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GENERAL PROPERTY PROPERTY REVIEWER

Ghost tax proves a scary prospect for foreign buyers

Pitcher Partners executive director and partner - tax consulting, Denise Honey,
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OPINION: THE spectre of Australia’s vacancy tax is about to become real for Chinese residential property owners, with penalties of up to $52,500 looming for those who miss the deadline.

One year after the Federal Government introduced vacancy tax rules, the first returns are starting to become due – and up to 15,000 foreign investors will be expected to provide evidence as to whether their property sat vacant in the last year.

Foreign owners of Australian residential property face a minimum vacancy tax of $5,200, and even occupied properties could incur a $52,500 penalty if the owner fails to meet the deadline to lodge a return declaring occupancy of their assets with the Australian Taxation Office (ATO).

Further, if they fail to keep the necessary records to prove occupation, they could be hit with an additional penalty of $52,500. And even then, the owner would still be liable to pay the vacancy fee. For a property worth upwards of $4 million, that could equate to combined penalties and fees of more than $150,000 —even if the property has been occupied throughout.

The annual vacancy tax rules are the latest in a series of imposts on foreign buyers, designed to reduce the impact of foreign ownership on housing affordability, particularly in the core property markets of Sydney and Melbourne.

While the ‘ghost tax’ is intended as a financial incentive for foreign owners to make their dwelling available for rent and increase available housing in Australia, it raises the question of whether Chinese buyers might be scared away by the long-term implication of the new rules.

Foreign owners must lodge a vacancy tax return every year, keep records for at least five years after selling, keep evidence regarding who is using their property, and manage the risk of significant financial penalties if they fail to do so.

The immediate challenge facing foreign owners who have bought a residential property since May 2017 is identifying when they will need to submit their vacancy review, and how they will go about proving whether the property was vacant or not.

While the burden of this new tax on Chinese buyers is hauntingly clear, the impact on foreign sales in the Australian residential market is not.

Chinese buyers remain Australia’s biggest investors in real estate but according to statistics published in the Foreign Investment Review Board’s (FIRB) 2016-17 Annual Report, the size of their investment more than halved from AUD$31.5 billion in 2015-16 to AUD$15.2bn in 2016-17.

Overall FIRB real estate approvals plunged from 40,149 in 2015-16, to 13,198 last year. But there have been a number of factors that may have contributed to this reduction, including the introduction of FIRB application fees, tighter Chinese capital controls and weaker Australian property market conditions.

For Chinese buyers, the residential property market continues to become more hostile in Australia and while it hasn’t yet reached New Zealand levels – where foreign buyers have been banned altogether – the latest changes are likely to have a chilling effect for many looking to purchase property.

By Denise Honey, partner and executive director – tax consulting, Pitcher Partners.*

Property Reviewer on Australian Property Journal