Queensland Budget taxes absentee land owners

The Queensland Government’s 2017-18 budget announced a number of key tax changes relevant to Queensland property investors.

New land tax surcharge for “absentee land owners” from 1 July 2017

• A new 1.5% land tax surcharge is being introduced for “absentee” land owners with land holdings valued at $350,000 or more. 
• Absentee land owners are already subject to higher rates of land tax (and lower land value thresholds) when compared with individual tax payers. Draft legislation released this week indicates the Government intends the new 1.5% surcharge to be introduced as an increase to the existing rates without any expansion of the existing concept of who is an “absentee” for land tax purposes.
• The new surcharge rates will apply to land tax assessments issued on and after 1 July 2017, which will be based on a person’s Queensland landholdings as at midnight on 30 June 2017.  As a result, there is limited time to make any changes to property ownership arrangements before the new rules take effect.

No increase to Foreign Acquirer Transfer Duty Surcharge, but certain changes proposed to its application

In 2016, the Queensland State Government introduced an additional foreign acquirer duty surcharge (AFAD) which applies to transactions involving interests in what is called “AFAD residential land”.

In a welcome development, no changes have been announced to the existing Foreign Acquirer Transfer Duty Surcharge. The surcharge rate will stay at 3% (which is significantly less than the 8% and 7% surcharge rate that applies in New South Wales and Victoria, respectively).

However, the draft legislation proposes some additional changes to the operation of AFAD in Queensland.

·         The draft legislation expands the meaning of AFAD residential land to include “chattels” in Queensland which “can be directly linked to, or is incidental to, the use and occupation of the land”.  Currently, only residential land and not chattels attract the surcharge rate of duty.  The move to include chattels in the surcharge duty base is a response to Government concern about the way in which value can be allocated between land and chattels.  The changes remove any incentive for value shifting.

·         The draft legislation will expand the application of AFAD to certain agency transactions affecting AFAD residential land.  Currently, the agency provisions in the Qld Duties Act permit a foreign principal to avoid AFAD by using a non-foreign agent to enter into an agreement for transfer (i.e., when duty is originally assessed).  The proposed amendments effectively mean that, where a principal is a foreign person at the time the relevant transfer of AFAD residential land occurs, the agreement will need to be reassessed as if AFAD applied to the agreement. 

·         The draft legislation also proposes removing the ability of foreign companies (pre-incorporation) to acquire AFAD residential land without incurring an AFAD liability through the use of an Australian entity to enter into an initial agreement for the transfer of land prior to the foreign company’s registration.  Currently under the Qld Duties Act, the initial agreement for the transfer would not attract AFAD and the subsequent transfer to the foreign company (post-incorporation) would be exempt.  The proposed amendments will require such an agreement to be reassessed as if AFAD applies and the subsequent transfer will not be exempt unless the duty (including AFAD) has been paid.

New Depreciation Rules only apply to properties purchased after 9 May 2017

The Federal Government has proposed adjustments to depreciation legislation in the 2017 Budget.  Investors who purchase existing apartments after 9 May 2017 will be worse off in respect of depreciation benefits, which will impact cash flow.

Under the new rules which are yet to be legislated by Parliament, investors will be able to depreciate new plant and equipment assets within a new property and items they add to their property; however subsequent owners who acquire a property after 9 May 2017 will not be able to claim depreciation on existing plant and equipment assets.

Investors will still be able to claim qualifying capital works deductions, including any additional capital works carried out by themselves or a previous owner.

The budget notes were clear that existing investments will be grandfathered. This means that anyone who has purchased a property up until 9 May 2017 will be able to claim depreciation as per normal.

See also BMT blog

Tax for foreign investors on transactions involving taxable Australian property

On 31 October 2014, the Government released a discussion paper outlining the proposed design options for implementing the previously announced non-final withholding tax in relation to disposals by foreign residents of certain 'taxable Australian property' assets. The measure is proposed to commence from 1 July 2016.

The measure was originally contained in the former Government's 2013-14 Budget. The current Government announced on 6 November 2013 that it would proceed with the measure.

The release of the discussion paper will be of interest to those foreign investors who may be considering divesting their Australian real property or business assets over the next few years, as well as investors who are considering acquiring such assets from foreign investors over the same time period.

For full details, see King & Wood Mallesons publication

Newman State Budget

• An increase in stamp duty: Increase in the transfer duty threshold from $980,000 to $1 million; rate to increase to a whopping 5.75 per cent.
• FHOCG:  For first home owner buyers who buy a new or off-the-plan apartment or house in limited circumstances.  Terry Ryder thinks it is a bad idea.  Will it just add $15,000 to the price of  new properties?  It is just another payback to developers who supported Newman, including the apartment developer who is Newman's father-in-law.  Why is the government trying to encourage young people to buy overpriced new apartments?

Prediction: Market to Keep Falling in Brisbane

My prediction for the next four months -- the Brisbane property market will continue to decline.  My reasons - (a) There is much uncertainty as to what new taxes and increased taxes Newman will hit property owners with.  We will not know until September.  (b) There will be many Queensland government employees and contractors who will suddenly become unemployed.  This has started to happen, and they are selling their investment properties in distressed situations, and few government workers are buying investments at present due to the uncertainty.  It is uncertain whether foreign buyers will be less interested due to the doubling of capital gains tax for non-residents.  I am seeing many Brisbane apartments being sold for 10% below recent sales price.  Gloomy times ahead.

Newman Targets Property Owners for Tax Increases

Any further financial imposts on property investors is likely to see them pull up stumps and sell their rental properties, according to the Real Estate Institute of Queensland (REIQ).

The release of today’s audit on the Queensland Government’s finances shows property owners, and investors in particular, have once again been earmarked to financially salvage the State’s fiscal woes.  The audit has outlined potential revenue-raising measures including: imposing a $100 levy on all property owners; reducing or removing the concession on land tax; applying a premium transfer duty rate; and increasing the landholder acquisition duty rate.

Acting REIQ CEO Antonia Mercorella said property owners were sick and tired of having to bail out the government.  ‘‘Property owners - and investors specifically - seem to forever be targeted by all levels of government when they are short of cash, whether it is through higher council rates, one-off levies or higher rates of stamp duty,’’ she said.  ‘‘The additional legislative and compliance obligations on property investors over recent years, coupled with weaker returns on investment, has resulted in many opting to sell their rental properties.’’

Australian Bureau of Statistics (ABS) data shows the number of investors active in the Queensland property market has halved in the last five years.  Ms Mercorella said this number was likely to decline even further if investors were slugged with additional costs.
“We are currently starting to see the impact of this reduced investor activity with vacancy rates tightening and rents increasing across the State. If more investors left the rental market, then this situation would undoubtedly worsen,” she said.  “If land tax thresholds are reduced or removed, the added costs would put an end to the glimmers of renewed investor activity we have seen in recent months and would also likely be passed onto tenants via increased rents.  Also the unit and townhouse market in particular is yet to see investors return significantly with the additional costs associated with this type of housing deterring investors.”

Newman was unfriendly to property owners as Mayor of Brisbane -- he substantially increased rates for apartment owners, and did nothing to reduce spending by Council or the number of council administration workers.

Budget to Impact Property Prices

Australian residential property will now be less attractive to foreigners after the Federal Budget last night.  As a large number of foreigners buy apartments off-the-plan in Queensland, this market for new apartments will be impacted by the changes, and the impact is negative.

The Government will remove the 50 per cent CGT discount for non residents on capital gains accrued after 7.30 pm (AEST) on 8 May 2012. The CGT discount will remain available for capital gains accrued prior to this time where non residents choose to obtain a market valuation of assets as at 8 May 2012. This measure would affect capital gains relating to taxable Australian property (e.g. capital gains from Australian real estate or interests in Australian land rich entities) which are realised by non-residents who would otherwise be eligible for the CGT discount (e.g. foreign individuals).

The Government will adjust the personal income tax rates and thresholds that apply to non residents’ Australian income. From 1 July 2012, the first two marginal tax rate thresholds will be merged into a single threshold. The marginal rate for this threshold will align with the second marginal tax rate for residents (32.5 per cent) and will apply to all taxable income below $80,000. From 1 July 2015, the same marginal rate will again rise from 32.5 per cent to 33 per cent.
Source:  KWM

Loss-making Landlords

According to the ATO, there were 1,751,679 property investors declared to the ATO in 2009-10 - representing one in seven taxpayers - an increase of 59,235 from the 2008-09 financial year.

Total losses on investment properties were $4.810 billion in 2009-10, or $2746 per property investor, down from $6.528 billion ($3857 per investor) in 2008-09. Of the 1,751,679 property investors recorded by the ATO in 2009-10, 63% or 1,110,922 were "negatively geared", meaning that holding costs (eg, interest payments, maintenance, and other costs) outweighed income from rents.

Of these negatively geared investors, nearly three-quarters earned less than $80,000 in 2009-10, and the average loss was $9132 per negatively geared investor, or $176 per week.

The concentration of negatively geared properties in lower income and older age cohorts has potentially important ramifications for the Australian housing market. The risk of widespread selling of investment properties is likely to intensify once Australia’s 1.1 million negatively geared investors come to the realisation that there is little prospect of a resumption of past strong rates of capital growth and they are stuck with a loss-making investment.

See Full Story here and report here

Campbell Newman and Apartments

Campbell Newman, when at Brisbane City Council, introduced the "parity factor", in relation to rates paid to the Council by Brisbane apartment owners.  Until this time, all rates in Brisbane were calculated based on the unimproved value of the land (regardless of the house or buildings on the land).  Under the "parity factor", apartment owners are now assessed taxes at a high rate than house owners.  In effect, house owners are taxed based on the unimproved value of the land, but for apartment owners, the tax takes into account the improvements on the land.  This doubled or tripled the rates for a number of apartment owners.

For houses, if I build a $2 million house on land worth $400,000, and you build a $250,000 house on the block of land next door also worth $400,000, we both pay the same rates in Brisbane.  But if you build an apartment building with 8 one-bedroom apartments, then the rates over all for those apartments will be higher than for the $2 million house.

I guess Campbell Newman will be looking at ways to increase taxes if he becomes Premier, and I doubt that he will be friendly to apartment owners.

View Tax

Apartment owners in Queensland are often taxed by local councils at higher rates than those of land owners or house owners.  People are starting to get upset by this.  In many cases the councils don't care, because the apartment owners don't live in the area and therefore can't vote.  See Sunday Mail story.

Property Investor Information

Two sites with useful information for property investors:

• negativegearedinvestmentproperty.com.au
• My Tax Zone

Tax Reform and Property

The Henry Tax Review was released at 2.30pm today. It was expected to have an impact on property investment, but it appears that the impact will be minimal in the short term. See Summary of Report and Mr Swan's response: www.futuretax.gov.au

From the Report:

• Over a long transition period, a land tax should be introduced on all land on a more efficient and uniform basis linked to unit land values, removing disincentives for institutional investment in rental property and integrated over time with property rate assessments.
• Over a similar period, transfer taxes on property should be reduced, and ultimately removed, with revenues replaced by efficient taxes, preferably annual land tax.
• Subject to transitional provisions, and following action to improve the current shortfall in housing supply, a more neutral personal income tax treatment of private residential rental investment should be introduced, with less volatile market effects, through a 40 per cent discount on all net residential rental income and losses, and capital gains.

The structure of land taxes could be improved by broadening the land tax base to eventually include all land. Land tax rates should be based on the value of a given property, so that the tax does not discriminate between different owners or uses of land. A tax-free threshold based on the per-square-metre value of the land could be set such that there would be no tax liability on most agricultural and other low-value land. Higher-value land could be taxed at differentiated rates based on the per-square-metre value of the land.

Stamp duties on conveyances are inconsistent with the needs of a modern tax system. While a significant source of State tax revenue, they are volatile and highly inefficient and should be replaced with a more efficient means of raising revenue.

Conveyance stamp duty is highly inefficient and inequitable. It discourages transactions of commercial and residential property and, through this, its allocation to its most valuable use. Conveyance stamp duty can also discourage people from changing their place of residence as their personal circumstances change or discourage people from making lifestyle changes that involve a change in residence. It is also inequitable, as people who need to move more frequently bear more tax, irrespective of their income or wealth.

Reforming land tax and conveyance stamp duty arrangements, along with the proposed changes to the taxation of rental housing and Rent Assistance, will go some way toward improving housing affordability. However, to a significant extent housing affordability is a supply issue (see Box 6.1).

Media Reports:

"Likewise the second part of the Henry Review’s two “key directions for efficient land and resource taxation”. The first part is the idea of a 40 per cent resource rent tax, which was first leaked in January. The response to the leak was obviously sufficiently mixed for the thing to become the centrepiece of Mr Swan’s tax reform.

The second part – and given equal weight in the review – is a national land tax of 1 per cent applying to all land regardless of use. Absolutely no mention of that in either leaks or today’s statement.

The Henry Review also recommends a 40 per cent discount to individuals for net interest income, residential rent, capital gains and interest related to listed shares. Also leaked, but rejected."

Business Spectator

The review proposes a 40 per cent discount on all income from savings, as well as on all residential rental income and losses, and capital gains.

These recommendations were widely flagged prior to today's announcement, with critics saying the current system doesn't give enough incentives for workers to put money in savings accounts.

Currently, interest earned on all savings accounts and term deposits is taxed at a worker's top marginal rate.

It is far less generous than the tax treatment of other investments such as shares and property, which the review says encourages investors to take on too much debt.

"The tax advantages from borrowing to invest in a rental property, also relevant for shares, leads to investors taking on too much debt and distorts the rental property market," the review says.

News Corp

Flat Market in Brisbane

In talking with people in the real estate industry in Brisbane recently, it seems to me that the market is relatively flat. At some open homes for houses in the $600,ooo price range, only 1 family will turn up for an inspection. Off the plan sales for apartments are, for the most part, slow. Prices are relatively stable for apartments. It is not a booming market at present. On the Sunshine and Gold Coasts, the market is very dead.

There are pending risks that may dramatically impact investment apartments in Queensland:

• higher interest rates
• risk of lower numbers of overseas students and tourists visiting Australia (including due to the higher Aussie Dollar)
• The review of the Australian Tax System, due within weeks, which will likely impact the treatment of capital gains for real estate, and probably recommend the removal of negatively gearing of losses from investment properties to offset income tax from income earned from other sources
• difficulties in obtaining investment loans, and the banks requiring a higher deposit for investment property loans
• increased school fees, which impacts the ability of many families wanting to invest in property
• increased body corporate fees and rates, making returns less
• poor performing vacation rentals and low vacation rental returns, often less than 2% net returns