Foreign Buyers of New OTP Apartments - A New Tax Trap

The Foreign Investment Review Board rules which prevent foreign buyers from acquiring existing residential premises has a broad exception which applies to new or OTP apartments etc. A new rule only applies to those who enter into new contracts on or after 9th May 2017 unless the property has a exemption certificate issued.

Many foreign buyers of excepted property may seek to avoid land tax etc by NOT renting the property to avoid detection. And some rent their property and ignore tax compliance. Or they seek to hold property that is never used for residential purposes for a extended period of time. However that can trigger a further tax issue.

The property MUST be used and if it is then the ATO will seek how it is used - Does it produce income or not ?? Have any deductions been claimed ?? . This test of use means rented or occupied by someone for at least 6 months in any period of twelve months. And the test applies continually until the owner becomes a resident. There doesnt even need to be a lease. So how does that impact tax ?

A vacant property charge can be imposed by the ATO on affected property that is not occupied or rented for at least 6 months in any year which the owner is not a resident of Australia. This in intended to make sure "investment" available property is made available for residential use and not merely warehoused by foreign buyers.

The process is administered by the ATO. So you either declare income and pay tax OR declare the person who does occupy (and NOT claim tax losses) OR a penalty is applied. A bit of a trap really. The penalty is an annual charge and unless conditions are met it can imposed in any one or several years. The charge is from $5500 A property with a cost of $1m is $11,100 and this increases with the property value. It is the same as the application fee applicable to a FIRB application.

So its a double edged issue - If a property is rented the income etc must be declared. If its not the issue is subject to review. And the fee wont be tax deductible as it does NOT relate to producing income. Quite the opposite.

The legislation is progressing through Parliament and when approved further forms and details will become available.

Residential real estate – annual vacancy charge [GN48] – Foreign Investment Review Board

 

How is this a trap? Its just a new rule.

 

Not occupied for 6 months of the year.

Friends of the owner come for holidays. 3 couples staying while on holidays for a month thats 3 months.

Owner drops by for the chinese winter months. Thats 3 months.

Occupied for 6 months. Always loopholes and the wealthy will find them.

 

Of course. I believe speculation about how they may evidence lack of USE has been raised in media. And dont underestimate the ATO using immigration info eg Arrivals cards / data and addresses of accommodation declared on them.

A lease itself doesnt evidence occupancy / use and nor would claiming to have friends staying. More importantly where an arms length lease isnt used then subjective evidence of real occupancy may been needed and the onus may well be on the owners to produce this on request. eg water, electricity consumption and use. Even Aibnb records !!

I suspect failing to lodge a return demonstrating rents would likely trigger a more detailed review of property use and a more diligent assessment of claims that "relatives and friends" have stayed.

Some people have also suggested a slow trickling tap and a few lamps may cater for evidence of use

 

If you dont earn rent it triggers further questions. ATO administer both - So if the owners dont declare income they need to prove USE or they get slugged a vacancy tax.

 

Again, how is this a trap? The ato has the power to question pretty much whatever they want.

 

Why do you need to have a lease in place ?

A property is considered to be “used” where it is rented out, used as a residence or otherwise occupied

If friends from overseas are staying there then it is occupied. Just get your clients to have the friends sign a stat dec saying they were staying there during their stay.

Ive got Chinese clients and im sure you do that do that all the time. The property is used for friends and relatives to stay during their stay.

I dont think its that big an issue. I tend to agree with Trainee here its just a change people need to adapt to. And advisers should be advising their clients how to deal with it.

its like the new form required when selling a property to ensure the entity selling it is a resident. A hassle sure. A change sure. But world caving in. Not really.

 

You dont need a lease never said you did but a arms length lease is a simple demonstration of use that is more easily accepted. But a lease wont sometimes prove use and the FIRB and ATO papers supporting the law change say that also. Eg wife leases to son and dad leases to daughter. Neither reside there.....Thats why evidence of occupancy plays a key role. If power and water use isnt really evident its hard to argue occupancy of 6 months to the year.

Its substantiation with or without the tax. The substantiation issue is now broader for those affected so even if they dont generate income they may face the substantiation anyway.

The key concern I have is that private use has now become focus of the ATO. Not for residents. But foreign owners are basically held reportable to the ATO whether their property is rented, vacant or used in any capacity.

Lennon / McCartney had it right when they wrote Taxman...