they own available for rent , thereby increasing the number of dwellings available for rent (proposed to apply to foreign persons who make a foreign investment application for residential property after the budget night announcement ) – Foreign owners of residential property who made the foreign investment approval application in respect of their residential purchase after the budget night announcement will be liable to pay an annual charge where the property is not occupied or genuinely available for rent for at least 6 months in a year. The charge will be equivalent to the relevant foreign investment application fee imposed on the property at the time it is acquired (i.e. will be at least $5,000).
- Measure denying foreign residents and temporary tax residents access to capital gains tax relief on sale of their main residence (proposed to apply to apply to sales after the budget night announcement but grandfathered application (operative 30 June 2019) to properties held at the time of the budget night announcement) – Denying foreign residents and temporary tax residents capital gains tax relief that will remain available to Australian residents, will allow Australian residents to more effectively compete in the purchase of housing.
- Measure reducing tax depreciation benefits from holding residential investment properties (proposed commencement 1 July 2017) – Owners who purchase residential investment properties will no longer be able to claim depreciation for plant and equipment purchased by a previous owner but only for plant and equipment which the taxpayer has purchased. The cost of plant and equipment acquired from previous owners will be included in a new owner’s cost base for CGT purposes.
While this is not put forward as contributing to housing affordability, we observe that it reduces the tax benefits for investors and correspondingly marginally reduces investor pricing pressure through reducing the attractiveness of investment in residential property. It is principally directed to closing an avenue for artificial manipulation of tax benefit.
- Measure countering incentive to hold residential investment property as a means to fund holiday/recreational travel (proposed commencement of 1 July 2017) – Some property investors were blurring holiday/recreational travel with travel to inspect rental properties. Property investors will be denied deductions for their personal travel costs to inspect rental properties, although reimbursement of third party inspection costs (e.g. real estate agent fees) will remain deductible. While this measure is presented as an integrity measure, we anticipate it will make investments in holiday localities marginally less attractive with associated marginal reduction in competition to acquire residential properties.