Spooked foreign property investors run into Australia’s ‘ghost tax’

Spooked foreign property investors run into Australia’s ‘ghost tax’

Tue, 16/10/2018 - 16:13

Vacant apartments are looming as a substantial new impost for foreign real estate owners in Australia. Photo: Raj Eiamworakul

The spectre of Australia’s vacancy tax is about to become real for foreign residential property owners, with substantial penalties looming for those who miss the deadline.

A year after the Federal Government introduced the vacancy tax rules, labelled a ‘ghost tax’, the first returns are starting to become due – and up to 15,000 foreign investors will be expected to provide evidence on the vacancy status of their properties in the past year.

The new rules are the latest in a series of federal and state imposts on foreign buyers, led by the Chinese, designed to reduce the impact of foreign ownership on housing affordability, particularly in the core property markets of Sydney and Melbourne.

Under the vacancy tax, foreign owners of 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 with the Australian Taxation Office declaring occupancy of their assets.

Further, if they fail to keep the necessary records to prove occupation, they could be hit with an additional penalty of $52,500. Even then, owners would still be liable to pay the vacancy fee.

For a property worth more than $4 million, that could equate to combined penalties and fees of over $150,000 —even if the property has been occupied throughout.

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While the ‘ghost tax’ is intended as a financial incentive for foreign owners to make their dwellings available for rent and increase available housing in Australia, it raises the question of whether foreign 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 and keep evidence regarding who is using their property, running the risk of significant financial penalties if they fail to do so.

The immediate challenge facing foreign owners who 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 tax on foreign 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 2016-17 annual report, the size of their investment more than halved from $31.5 billion in 2015-16 to $15.2 billion in 2016-17.

Overall, FIRB real estate approvals plunged from 40,149 in 2015-16, to 13,198 in 2016-17.

But there have been a number of factors that may have contributed to this reduction, including the introduction of FIRB application fees, stamp duty and land tax surcharges for foreign purchasers, 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 has not yet reached New Zealand levels – where foreign buyers have been banned – the latest changes are likely to have a chilling effect for many looking to purchase property.

Pitcher Partners is an association of independent firms located in Melbourne, Sydney, Perth, Adelaide, Brisbane and Newcastle. Pitcher Partners is an independent member of Baker Tilly International.