Michael Yardney, from Metropole Property Strategists, tells us about a little known fact that will deal another shock for Australian property markets.
Kevin: My next interview surprised me when I found out about it. I’m sure it’s going to surprise you, too. Not many people realize that at a time when Australian property markets have enough to contend with, with falling pre-election consumer confidence, foreign buyers pulling out of markets – and I read a staggering story today that Chinese buyers are now looking at taking money away from Australia and starting to invest in the USA – banks make it harder to get finance.
Now the Australian Taxation Office has delivered another blow for those dealing with properties valued at more than $2 million. You might think it’s for foreign buyers only, but stand by because this is going to impact anyone who is buying and selling a property that’s in excess of $2 million.
Let’s have a look at what this really means and we’ll explore it in a little more detail. Michael Yardney from Metropole Property Strategists joins us.
Michael, thanks for drawing this to my attention. I understand you’ve only just been told about this by your solicitors, as well.
Michael: That’s right. It was actually first mentioned a number of years ago by former Treasurer Joe Hockey, and it came into our active parliament in February this year. But it’s actually been kept quiet, and I bet there will be a bit more news about it because as of July 1st, everyone in Australia is going to be deemed a foreign resident when they sell their property unless they get a tax certificate saying they’re not.
Kevin: This is every person who is selling a property over $2 million, or just everyone?
Michael: The rules say as follows: that everybody who is selling a property – and property is not just real estate but it includes leaseholds and a number of other assets, not shares on the stock exchange – is deemed a foreign resident and withholding tax will have to be held back unless certain elements apply. One of them is, yes, the property has to be worth more than $2 million. So it will change the way large property transactions occur.
Kevin: What is the purpose behind this? Is it trying to capture overseas buyers?
Michael: Clearly, the Australian Tax Office is concerned that foreign buyers were purchasing and then selling Australian property, including real estate, and then taking the proceeds overseas without paying the appropriate tax. Now it has transferred some of the responsibility for collecting a portion of that capital gains tax to buyers, to purchasers, of Australian real estate rather than purely leaving it up to the sellers to be open and declare it.
Kevin: Let’s walk through this. Let’s paint a scenario here where I had – I wish – a property over $2 million to sell and I was going to sell it to you. What does the transaction look like?
Michael: You’re classified as an overseas investor, which means that you have to then go to the tax office, go to their website, and you can get a special tax clearance. To be honest, most Australian residents won’t have any difficulty getting that for one of two reasons.
First of all, it won’t apply to most people because most transactions aren’t $2 million. But anything over that, whether it’s residential or commercial, you have to apply for a tax clearance. Most people will be able to get it and say, “I am not a foreign resident.” This means then that there won’t be a tax withheld, but it may bring you to the attention of the tax department when may you don’t want them to know about you.
Kevin: Let’s go back to the scenario where I am a seller of, say, a $2.1 million property. I put it on the market. You come across and you’re a Chinese buyer. You’re a foreign investor and you’re going to buy it. Does that mean that, as the seller, I’ll actually have to either add 10% to my purchase price or have to cop a 10% loss?
Michael: No. Kevin, whether you’re a foreign purchaser or an Australian resident purchasing the property, you have to request from the seller a clearance certificate saying no tax is payable, no capital gains tax is payable. If it is your primary place of residence, and that’s the most likely scenario – those nice, big homes in the good suburbs – then you don’t have to pay tax because you are exempt of tax.
On the other hand, if tax is payable because you’re a property developer or you’re in the business of property or it’s an investment you bought a few years ago and there is capital gains tax, then you may not get a clearance certificate because it will be clear that an element of tax is payable, and either as the seller, you’re going to have to pay it or the purchaser won’t give you your $2.1 million; they’ll actually give you $210,000 less because they’re going to have to give $210,000, 10%, to the tax department just in case you don’t pay your tax.
Kevin: This is really an exercise to capture foreign buyers who will then become sellers of that same property.
Michael: In one regard, it is. It’s also to capture Australians who maybe haven’t filed tax returns for a while. There are lots of people who do buy, sell, develop their homes. Actually, I know people who build a nice, modern home every couple of years, on-sell it, upgrade, and do another one.
Because they use their principal place of residence exclusion so that they don’t have to pay capital gains tax, they often get away with that. That’s fine. It’s within the law. But if you do it too often, you could be deemed a developer. Those people could fall foul of this particular law, also. Also, it could be if you actually sell your $2 million house and maybe you don’t have a tax return that shows you could afford it.
The bottom line really is be aware, speak to your solicitor when you’re about to buy or sell a house, just make sure you do everything that complies, and as long as you’ve done everything correctly and legally tax-wise, there’s nothing to worry about.
Kevin: This comes into effect on July 1 of this year.
Michael: Yes, the day before the election, Kevin.
Kevin: That’s interesting, isn’t it? That couldn’t have been planned that way.
Michael: No, it wasn’t because it was actually put in as an Act of Parliament in February of this year.
Kevin: The bottom line is make sure that all of your I’s are dotted and your T’s are crossed. Consult with your solicitor, I guess, is the message.
Michael: Yes. Just to make things clear, I have no issue with the Australian Tax Office collecting taxes due to it, especially if it’s money owed to the Australian system and it’s being funneled offshore.
Kevin: Good talking to you, Michael Yardney from Metropole Property Strategists.
Michael: My pleasure, Kevin.