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Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017

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2016-2017

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Treasury Laws Amendment (Housing Tax Integrity) Bill 2017



Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by authority of the

Treasurer, the Hon Scott Morrison MP)





Table of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Travel related to use of residential premises................... 6

Chapter 2               Limiting depreciation deductions for assets in residential premises          19

Chapter 3               Vacancy fees for foreign acquisitions of residential land... 41

 



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

Commissioner

Commissioner of Taxation

CGT

capital gains tax

FATA

Foreign Acquisitions and Takeovers Act 1975

FATA Regulation

Foreign Acquisitions and Takeovers Regulation 2015

Fees Act

Foreign Acquisitions and Takeovers Fees Imposition Act 2015

Fees Amendment Bill

Foreign Acquisitions and Takeovers Imposition Amendment (Vacancy Fees) Bill 2017

Fees Regulation

Foreign Acquisitions and Takeovers Fees Imposition Regulation 2015

GST Act

A New Tax System (Goods and Services Tax) Act 1999

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

TAA

Taxation Administration Act 1953

 



Travel related to use of residential premises

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to ensure that travel expenditure incurred in gaining or producing assessable income from residential premises is:

•        not deductible; and

•        not recognised in the cost base of the property for capital gains tax (CGT) purposes.

The amendments improve the integrity of the tax system by addressing concerns that some taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private purposes.

The amendments are not intended to affect deductions for institutional investors in residential premises, as the same integrity concerns do not arise for such investors. The amendments also do not affect deductions for travel expenditure incurred in carrying on a business, including where an entity carries on a business of providing property management services.

Date of effect:   The amendments apply to losses or outgoings incurred on or after 1 July 2017.

Proposal announced:   This measure was announced in the 2017-18 Budget as ‘Reducing Pressure on Housing Affordability disallow the deduction of travel expenses for residential rental property’ and forms part of a package of measures concerning housing affordability.

Financial impact:   The measure is estimated to result in a gain to revenue of $540 million over the forward estimates period:

2016-17

2017-18

2018-19

2019-20

2020-21

-

..

$160m

$180m

$200m

- Nil

.. not zero but rounded to zero

Human rights implications:   This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights paragraphs 1.44 to 1.48.

Compliance cost impact:   This measure is estimated to result in a small reduction in compliance costs.

Limiting depreciation deductions for assets in residential premises

Schedule 2 to the Bill amends the ITAA 1997 to deny income tax deductions for the decline in value of ‘previously used’ depreciating assets used in gaining or producing assessable income from the use of residential premises for the purposes of residential accommodation.

However, the amendments do not affect deductions that arise:

•        in the course of carrying on a business; or

•        for corporate tax entities, superannuation plans other than self-managed superannuation funds, public unit trusts, managed investment trusts and unit trusts or partnerships, all the members of which are entities of a type listed here.

The proportion of the decline in value of an asset that cannot be deducted is recognised as a capital gain or loss when the asset ceases to be used.

Date of effect:   The amendments apply in income years commencing on or after 1 July 2017 unless:

•        the asset was acquired by an entity before, or under a contract entered into before, 7.30 pm on 9 May 2017; or

•        the start time for the asset occurred during or before the income year containing 9 May 2017 and the entity was not entitled to a deduction under Division 40 or

Subdivision 328-D of the ITAA 1997 for the asset in that income year.

Proposal announced:   These amendments implement the measure announced in the 2017-18 Budget as ‘Reducing Pressure on Housing Affordability - limit plant and equipment depreciation to outlays actually incurred by investors’ and forms part of a package of measures concerning housing affordability.

Financial impact:   This measure is estimated to result in a gain to revenue of $260 million over the forward estimates period, comprising:

2016-17

2017-18

2018-19

2019-20

2020-21

-

-

$40m

$100m

$120m

- Nil

Human rights implications:   This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights paragraphs 2.95 to 2.100.

Compliance cost impact:   The measure is estimated to result in a moderate ongoing decrease in compliance costs.

Vacancy fees for foreign acquisitions of residential land

This Schedule implements an annual vacancy fee on foreign owners of residential real estate where residential property is not occupied or genuinely available on the rental market for at least six months in a 12 month period.

The Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017 (Fees Amendment Bill), imposes the vacancy fee and establishes the amount payable. Broadly, the fee which will be payable when a dwelling is left vacant is the fee that was payable at the time of the foreign investment application.

Date of effect : F rom 7:30PM (AEST) on 9 May 2017.

Proposal announced 2017-18 Budget.

Financial impact The vacancy charge is estimated to have a gain to budget of $16.3 million over the forward estimates period.

Funding of $3.7 million over four years from 2017-18 will be provided to the Australian Taxation Office (ATO) to implement the vacancy charge.

Human rights implications :  This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights —paragraphs 3.98 to 3.111.

Compliance cost impact Low. There will be minor regulatory cost for foreign persons who buy residential real estate from 9 May 2017 onwards, to report their usage of the property. Furthermore, the requirement to use the property may mean that investors also have to take steps to ensure that the property is occupied for at least 6 months of a given 12 month period.

 



Outline of chapter

1.1                   Schedule 1 to this Bill amends the ITAA 1997 to ensure that travel expenditure incurred in gaining or producing assessable income from residential premises is:

•        not deductible; and

•        not recognised in the cost base of the property for CGT purposes.

1.2                   The amendments improve the integrity of the tax system by addressing concerns that some taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private purposes.

1.3                   The amendments are not intended to affect deductions for institutional investors in residential premises, as the same integrity concerns do not arise for such investors. The amendments also do not affect deductions for travel expenditure incurred in carrying on a business, including where an entity carries on a business of providing property management services.

1.4                   All legislative references in this Chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

1.5                   Generally, section 8-1 allows income tax deductions for losses and outgoings that are incurred in the gaining or producing of assessable income, or are necessarily incurred in the carrying on of a business for the purpose of gaining or producing assessable income. 

1.6                   Prior to the amendments made by this Schedule, travel expenditure for, but not limited to, the inspection or maintenance of a rental property owned by a taxpayer, or travel expenditure to collect rent, was deductible as being incurred in gaining or producing assessable income under section 8-1. Deductible travel expenditure included car, airfare and accommodation costs. Where travel was for a mixed purpose, investors could only claim expenses to the extent they were incurred in relation to gaining income from the rental property.

1.7                   In the 2017-18 Budget, the Government announced a package of measures designed to reduce pressure on housing affordability. This Schedule implements one of the reforms in the package to disallow travel deductions relating to residential investment properties. This is an integrity measure to address concerns that some taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private purposes. The amendments enhance community confidence in the tax system by ensuring tax deductions are better targeted.

Summary of new law

1.8                   Schedule 1 amends the ITAA 1997 to ensure that travel expenditure incurred in gaining or producing assessable income from residential premises is not deductible unless incurred by certain institutional entities or by an entity in the course of carrying on a business.

1.9                   Furthermore, travel expenditure which is prevented from being deducted by the amendments in this Schedule cannot form part of any element of the cost base and reduced cost base of residential premises for CGT purposes.

Comparison of key features of new law and current law

New law

Current law

Deducting travel expenditure

An entity may not deduct a loss or outgoing they incur to the extent that it is related to travel if it is incurred to gain or produce assessable income from the use of residential premises as residential accommodation.

However, an entity may continue to deduct such losses or outgoings if:

•        the entity is in an excluded class of entity; or

•        the losses or outgoings are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

An entity is in an excluded class if, at any time during the income year in which the loss or outgoing is incurred, the entity is:

•        a corporate tax entity;

•        a superannuation plan that is not a self managed superannuation fund;

•        a public unit trust;

•        a managed investment trust; or

•        a unit trust or a partnership, all of the members of which are entities of a type listed above.

Generally, an entity may deduct a loss or outgoing they incur in gaining or producing assessable income, or which is necessarily incurred in the carrying on of a business for the purpose of gaining or producing assessable income. This means that an entity may generally deduct losses or outgoings related to travel to gain or produce assessable income from the use of residential premises as residential accommodation.

Travel expenditure cost and reduced cost base

Travel expenditure which is prevented from being deducted by the amendments introduced in this Schedule does not form part of any element of the cost base or reduced cost base of a residential investment property.

Generally, travel expenditure does not form part of the cost base or reduced cost base of a residential investment property to the extent that a taxpayer has deducted or can deduct it.

Detailed explanation of new law

1.10               These amendments deny deductions for travel expenditure incurred in gaining or producing assessable income from residential premises to address concerns that some taxpayers have been incorrectly claiming travel deductions.

1.11               The amendments do not prevent an entity from claiming such a deduction if:

•        the entity is in an excluded class (refer paragraphs 1.26 to 1.34); or

•        the losses or outgoings are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (refer paragraphs 1.35 to 1.37).

Travel expenditure related to use of residential premises not deductible

1.12               The amendments provide that an entity cannot deduct a loss or outgoing incurred under the income tax law, to the extent that it is related to travel, if it is incurred to gain or produce assessable income from the use of residential premises as residential accommodation . [Schedule 1, item 2, paragraph 26-31(1)(a)]

Residential investment property

1.13               These amendments prevent travel expenditure related to residential premises being deducted. The term ‘residential premises’ is defined in the ITAA 1997 as having the same meaning as in the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The GST Act provides that ‘residential premises’ are land or buildings that are occupied as a residence or for residential accommodation or intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation (regardless of the term of the occupation or intended occupation) and includes a ‘floating home’ (within the meaning of the GST Act). [Schedule 1, item 2, paragraph 26-31(1)(a)]

1.14               Due to its use in the GST law, this defined term is already the subject of considerable judicial scrutiny as well as interpretative guidance. Broadly, land or a building is residential premises if it provides, at a minimum, shelter and basic living facilities and is either occupied by a person (the first limb) or designed for occupation (the second limb).

1.15               The courts have found that, for both limbs, whether premises are capable of being occupied as a residence or for residential accommodation is to be ascertained by an objective consideration of the character of the property. The purpose for which an entity may hold the property is not relevant.

1.16               The definition is broad and may include commercial residential premises, such as a hotel or boarding house. However, where travel expenditure is necessarily incurred in carrying on a business, the expenditure remains deductible under section 8-1 (refer paragraphs 1.35 to 1.37).

1.17               These amendments deny deductions for travel expenditure incurred in producing assessable income that is related to the use of residential premises as residential accommodation. In other words, the amendments disallow deductions for travel expenditure incurred in producing rental income from residential premises.

1.18               These amendments do not prevent an entity from deducting travel expenditure where they are not using residential premises as residential accommodation, but are using the premises for other income producing purposes. To the extent that the residential premises are used for other income producing purposes, travel expenditure relating to these purposes can continue to be deducted.

1.19               These amendments principally affect owners of residential rental properties. However, the amendments also affect entities that do not have a legal ownership interest in a property but have the right to use the property to produce income from the use of the residential premises as residential accommodation. This would include sublease arrangements (see example 3.2).

Travel expenditure

1.20               These amendments deny deductions for travel expenditure incurred to gain or produce assessable income from the use of residential premises as residential accommodation. This includes travel for activities undertaken to gain or produce rental income from an entity’s residential investment property, such as, but not limited to, inspecting, maintaining, or collecting rent for the property. [Schedule 1, item 2, subsection 26-31(1)]

1.21               For the purposes of these amendments, the ordinary meaning of ‘travel’ applies. Travel expenditure would be expected to include motor vehicle expenses, taxi or hire car costs, airfares, public transport costs, and any meals or accommodation related to the travel.

1.22               The travel is not restricted to travel to the relevant property. For example, travel undertaken to attend an apartment building owner’s corporation meeting or visit a real estate property manager to discuss the property is also not deductible.

1.23               The travel will not necessarily be undertaken by the taxpayer. For example, the taxpayer may incur a loss or outgoing related to their relative’s travel if they reimburse or directly pay for their relative’s travel and the travel is related to the rental property. Regardless of who undertakes the travel, these amendments deny deductions for travel expenditure incurred by a taxpayer to gain or produce assessable income from the use of residential premises as residential accommodation.

1.24               These amendments do not affect the ability of a taxpayer to deduct from their assessable income the cost of property management services under section 8-1, such as where the taxpayer engages a real estate agent to provide these services. As is the case prior to these amendments, the taxpayer is not able to deduct any expenditure (other than indirectly via the property manager’s fees) for travel undertaken by the property management service provider as the taxpayer has not directly incurred this expenditure. Further, the payment of a property management service fee is not considered an expense related to travel, even if a component of the fee is a direct reimbursement of travel costs. [Schedule 1, item 2, subsection 26-31(1)]

1.25               However, the cost of the travel continues to be deductible to the property management service provider as it is an expense necessarily incurred in the course of carrying on their business for the purpose of gaining or producing assessable income (see paragraphs 1.35 to 1.37). Those travel costs would be expected to be passed on to the taxpayer as part of the real estate agent’s fee for providing property management services.

Example 1.1 : Travel expenditure for inspecting property and visiting real estate agent not deductible

Michael owns an investment property and engages a real estate agent to manage his property which is located across town. The property is leased for residential accommodation and therefore considered residential premises within the meaning of the GST Act.

Every six months, Michael travels by car to inspect the property. He also meets with the real estate agent once a year to discuss potential rent increases and any other property management issues. Travel expenditure to inspect the property and meet with the real estate agent is for the purpose of gaining or producing rental income from the use of residential premises as residential accommodation.

Michael incurs fuel costs associated with this travel. The fuel costs are not incurred in carrying on a business. Michael cannot deduct such travel expenditure as it is related to travel and incurred to derive income from the use of residential premises for residential accommodation.

Example 1.2 : Travel expenditure related to residential premises subject to a sublease arrangement not deductible

Chris is the owner of an investment property, which he has leased out to head tenant Billy. Billy decides to move out of the property but decides not to break the lease. Instead, Billy subleases the property to another tenant, Jared.

Billy collects rental income from Jared and incurs expenditure travelling to the property to inspect it every month. Billy is prevented from deducting such expenditure, which is related to travel and is incurred to gain or produce assessable income from the use of residential premises as residential accommodation.

Excluded classes of entity

1.26               These amendments do not prevent an entity from deducting a loss or outgoing related to travel incurred in relation to a residential investment property, if at any time during the income year in which the loss or outgoing is incurred, the entity is:

•        a ‘corporate tax entity’ (within the meaning of the ITAA 1997);

•        a ‘superannuation plan’ that is not a ‘self managed superannuation fund’ (within the meaning of the ITAA 1997);

•        a public unit trust (within the meaning of section 102P of the Income Tax Assessment Act 1936 (ITAA 1936));

•        a managed investment trust; or

•        a partnership or unit trust if all of the members of the partnership or trust are entities included on this list (including this item).

[Schedule 1, item 2, subsection 26-31(2)]

1.27               The amendments do not apply to deductions for institutional investors in residential premises. Institutional investors usually operate under a corporate structure, are public unit trusts, managed investment trusts, or meet the description of being a ‘superannuation plan’ that is not a ‘self managed superannuation fund’ or are unit trusts or partnerships that are ultimately held by these entities. Generally, such investors are considered to have a low risk of incorrectly claiming travel deductions, as these entities are either outside the control of an individual, do not receive tax concessions which flow through to individuals or both. Furthermore, situations where apportionment of expenditure is required because there is a mixed purpose for travel are less likely to arise for such taxpayers.

1.28               Corporate tax entity is defined in section 960-115. It includes entities that are companies, corporate limited partnerships, corporate unit trusts and public trading trusts at the relevant time. It does not include a trust merely because the trustee of the trust is a corporate tax entity.

1.29               ‘Superannuation plan’ and ‘self-managed superannuation fund’ are defined in subsection 995-1(1).

1.30               Public unit trust is defined in section 102P of the ITAA 1936. Broadly, a unit trust will be a public unit trust if the units in the trust are listed for quotation in the official list of a stock exchange, offered to the public in a public offer, held by more than 50 people or where a tax-exempt investment vehicle, such as a foreign superannuation fund, is a substantial unitholder (see subsections 102P(1) and (2) of the ITAA 1936). However, a trust is not a public unit trust if 20 or fewer people hold the beneficial interest in 75 per cent or more of the income or property of the trust, or if other integrity rules are not satisfied (see section 102P of the ITAA 1936).

1.31               Trusts are also excluded if they are managed investment trusts within the meaning of section 275-10. As part of its Housing Affordability package, the Government announced amendments to the tax law to enable managed investment trusts to invest in dwellings used to provide affordable housing and benefit, for example, from reduced rates of withholding tax. Excluding managed investment trusts removes any doubt that such trusts that comply with the widely held rules for managed investment trusts and engage in institutional investment in affordable housing are permitted deductions for travel expenditure.

1.32               In all cases these requirements ensure that trusts must be widely held and genuinely free from the control of any one member to benefit from this exclusion.

1.33               The final exclusion is for unit trusts or partnerships if all of the members of the entity (i.e. the unit holders or partners) are listed as excluded entities. This exclusion ensures that where all the benefit of deductions goes to excluded entities, the deductions continue to be available. This includes situations where the excluded entities receive the benefit of deductions through a chain of unit trusts or partnerships.

1.34               For example, a unit trust that owns residential premises is entitled to deduct travel expenditure for an income year if all of the units in the trust are held by another unit trust and all of the units in that unit trust are owned by excluded entities, such as companies.

Travel expenditure incurred in carrying on a business

1.35               These amendments ensure that deductions for travel expenditure incurred in carrying on a business remain deductible under section 8-1. This means deductions continue to be available for an entity that carries on a business of property investing or a business of providing retirement living, aged care, student accommodation or property management services. [Schedule 1, item 2, paragraph 26-31(1)(b)]

1.36               Whether a business is being carried on depends on the facts of the particular case. For example, some indicators that the courts have considered relevant are whether the activity has a significant commercial purpose or character, whether there is repetition and regularity of the activity and whether the activity is better characterised as a hobby or recreational pastime.

1.37               An entity that is considered to be carrying on a business of providing retirement living, aged care or student accommodation may incur travel expenditure in carrying on its business. For example, a retirement village operator may incur travel expenditure in having an employee travel from a head office to a retirement village to inspect the property or carry out maintenance. This travel is for the purpose of gaining or producing assessable income from the use of residential premises as residential accommodation. Such entities can continue to deduct travel expenditure necessarily incurred in carrying on their business (refer section 8-1).

Example 1.3 : Travel expenditure incurred in carrying on a business deductible

Mirela operates a business of leasing holiday flats in Coffs Harbour. She undertakes various tasks such as cleaning, laundry, greeting guests and topping up provisions on a daily basis.

Mirela uses a car to travel between the flats and her garage at home where she keeps her equipment and stock. She uses the logbook method to calculate her travel expenditure.

Her travel expenditure is incurred in the course of carrying on a business for the purpose of producing assessable income and therefore remains deductible.

Example 1.4 : Travel expenditure in a mixed use property

Anna owns multiple workshops across Australia as part of her business operations. She owns a two-storey brick shop-house in Melbourne. The building comprises a workshop on the ground floor and an apartment on the first floor.

The apartment is rented out separately to a couple, Leon and Michelle. Therefore, Anna derives assessable income from both her workshop and the apartment.

The apartment satisfies the definition of residential premises within the meaning of the GST Act.

Anna travels from her home town in Canberra to her property in Melbourne for the purpose of carrying out maintenance to the floor of the workshop. This maintenance activity is solely related to gaining or producing assessable income from the workshop.

Anna incurs airfare costs associated with this travel. Anna will be able to deduct her travel expenditure as it relates to gaining or producing assessable income in the course of carrying on her business from her workshop, not from gaining or producing assessable income from the use of her apartment as residential accommodation.

Anna takes a second trip from her home town in Canberra to her property in Melbourne for the purpose of carrying out maintenance to the wall of her apartment. This maintenance activity is solely related to gaining or producing assessable income from the apartment. Anna incurs airfare costs associated with this travel. This time Anna will not be able to deduct her travel expenditure as it relates to gaining or producing assessable income from the use of her apartment as residential accommodation.

Ensuring non-deductible travel expenditure is excluded from the cost base for capital gains tax purposes

1.38               This Schedule includes amendments to the CGT rules that ensure that losses and outgoings, which are prevented from being deducted by the amendments in this Schedule do not form part of any element of the cost base and reduced cost base of a residential investment property. This has the effect that the travel expenditure is never included in any of the elements of the cost base or reduced cost base (refer section 110-37). [Schedule 1, items 3 and 4, subsections 110-38(4A) and 110 55(9J)]

1.39               This ensures that the expenses that are no longer recognised on a taxpayer’s revenue account are also prevented from being recognised on their capital account.

Non-deductible travel expenditure also not deductible as black hole expenditure

1.40               Travel expenditure is not deductible under section 40-880 (which makes certain business related capital expenditure, known as ‘black hole expenditure’, deductible) to the extent that it is not deductible under these amendments (refer paragraphs 40-880(5)(g) and (h)).

Consequential amendments

1.41               Schedule 1 includes consequential amendments adding references to the new rules to the guidance material in section 12-5 (which contains a list of provisions about deductions). [Schedule 1, item 1, table item headed ‘travel expenses’ in section 12-5]

1.42               This Schedule also includes consequential amendments adding notes to assist users of the legislation. [Schedule 1, items 3 and 4, note to subsections 110-38(4A) and 110-55(9J)]

Application and transitional provisions

1.43               The amendments apply to any loss or outgoing incurred on or after 1 July 2017. [Schedule 1, item 5]

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Travel related to use of residential premises

1.44               This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

1.45               Schedule 1 to this Bill amends the ITAA 1997 to ensure that travel expenditure incurred in gaining or producing assessable income from residential premises is not deductible unless incurred by certain institutional entities or by an entity in the course of carrying on a business.

1.46               Travel expenditure which is prevented from being deducted by the amendments in this Schedule cannot form part of any element of the cost base and reduced cost base of residential premises for CGT purposes.

Human rights implications

1.47               This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

1.48               This Schedule is compatible with human rights as it does not raise any human rights issues.

 



Outline of chapter

2.1                   Schedule 2 to the Bill amends the ITAA 1997 to deny income tax deductions for the decline in value of ‘previously used’ depreciating assets (plant and equipment) an entity uses in gaining or producing assessable income from the use of residential premises for the purposes of residential accommodation.

2.2                   However, the amendments do not affect deductions that arise:

•        in the course of carrying on a business; or

•        for corporate tax entities, superannuation plans (other than self managed superannuation funds), public unit trusts, managed investment trusts, and unit trusts or partnerships, all the members of which are entities listed here.

2.3                   The proportion of the decline in value of an asset that cannot be deducted is recognised as a capital loss (or in certain circumstances a capital gain) when the asset ceases to be used.

2.4                   All legislative references in this Chapter refer to the ITAA 1997 unless otherwise stated.

Context of amendments

Operation of the existing law

2.5                   The ITAA 1997 contains different sets of rules for recognising the cost of different types of capital assets. Deductions for depreciating assets - assets that have a limited effective life and can be reasonably expected to decline in value over their period of use (see section 40-30) - are generally governed by the uniform capital allowance rules in Division 40.

2.6                   Under these rules, entities may deduct the amount of the decline in value of a depreciating asset over the period they hold the asset during an income year (see section 40-25).

2.7                   However, this deduction is only available to the extent that the decline in value of the asset is not attributable to it being used or installed ready for use for a purpose other than a taxable purpose. Taxable purpose include a purpose of producing assessable income (as well as certain purposes relating to mining and environmental protection) (see subsections 40-25(2) and (3)).

2.8                   Depreciating assets means plant and equipment - that is, fixtures and fittings that are associated or used in connection with real property but do not merely function as part of the structure of the property (see section 40-30). However, it does not include certain assets that are dealt with specifically in other provisions of the tax law, such as capital works - see sections 40-45 and 40-50.

2.9                   Generally, when an entity permanently ceases to use a depreciating asset, such as by selling the asset, a balancing adjustment event occurs. This requires the entity to make a balancing adjustment to its taxable income if the final value of the asset (its termination value as defined in section 40-300) is greater than the cost of the asset reduced by the decline in value of the asset calculated under Division 40 (its adjustable value). The balancing adjustment effectively ensures that the tax benefits the entity has received for holding the asset are aligned with the final valuation of the asset at the time use ceases.

Budget announcement

2.10               In the 2017-18 Budget, the Government announced a package of measures designed to reduce pressure on housing affordability. As part of this package, the tax law is to be amended to improve the integrity of the tax system in relation to investment properties.

Summary of new law

2.11               Schedule 2 reduces the amount an entity can deduct for a depreciating asset under Division 40 or Subdivision 328-D to the extent that the asset is a previously used asset used for the purposes of gaining or producing assessable income from the use of residential premises for residential accommodation. If a depreciating asset is used wholly for this purpose, no deduction is available.

2.12               This reduction does not apply to a deduction that arises in the course of carrying on a business or for a corporate tax entity, superannuation plan (that is not a self managed superannuation funds), a public unit trust, a managed investment trust, or a unit trust or a partnership, all of the members of which are entities of a type listed here.

2.13               To the extent that an entity’s deductions for an asset are reduced because of these amendments, the amount of any balancing adjustment is reduced and the proportion of the decline in value of the asset is recognised as a capital loss (or in certain circumstances a capital gain) when the entity ceases to use the asset.

Comparison of key features of new law and current law

New law

Current law

Deducting amounts for depreciating assets for residential premises

Entities may only deduct amounts under Division 40 or Subdivision 328-D for depreciating assets used in gaining or producing assessable income from the use of residential premises for residential accommodation if:

•        the entity is a corporate tax entity - a superannuation plan that is not a self managed superannuation fund, a public unit trust, a managed investment trust, or a unit trust or a partnership, all of the members of which are entities of a type listed here; or

•        the deduction arises in the course of carrying on a business; or

•        the entity:

-       held the asset at the first time it was first used or installed ready for use by any entity (other than as trading stock); and

-       has never used or installed ready for use the asset in a residence of the entity or for a purpose other than a taxable purpose, except for incidental or occasional use; or

•        the entity:

-       first held the asset at a time when it was used or installed ready for use in premises supplied to the entity as new residential premises; and

-       was the first entity to either deduct any amount for the decline in value of the asset or use or install the asset in premises in which any entity resided, other than premises sold within six months of becoming new residential premises; and

-       has never used or installed ready for use the asset in either a residence of the entity or for a purpose other than a taxable purpose, except for occasional use.

Entities may deduct amounts under Division 40 or Subdivision 328-D for depreciating assets used in gaining or producing assessable income from the use of residential premises for residential accommodation.

Balancing adjustments and capital gains

When an entity ceases to use a depreciating asset, a balancing adjustment may need to be made to the entity’s taxable income.

The amount of this adjustment is based on the difference between the actual value of the asset at that time and the value based on deductions previously claimed.

If the entity’s deductions in respect of an asset have been reduced because the entity used the asset for a purpose other than a taxable purpose or because of these amendments , the amount of this adjustment is reduced. Further, CGT event K7 occurs and may result in a capital gain or loss for the entity to account for the proportion of the change in value of the asset attributable to the use of the asset for a purpose other than a taxable purpose or for which deductions are not available because of these amendments.

When an entity ceases to use a depreciating asset, a balancing adjustment may need to be made to the entity’s taxable income.

The amount of this adjustment is based on the difference between the actual value of the asset at that time and the value based on deductions previously claimed.

If the entity’s deductions in respect of an asset have been reduced because the entity used the asset for a purpose other than a taxable purpose, the amount of this adjustment is reduced. Further, CGT event K7 occurs and may result in a capital gain or loss for the entity to account for the proportion of the change in value of the asset attributable to the use of the asset for a purpose other than a taxable purpose.

Detailed explanation of new law

Denying deductions for depreciating assets used in residential premises

2.14               Schedule 2 amends Division 40 and Subdivision 328-D to reduce the amount that can be deducted by an entity for the decline in value of a depreciating asset (i.e. plant and equipment) for an income year to the extent that the asset:

•        is used or installed for the purposes of gaining or producing assessable income from the use of residential premises for the purposes of providing residential accommodation; and

•        was ‘previously used’.

[Schedule 2, item 4, subsections 40-27(1), (2)]

2.15               This reduction does not apply if the entity is:

•        a corporate tax entity;

•        a superannuation plan that is not a self managed superannuation fund;

•        a public unit trust within the meaning of section 102P of the ITAA 1936;

•        a managed investment trust; or

•        a partnership or unit trust if all of the members of the partnership or unit trust are entities of a type listed here (including under this item).

[Schedule 2, item 4, subsection 40-27(3)]

2.16               The reduction also does not apply if the asset is used in carrying on a business. [Schedule 2, item 4, paragraph 40-27(2)(b)]

2.17               The effect of these amendments is that certain entities can only deduct the decline in value of depreciating assets used in gaining or producing assessable income from residential premises if the asset is acquired new for that purpose. Broadly, the amendments ensure that entities cannot claim excessive deductions relating to rental properties by ‘refreshing’ the value or effective life of previously used depreciating assets used or installed in those properties.

Gaining or producing assessable income from residential premises

2.18               The reduction only applies to the asset if it is used for the purpose of gaining or producing assessable income from the use of residential premises to provide residential accommodation. [Schedule 2, item 4, paragraph 40-27(2)(a)]

2.19               The term ‘residential premises’ is defined in the ITAA 1997 as having the same meaning as in the GST Act. The GST Act provides that ‘residential premises’ means land or a building that:

•        is occupied as a residence or for residential accommodation; or

•        is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

2.20               The definition specifies that land or a building that meets these requirements is residential premises regardless of the term of the occupation or intended occupation. It also specifies that ‘residential premises’ includes a floating home.

2.21               Due to its use in the GST law, this defined term is already the subject of considerable judicial scrutiny and interpretative guidance. Broadly, land or a building is residential premises if it provides, at a minimum, shelter and basic living facilities and is either occupied by a person (the first limb) or designed for occupation (the second limb).

2.22               The courts have found that for both limbs, whether premises are capable of being occupied as a residence or for residential accommodation is to be ascertained by an objective consideration of the character of the property. The purpose for which an entity may hold the property is not relevant.

2.23               Residential premises need only be suitable for occupation, rather than long-term occupation - they include, for example, a hotel room that may only be suitable for short term accommodation. However, it does not include things that people may occupy that are not land or a building, such as a caravan. It also does not include premises that may provide shelter and basic living facilities where it is clear from the design and structure of the premises that this is incidental to the character of the premises.

2.24               For example, while hospitals often have facilities to permit extended occupation by patients, this does not mean that a hospital is occupied or intended for occupation as a residence or as residential accommodation. Similarly, if premises are designed and constructed as a shop, even if they provide shelter and basic living facilities, they generally do not have the character of residential accommodation.

2.25               Additionally, for the reduction to apply, the use of the asset must be related to the use of residential premises to provide residential accommodation. The fact that a tenant may use residential premises to some extent other than as residential accommodation (for example, as a home office) will not generally affect the character of the use of the asset by the landlord. Granting entitlement to use residential premises under a tenancy agreement or similar arrangement is the provision of residential accommodation (whether or not the tenant uses it wholly, partly or at all for that purpose).

2.26               However, if a building is specifically designed, built or modified so that part of the building is suitable for only commercial purposes (such as a doctor’s surgery) and part is for residential accommodation then the income from the commercial part will not relate to the use of the premises as residential accommodation (in addition, the commercial part of the building may be separate premises that are not residential premises). Any such distinction needs to be reflected in the physical characteristics of the premises - merely fitting out a room as an office does not change its character.

2.27               Deductions continue to be available for assets that are used for other taxable purposes unrelated to gaining or producing assessable income from residential premises, for example, exploration and prospecting or gaining income from employment.

2.28               This is the case even if an asset may be used in residential premises in the course of this other purpose. For example, a home cleaning service may use depreciating assets in residential premises, but its income does not come from the use of the premises but from its cleaning activities.

2.29               Even where assets are used in income generating activities in residential premises, the deductions continue to be available for the assets if these activities are unrelated to the use of the premises to provide residential accommodation. For example, an entity continues to be entitled to deduct the decline in value of solar panels, or a horse stable, that forms part of the premises to the extent the solar panels are used for the purpose of generating income from the sale of electricity or the stable is used to generate income from agistment fees, separate to the provision of residential accommodation.

Previously used

2.30               The reduction also only applies if the asset has been ‘previously used’.

2.31               An asset is ‘previously used’ for an entity if:

•        the entity is not the first entity that used the asset or installed the asset ready for use (within the meaning of Division 40) other than as trading stock;

•        the asset is used or installed ready for use during any income year in premises that are, at that time, a residence of the entity; or

•        the asset is used or installed ready for use during any income year for a purpose that is not a taxable purpose, other than incidental or occasional use.

[Schedule 2, item 4, paragraphs 40-27(2)(c) and (d)]

2.32               An asset will be previously used if there has been any prior use of the asset by another entity, other than use as trading stock. This includes situations in which another entity used an asset both as trading stock and for some other purpose.

2.33               For example, if a developer installs an asset in premises it intends to sell, this will generally constitute use as trading stock. If the developer rents out the property containing the asset while it seeks to find a purchaser, the property and hence the asset are used, at least in part, for a purpose other than as trading stock and the asset would be previously used in the hands of any subsequent purchaser (subject to the exception outlined below for assets used or installed in certain new residential premises - see paragraphs 2.43 to 2.53).

2.34               An asset will also be previously used for an entity if it has been used or installed ready for use in residential premises that are at that time a residence of the entity.

2.35               For example, if an individual acquires a new apartment and uses it as their residence in an income year before renting it out, any assets used in the premises would generally have been used wholly for personal use or enjoyment during that income year. The individual would not subsequently be able to access any deductions for the decline in value of those assets while it is being rented out.

2.36               In this context, residence is used with its ordinary meaning, of a person’s dwelling, similar to the basic concept of main residence in Subdivision 118-B. However, unlike ‘main residence’, a person may have more than one residence if they commonly occupy, or have available for the purpose of their occupation, two or more residential premises. The mere fact a person does not reside in premises at a particular time does not mean that the premises are not a residence of the person at that time.

2.37               Whether residential premises are a person’s residence at a particular time is a question of fact requiring an examination of the person’s connection with and use of the premises. A dwelling an entity owns that is currently being rented out to a tenant is not generally a residence of the entity at that time, even if it had previously been a residence of the entity. On the other hand, a holiday home that is principally held available and ready for the use of an entity may well be the entity’s residence at that time.

2.38               An asset is also previously used for an entity if it is used or installed ready for use for a purpose that is not a taxable purpose unless the use for that purpose is occasional.

2.39               Use or installation ready for use and a purpose that is not a taxable purpose are existing concepts in Division 40 and are used in these amendments with the same meaning. Use for a purpose generally includes use that is incidental to a purpose. Use is incidental if it is minor in the context of the overall use and arises in connection with another non-incidental use - for example staying at the property for one evening while carrying out maintenance activities would generally be incidental use.

2.40               In this context, use for a purpose is occasional where that use is infrequent, minor and irregular. Use of assets in different ways for the same purpose must be considered together in determining if use for that purpose is occasional.

2.41               For example, spending a weekend in a holiday home or allowing relatives to stay for one weekend in the holiday home free of charge that is usually used for rent would generally be occasional use.

2.42               The requirement that assets must have been previously used in one of the three ways outlined in paragraph 2.31 ensures that the reduction is targeted to situations in which there is a particular risk of the overvaluation of previously used depreciating assets. When assets are purchased new, there is generally little ambiguity about their value. If they are purchased after being used by another entity or applied to a taxable purpose after private use, their value is less clear and there is more scope for the entity holding the asset to adopt a ‘refreshed’ or unrealistic valuation or extended effective life that increases the amount deductible.

Example 2.1 : ‘Previously used’ assets

Craig has acquired an apartment that he intends to offer for rent. This apartment is three years old and has been used as a residence for most of this time.

Craig acquires a number of depreciating assets together with the apartment, including carpet that was installed by the previous owner. He also acquires a number of depreciating assets to install in the apartment immediately prior to renting it out, including:

•        curtains, which he purchases new from Retailer Co; and

•        a washing machine, that he purchases used from a friend, Jo.

Craig also purchases a new fridge, but rather than place this in the apartment, he uses it to replace his personal fridge, that he acquired a number of years ago for use in his residence. He instead places his old fridge in the new apartment.

The amendments do not permit Craig to deduct an amount under Division 40 for the decline in value of the carpet, washing machine or fridge for their use in generating assessable income from the use of his apartment as a rental property as both are previously used. The carpet and washing machine are previously used as the previous owner or Jo rather than Craig first used or installed the assets (other than as trading stock). The fridge is previously used as while Craig first used or installed the fridge, he has used it in premises that were his residence at that time.

The amendments do not affect Craig’s entitlement to deduct an amount under Division 40 for the decline in value of the curtains. They are not ‘previously used’ under either limb of the definition.

Assets acquired in a supply of new residential premises

2.43               A qualification applies to the requirement that the asset must not have been first used or installed ready for use (other than as trading stock) by another entity.

2.44               Often developers will acquire and install various depreciating assets in the course of constructing or substantially renovating residential premises. In some cases the property may already have an owner, but in others, the developer or another entity may hold the land and it will not be sold until after construction and installation.

2.45               In these situations, in which a new asset is installed in new and unoccupied residential premises, the value of the asset has not yet declined and there is no risk of the valuation of the asset for the purposes of depreciation being refreshed.

2.46               Accordingly, even if an entity did not hold an asset when it was first used or installed ready for use, the amendments do not apply to an asset held by that entity that was installed in premises supplied as new residential premises (including substantially renovated premises) if:

•        no entity has previously been entitled to any deduction for the decline in value of the asset; and

•        either:

-                  no one resided in residential premises in which the asset has been used before it was held by the current owner; or

-                  the asset was used or installed in new residential premises (or related real property) that were supplied to the entity within six months of the premises becoming new residential premises, and the asset had not been used or installed in a residence before that use or installation.

[Schedule 2, item 4, subsections 40-27(4) and 40-27(5)]

2.47               Combined, these requirements only allow access to this exception in circumstances where the asset is substantially new - no entity has been entitled to any deduction for the decline in value of the asset and it has not been used in any person’s residence for a substantial period of time. Allowing entities to access the exception for assets only used or installed in new residential premises supplied within six months of the premises becoming new residential premises ensures that entities acquiring tenanted apartments are not disadvantaged. In such cases there is limited time for the assets to decline in value through use or age and the integrity risks are relatively low.

2.48               The amendments also do not apply to a depreciating asset used or installed in property that is not residential premises, but is supplied as part of a supply of new residential premises, if no entity has previously been entitled to any deduction for the decline in value of the asset. This is the case even if an entity is not the entity that held the asset when it was first used or installed ready for use (other than as trading stock ) . [Schedule 2, item 4, subparagraph 40-27(4)(c)(ii)]

2.49               This ensures that the amendments apply appropriately when an entity acquires assets provided in connection with residential premises, such as assets installed in the common property of apartment complexes. In this situation, as the asset is not used in residential premises, the question of whether any entity has resided in the premises does not arise. As a result, the entity may deduct amounts for the decline in value of such assets reflecting the extent of their ownership of the asset unless:

•        a previous owner of the same unit or apartment deducted amounts related to depreciation of the asset; or

•        the asset has been previously used or installed ready for use in residential premises that were being used as a residence.

2.50               It should be noted that this exception does not prevent the amendments applying to an entity in relation to an asset if the asset is ever used or installed ready for use in a residence of the entity or used, by the entity, for a non-taxable purpose - see paragraphs 2.30 to 2.42.

2.51               The term ‘new residential premises’ has, for the purposes of the amendments, the same meaning as in the GST law. Section 40-75 of the GST Act defines new residential premises as, broadly, premises that have not been previously sold or subject to a long-term lease as residential premises, or have been subject to a substantial renovation or replacement of existing premises.

2.52               ‘Substantial renovations’ is also defined in the GST law as, broadly, renovations in which substantially all of a building is removed and replaced (though it does not always need to involve structural alterations). For example, the installation of a new kitchen and bathroom in an existing home is not, on its own, ‘substantial renovations’.

2.53               Interpretative guidance has been issued in relation to the meaning of ‘new residential premises’, ‘substantial renovations’ and other related concepts - see for example GST Ruling GSTR 2003/3 ‘Goods and services tax: when is a sale of real property a sale of new residential premises?’.

Example 2.2 : Assets installed in new residential premises

Hannah purchases two apartments off the plan from Developer Co. The apartments are supplied three months after completion - one is already tenanted and the other is vacant.

In addition to the construction of the apartments, Developer Co has fitted out the apartments, installing ready for use depreciating assets including curtains and furniture prior to settlement and the transfer of the title to Hannah. Developer Co has also fitted out the shared areas of the complex in which the apartment is located, installing ready for use a range of deprecating assets that are the joint property of the apartment owners.

All of these assets are new at the time of installation. As these assets were first installed by Developer Co, not Hannah, they are previously used and a deduction would not be available under the general rules established by these amendments.

However, a deduction is still available to Hannah for the depreciating assets (including Hannah’s share of the assets installed in the shared areas of the apartment) for the period she holds the assets as:

•        the assets have been installed ready for use in premises that were supplied to Hannah as new residential premises or in other real property supplied as part of the supply of residential premises;

•        Developer Co has not claimed any deduction for the decline in value of the assets (and nor has any other entity); and

•        either (excluding assets installed in the common property):

-                  for assets in the first apartment, the assets were only used or installed in the apartment, which was supplied to Hannah as new residential premises within six months of the apartment first becoming residential premises; or

-                  for assets in the second apartment, no entity has resided in residential premises in which the assets have been installed before Hannah held the assets.

Exception for certain entities

2.54               The reduction in the amount that can be deducted also does not apply to deductions incurred by an entity for an income year in which the entity is:

•        a corporate tax entity;

•        a superannuation plan that is not a self managed superannuation fund;

•        a public unit trust (within the meaning of section 102P of the ITAA 1936);

•        a managed investment trust; or

•        a partnership or unit trust if all of the members of the partnership or trust are entities included on this list (including this item).

[Schedule 2, item 4, subsection 40-27(3)]

2.55               As discussed in paragraph 2.17, these amendments are intended to address incentives to obtain excessive deductions. These incentives primarily exist for individuals, who are most likely to be in a position to apply such deductions to reduce tax payable on income from employment and other unrelated activities and receive favourable tax treatment for capital gains. The incentives also exist for entities that individuals can control and which either can pass income (including capital gains) or deductions through to individuals or receive similar tax concessions.

2.56               The same incentives do not arise for corporate tax entities, superannuation plans (that are not self managed superannuation funds), public unit trusts, managed investment trusts and unit trusts or partnerships that are ultimately held by these entities. They are either outside the control of an individual, do not receive tax concessions or both. Given this, the amendments do not apply to these entities.

2.57               Corporate tax entity is defined in section 960-115. It includes entities that are companies, corporate limited partnerships, corporate unit trusts and public trading trusts at the relevant time. It does not include a trust merely because the trustee of the trust is a corporate tax entity.

2.58               ‘Superannuation plan’ and ‘self managed superannuation fund’ are similarly defined in subsection 995-1(1).

2.59               Public unit trust is defined in section 102P of the ITAA 1936. Broadly, a unit trust will be a public unit trust if the units in the trust are listed for quotation in the official list of a stock exchange, offered to the public in a public offer, held by more than 50 people or where a tax exempt investment vehicle, such as a foreign superannuation fund, is a substantial unitholder (see subsections 102P(1) and (2) of the ITAA 1936). However, a trust will not be a public unit trust if 20 or fewer people hold beneficial interests in 75 per cent or more of the income or property of the trust, or if other integrity rules are not satisfied (see section 102P of the ITAA 1936).

2.60               Trusts are also excluded if they are managed investment trusts within the meaning of section 275-10. As part of its Housing Affordability package, the Government announced amendments to the tax law to enable managed investment trusts to invest in dwellings used to provide affordable housing and for investors to benefit, for example, from reduced rates of withholding tax. Excluding managed investment trusts removes any doubt that such trusts that comply with the widely held rules for managed investment trusts and engage in institutional investment in affordable housing are permitted depreciation deductions.

2.61               In all cases these requirements ensure that trusts must be widely held and genuinely free from the control of any one member to benefit from this exclusion.

2.62               The final exclusion is for unit trusts or partnerships if all of the members of the entity (i.e. the unit holders or partners) are listed as excluded entities. This exclusion ensures that where all the benefit of deductions goes to excluded entities, the deductions continue to be available. This includes situations where the excluded entities receive the benefit of deductions through a chain of unit trusts or partnerships.

2.63               For example, a unit trust that owns residential premises is entitled to deduct the decline in value of those assets for an income year if all of the units in the trust are held by another unit trust and all of the units in that unit trust are owned by excluded entities, such as companies.

Carrying on a business

2.64               Similarly, deductions also continue to be available to the extent that an asset is used in the course of carrying on a business, even if that business is carried on for the purpose of gaining or producing income from the use of residential premises for residential accommodation. For example, an entity operating a hotel continues to be entitled to deduct the decline in value of the depreciating assets used for the purposes of the business in the hotel premises. [Schedule 2, item 4, paragraph 40-27(2)(b)]

2.65               Whether a business is being carried on depends on the facts of the particular case. For example, some indicators that the courts have considered relevant are whether the activity:

•        has a significant commercial purpose or character;

•        is repeated and regular; and

•        is better characterised as a hobby or recreational pastime.

Application to small business entities

2.66               Small business entities may choose to calculate their deductions for the decline in value of depreciating assets they hold using Subdivision 328-D rather than Division 40.

2.67               These amendments have limited application to the assets of small business entities. Small business entities must, among other things, carry on a business. The assets used in carrying on their business are excluded - see paragraphs 2.64 to 2.65 above.

2.68               However, while an entity must be a small business entity to apply Subdivision 328-D, the application of the Subdivision is not limited to assets used in carrying on the business. Small business entities that choose to apply Subdivision 328-D generally must apply it in respect of all depreciating assets they hold, even those that are not used in carrying on a business - see section 328-175.

2.69               This means that while it is unusual, it is possible for depreciating assets to which these amendments would generally apply - assets used in gaining or producing assessable income from the use of residential premises to provide residential accommodation other than in the course of carrying on a business - to be subject to the small business depreciation rules in Subdivision 328-D.

2.70               To address this, the amendments prevent an entity deducting amounts under Subdivision 328-D for an asset to the extent that the entity could not deduct amounts under section 40-25 for that asset because of these amendments. [Schedule 2, item 11, subsection 328-175(9A)]

Application to low value pools

2.71               Entities may choose to allocate certain assets (generally assets with a value of less than $1,000 in the year in which the asset is first used by the entity for a taxable purpose) to a low value pool for an income year (see section 40-425).

2.72               The decline in value of assets placed in a low value pool is calculated on a fixed basis for the whole pool - see section 40-440. The amount that can be deducted is not reduced for the use of the assets for a purpose that is not a taxable purpose (see subsection 40-25(5)).

2.73               Instead, an entity must make a reasonable estimate of the percentage of its total use of an asset that will be used for a taxable purpose when the asset is first allocated to a low value pool. Only this percentage of the value of the asset will be placed in the pool - see section 40-440.

2.74               The amendments provide that the amount an entity can deduct for assets is similarly not specifically reduced as described in paragraph 2.14 above. However, to the extent an asset is estimated to be put to a use for which the amendments prevent a deduction from being available, this use is treated as being use for a purpose that is not a taxable purpose. [Schedule 2, item 7, subsection 40-435(2)]

2.75               This reduces the taxable purpose proportion for such assets and hence the amount that is included in the low value pool to be deducted. It results in an equivalent outcome for these assets that is consistent with the operation of the low value pool rules.

Subsequent implications of denied deductions

2.76               Schedule 2 also amends the rules in the ITAA 1997 to modify the consequences if an entity sells or otherwise ceases to use an asset.

2.77               As a result of the amendments:

•        any balancing adjustment the entity must make is adjusted to account for any reductions in the amount the entity can deduct; and

•        to the extent that the amendments prevent an entity deducting the decline in value of the asset, the change in value of the asset is recognised as a capital loss (or gain if the asset has appreciated rather than declined in value).

[Schedule 2, items 5, 8 and 9, section 40-291, paragraph 104-235(1)(b) and paragraph (a) of the definition of sum of reductions in subsection 104-240(1)]

Balancing adjustments

2.78               First, when a depreciating asset is sold or permanently ceases being used, if the termination value of the asset (the value of the asset when it was sold or otherwise ceased to be used) differs from its adjusted value (its cost less its decline in value), the entity must make a balancing adjustment. The entity makes this adjustment by including the amount of the difference in its assessable income or deducting the amount.

2.79               The balancing adjustment ensures that the entity is only able to deduct the amount by which the value of the asset has actually declined over the period it has been used by the entity (and brings to account any gain if the asset has appreciated).

2.80               The amount of the balancing adjustment is normally reduced to the extent an entity has not been able to deduct amounts for the decline in value of an asset, for example because of private use.

2.81               The amendments reduce the amount of the balancing adjustment to account for the proportion of the decline in value of the asset that the entity has not been entitled to deduct because of these amendments. [Schedule 2, item 5, section 40-291]

2.82               This is consistent with the treatment of balancing adjustments for assets for which an entity has not been able to deduct amounts because the asset has been used for a purpose other than a taxable purpose. It ensures that, when an entity ceases to use an asset, the total amount they are entitled to deduct for the decline in value of the asset (or required to pay if the asset has appreciated) is consistent with the final value of the asset.

CGT event K7

2.83               Second, if a balancing adjustment event occurs in relation to a depreciating asset that has not been wholly used for a taxable purpose, CGT event K7 will also occur, resulting in a capital gain or loss for that entity.

2.84               The amount of this capital gain or loss is broadly equal to the proportion of the decline in value of the asset (the difference between the termination value of the asset and its adjusted value) that the entity has not been able to deduct - see sections 104-235, 104-240 and 104-245. For example, if an entity sells a depreciating asset it has used for wholly private purposes, CGT event K7 results in the entity having a capital loss equal to the difference between the cost of the asset and its sale price.

2.85               Unlike most other CGT events, a gain or loss from CGT event K7 is not disregarded if it happens in relation to a depreciating asset an entity holds.

2.86               The amendments provide that CGT event K7 also occurs if a balancing adjustment event occurs for a depreciating asset where some or all of the decline in value has not been deductible because of these amendments. [Schedule 2, items 8 and 9, paragraph 104-235(1)(b) and paragraph (a) of the definition of sum of reductions in subsection 104-240(1)]

2.87               The amendments also change the amount of the capital gain or loss that occurs as a result of CGT event K7 so that it includes the amount of the decline in value of the asset that an entity has not been able to deduct due to these amendments. [Schedule 2, items 8 and 9, paragraph 104-235(1)(b) and paragraph (a) of the definition of sum of reductions in subsection 104-240(1)]

Example 2.3 : Resale of a property including depreciating assets

Gunther purchases a two year old property for $500,000 on 10 July 2017. Part of the purchase price relates to six previously used depreciating assets that are included with the residential premises. The assets are worth $1,000, $3,000, $4,000, $6,000, $7,000 and $9,000, respectively, for a total of $30,000.

Gunther rents out the property. He is unable to deduct the decline in value of any of the depreciating assets he acquired with the property as they are previously used. On 10 May 2021, Gunther sells the property, including these depreciating assets, for $700,000. At the time of sale, the six depreciating assets have a value of $0, $1,000, $3,000, $4,000, $5,000 and $7,000, respectively, so in total $20,000 of the sale price relates to the depreciating assets.

The sale of the property is a balancing adjustment event.

As Gunther has not been able to deduct any amount of the decline in value of the depreciating assets, Gunther does not need to make any adjustment to his assessable income for the income year.

However, as a balancing adjustment event occurs in relation to depreciating assets for which the available deduction has been reduced by these amendments, CGT event K7 occurs.

As a result of CGT event K7 occurring, Gunther has a capital loss equal to the proportion of the decline in value of the assets that Gunther has not been able to deduct either because of these amendments or because the amount deductible was reduced under section 40-25.

In this case, the difference between the total termination value of the assets ($20,000) and the total cost of the assets ($30,000) is $10,000 and all deductions for the decline in value have been denied (so the proportion of total deductions denied is 10,000/10,000 or 1). Therefore the amount of Gunther’s total capital loss because of the disposal of all of the assets is $10,000 ((30,000 - 20,000)*1 = $10,000).

Consequential amendments

2.88               Schedule 2 also makes a number of minor consequential amendments to the ITAA 1997 to reflect the principal amendments, including updating guidance material. [Schedule 2, items 1 to 3, 6, 10 and 12, the item headed capital allowances in the table in section 12-5, subsection 25-47(4A), the note to subsection 40-25(2), subsection 40-435(1), paragraph 250-290(2)(c) and the definition of new residential premises in subsection 995-1(1)]

Application and transitional provisions

2.89               Schedule 2 to this Bill commences on the first day of the next quarter following the day of Royal Assent. [Clause 2]

2.90               The amendments apply to income years starting on or after 1 July 2017 to assets acquired at or after the time the measure was publicly announced (7.30 pm on 9 May 2017) unless the asset was acquired under a contract entered into before this time. [Schedule 2, subitem 13(1)]

2.91               The amendments also apply to assets acquired before this time if the assets were first used or installed ready for use by an entity during or prior to the income year in which this measure was publicly announced (generally the 2016-17 income year), but the asset was not used at all for a taxable purpose in that income year. [Schedule 2, subitem 13(2)]

2.92               These application rules are intended to limit the effect of the measure to assets being newly used after Budget night for purposes that permit deductions for the decline in value of the asset, whether this is because the asset is newly acquired or newly applied for a purpose that allows its decline in value to be deducted.

2.93               The application to assets used for wholly non-taxable purposes in the income year in which this measure was announced avoids creating unintended incentives for:

•        individuals to move personal assets into rental properties; and

•        the value of these assets or effective life of these assets to not properly account for the decline in value of the assets during the period in which this decline was not deductible.

2.94               The retrospective application to assets newly applied for use in residential investment properties after the measure was announced is consistent with the Budget announcement by the Government. This is necessary to ensure taxpayers cannot avoid the operation of the amendments by acquiring new assets or applying existing assets between the time of announcement and application in order to take advantage of the limitations in the existing law. Any adverse impact is expected to be minor, given the retrospective application was included in the Budget announcement and has been widely publicised.

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Limiting depreciation deductions for assets in residential premises

2.95               This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

2.96               Schedule 2 to the Bill amends the ITAA 1997 to deny income tax deductions for the decline in value of ‘previously used’ depreciating assets (plant and equipment) used in gaining or producing assessable income from the use of residential premises for the purposes of residential accommodation.

2.97               However, the amendments do not affect deductions that arise:

•        in the course of carrying on a business; or

•        for corporate tax entities, superannuation plans other than self managed superannuation funds, managed investment trusts, public unit trusts and unit trusts or partnerships if each member of the unit trust or partnership is one of these entities.

2.98               The proportion of the decline in value of assets that cannot be deducted is recognised as a capital gain or loss when the asset ceases to be used.

Human rights implications

2.99               This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

2.100           This Schedule is compatible with human rights as it does not raise any human rights issues.



Chapter 3                                         

Vacancy fees for foreign acquisitions of residential land

Outline of chapter

3.1                   This Chapter explains the amendments to the Foreign Acquisitions and Takeovers Act 1975 (FATA) contained in Schedule 3 to the Bill. Schedule 3 implements an annual vacancy fee on foreign owners of residential real estate where property is not occupied or genuinely available on the rental market for at least six months in a 12 month period.

Context of amendments

3.2                   Under Australia’s foreign investment framework, foreign persons generally need to apply for foreign investment approval before purchasing residential real estate in Australia.

3.3                   The Government’s policy is to channel foreign investment into new dwellings as this creates additional jobs in the construction industry and helps support economic growth. It can also increase government revenues, in the form of stamp duties and other taxes, and from the overall higher economic growth that flows from additional investment.

3.4                   Foreign investment applications are therefore generally considered in light of the overarching principle that the proposed investment should increase Australia’s housing stock (by creating at least one new additional dwelling).

3.5                   The vacancy fee builds on this overarching principle which seeks to increase the number of houses available for Australians to live in. The fee provides a financial incentive for the foreign owner to make their property available on the rental market.

3.6                   The imposition of an annual vacancy fee is expected to result in greater utilisation of foreign owned residential properties. Reporting and notification requirements are also expected to provide greater visibility of vacancy rates for foreign owned residential properties.

3.7                   The vacancy fee is part of the Government’s comprehensive housing affordability plan, designed to improve outcomes across the housing spectrum, announced at the 2017-18 Budget.

3.8                   To address housing affordability and ensure that available housing is either occupied or on the rental market, the annual vacancy fee will be levied on foreign owners of residential properties where the property is not occupied or genuinely available on the rental market for at least 183 days in a 12 month period.

3.9                   This amendment is expected to increase the number of homes available to Australians wishing to rent. Where a foreign-owned residential property is not occupied or available to rent for at least 183 days in a 12 month period, a fee will be levied on the foreign owner equivalent to the foreign investment application fee which was paid at the time of application to the Foreign Investment Review Board for approval.

Summary of new law

3.10               Foreign owners of residential real estate will be liable to pay a vacancy fee where a residential property is not occupied or genuinely available on the rental market for at least six months in a 12 month period.

3.11               If the owner or a relative of theirs occupies their dwelling for 183 days or more in a 12 month period, they will not be liable to pay the vacancy fee.

3.12               If the dwelling is subject to lease/s or licence/s with a minimum duration of 30 days which total 183 days in a 12 month period, then the owner will also not be liable to pay the vacancy fee.

3.13               Similarly, if the dwelling is made genuinely available on the rental market, with minimum durations of 30 days, for a total of 183 days in a 12 month period, the owner will not be liable to pay the vacancy fee.

3.14               An owner will be liable to pay a vacancy fee if the dwelling is not residentially occupied, or genuinely available to be occupied, for at least 183 days in a 12 month period (referred to as a vacancy year).

3.15               A vacancy year commences on the owner’s initial right to occupy the dwelling (the occupation day).

3.16               The foreign person is required to give a vacancy fee return to the Commissioner of Taxation (Commissioner) after the end of each year during which the person may be liable for a vacancy fee for a dwelling.

3.17               The Commissioner will issue a notice to the foreign person if a vacancy fee is payable, explaining why the liability has arisen. Schedule 3 amends the FATA to provide the Treasurer with powers to recover unpaid amounts. 

3.18               The Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017 amends the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (the Fees Act) to set the level of vacancy fee payable. 

Comparison of key features of new law and current law

New law

Current law

A vacancy fees is payable where a residential property has been occupied for fewer than 183 days in the relevant 12 month period (vacancy year).

No equivalent in the current law.

A foreign person must give the Commissioner of Taxation a ‘vacancy fee return’ in the approved form to advise of the number of days a residential property was occupied in a 12 month period (vacancy year).

No equivalent in the current law.

The Treasurer has the power to recover a vacancy fee if it remains unpaid, as a debt due to the Commonwealth in a court of a competent jurisdiction, or by notifiable instrument which declares a charge over the residential property.

Section 104 of the FATA enables the Treasurer to create a charge over land where a court finds that a person has contravened the FATA such that civil penalties under Division 3 of Part 5 of the FATA apply.

Section 113 provides that the Treasurer may recover unpaid fees that relate to exemption certificates given to developers under section 57 of the FATA as debts due to the Commonwealth in a court of a competent jurisdiction.

A civil penalty may apply where a foreign person fails to submit a ‘vacancy fee return’ or keep the required records.

Subdivision C of Division 3 of Part 5 provides for civil penalties in relation to residential land including where a foreign person fails to notify the Treasurer of an action or does not meet the conditions included in an approval letter.

Detailed explanation of new law

3.19               Schedule 3 to the Bill amends the FATA to insert a new Part, Part 6A into the FATA. [Schedule 3, item 7, Part 6A of the FATA]

3.20               New Part 6A establishes that a fee, a ‘vacancy fee’ which is a new defined term, is payable by foreign persons if a residential dwelling they hold an interest in is not occupied for at least 183 days in a 12 month period. [Schedule 3, item 1, section 4 of the FATA]

3.21               The Commissioner has the general administration of the vacancy fee, and relevant provisions in the FATA. [Schedule 3, item 7, subsection 115B(2) of the FATA]

3.22               A foreign person with an interest in a residential dwelling is required to give the Commissioner a vacancy fee return in the approved form, annually. The date for providing the vacancy fee return is determined by reference to the occupation day of the relevant dwelling on the land. [Schedule 3, item 7, section 115D of the FATA]

3.23               The occupation day will usually align with the first day the foreign person has the right to occupy the dwelling. This will typically be a settlement day, but could also be the day on which a fitness for occupancy certificate is provided in respect of the property. [Schedule 3, item 1, section 4 of the FATA]

Example 3.1  

Benji purchased an established residential dwelling in Chatswood, Sydney via auction on August 12 th . He will be entitled to occupy the dwelling on the date stipulated in the contract of sale which, in this case, is the 23 rd  September or six weeks after the auction date. Benji’s first occupation day is the 23 rd September 2017.

3.24               For a new dwelling or one which has undergone significant renovations ore redevelopment, a fitness for occupancy certificate will generally be provided to a developer or builder once the new dwelling or renovation meets the relevant standards for occupation in the State or Territory of its construction.

Who is in scope?

3.25               The amendments included in Schedule 3 to the Bill apply to a person who is a foreign person, has acquired an interest in residential land on which one or more dwellings is located, or will be located, and the acquisition is a notifiable action or it would have been a notifiable action had an exemption certificate not been in place. [Schedule 1, item 7, subsection 115B(1) of the FATA]

3.26               The note to subsection 115B(1) refers the reader to the existing regulation power at section 37 of the FATA which provides that regulations may be made which prescribe certain circumstances where these provisions may not apply to a foreign person or a dwelling. [Schedule 3, item 7, Note to subsection115B(1) of the FATA]

When is the vacancy fee payable?

3.27               Where a residential dwelling owned by a foreign person is not occupied for at least 183 days in a 12 month period, the foreign person will be liable to pay a fee. [Schedule 3, item 7, subsection 115C of the FATA]

3.28               A new term, vacancy fee, is inserted into the FATA to refer to this fee. The amount of the vacancy fee is set out in the Fees Act. [Schedule 3, item 1, section 4 of the FATA]

3.29               In determining whether a dwelling has been occupied for a period of 183 days, a new definition, ‘vacancy year’ is inserted into the FATA to define the 12 month reference period. [Schedule 3, item 1, section 4 of the FATA]

3.30               The vacancy year, is unique to each foreign person and each dwelling on the land. It is determined based on the first and each successive period of 12 months since the occupation day for the specific dwelling where the foreign person has held an interest in the land. [Schedule 3, item 7, subsection 115C(2) of the FATA]

3.31               To establish whether a dwelling is occupied, a new definition, ‘residentially occupied’ is inserted into the FATA. [Schedule 3, item 1, section 4 of the FATA] .

3.32               A dwelling will be considered occupied if:

•        The property owner or the  owner’s relative/s genuinely occupy the dwelling as a residence;

•        The dwelling is occupied under lease/s or licence/s covering a period/s of 30 days or more; or

•        The dwelling is made genuinely available as a residence, for example as a rental property for 30 days or more.

[Schedule 3, item 7, subsection 115C(5) of the FATA]

3.33               If a dwelling is covered by lease/s or licence/s which extend across a vacancy year as defined in the FATA, the dwelling is considered to be residentially occupied under lease/s or licence/s for a total of 183 days or more in each vacancy year where each lease or licence endures for a minimum of 30 days. [Schedule 3, item 7, subsection 115C(6) of the FATA]

3.34               Example 3.2 below illustrates how the vacancy fee applies to foreign persons who own a dwelling and either use it themselves, or enable a relative to use it, as a residence for a total of 183 days or more in each vacancy year.

Example 3.2  

Benji owns a house in Sydney. He spends most of his time in Denmark due to work commitments and is unable to be in the house for 183 days or more in a vacancy year.

However, Benji’s brother Jonte resides mainly in Benji’s Sydney residence for two years and, as a result, Benji meets the test of having his dwelling residentially occupied for at least 183 days in the relevant vacancy years. Benji advises the Commissioner in his annual vacancy fee return that he has occupied the dwelling for more than 183 days in the vacancy year.

Example 3.3  

Nick purchases a new apartment on the Gold Coast. He intends to spend significant time there as he has business interests on the Gold Coast and his family enjoy coming to Australia to holiday from Hong Kong.

Nick finds that his work in Hong Kong takes up more and more time so he decides to place his apartment on Airbnb. He feels that this will provide the flexibility he requires to be able to use the property through the year as a holiday residence as the apartment is rented via Airbnb for generally less than one week at a time. Nick ends up spending only two weeks in Australia in the relevant vacancy year.

Because Nick’s apartment is not genuinely available as a rental property for a continuous period of 30 days or more, it will not be considered to be residentially occupied for the purposes of the vacancy fee and Nick will be liable to pay the vacancy fee for this apartment.

3.35               Example 3.3 illustrates a difference in how the property is made available by the foreign person who owns it and, as a result, where the vacancy fee will be applied. In the example, the owner chooses to utilise a web-based short term stay site and only makes the property available for periods of less than 30 days in order to maintain flexibility should the owner wish to use the property during the vacancy year. This type of rental does not make the property genuinely available for periods of 30 days or more. As a result, the foreign owner would be liable to pay the vacancy fee even if the residence was rented as a short stay apartment, for example, a weekend rental, via Airbnb, for more than 183 days or more in the vacancy year.

3.36               A dwelling will be considered genuinely available for occupation as a residence (with a term of 30 days or more) if the dwelling is:

•        made available on the rental market;

•        advertised publicly; and

•        available at a market rent.

Example 3.4  

Max and Christine purchase a house in Perth which they use as a holiday home when visiting Australia from London. They understand that if their house is not genuinely available for occupation as a residence for a minimum of 30 days that they will be subject to the vacancy fee.

Max and Christine are not excited by the prospect of renting their new home so they ask the real estate agent to place it on the rental market with an advertised per week rental cost of $3,000. Similar homes in the area are available for rent at a rate of $1,500 per week.

While the dwelling is available to rent with a term of 30 days or more, the inflated rental price means it is very unlikely any tenants for the dwelling can be found. In the relevant vacancy year, their dwelling remains vacant even though it was technically available for lease. As a result, Max and Christine will be subject to the vacancy fee as they have not made their property genuinely available. The inflated rental price, when compared with similar homes in the area, means the dwelling cannot be considered to have been made genuinely available.

3.37               A new term, occupation day, is inserted into the FATA. [Schedule 3, item 1, section 4 of the FATA]

3.38               The occupation day will usually align with the first day the foreign person has the right to occupy the residential property. This will typically be the contracted settlement day, but could also be the day on which a fitness for occupancy certificate is provided to the foreign person in respect of the property. [Schedule 3, item 7, subsections 115C(3) and (4) of the FATA]

3.39               If the foreign person purchases a dwelling from a developer and the relevant purchase is covered by the developer’s new dwelling exemption certificate, the occupation day will be the first day on which the foreign person has the right to use the dwelling. This may be later than the date on which a certificate of fitness for occupancy is provided as that certificate may be provided to the developer before the foreign person has the right to use the property. [Schedule 3, item 7, subparagraph 115C(3)(b)(ii) of the FATA]

Example 3.5  

Aline enters into a contract with a developer on 18 August 2017 for an apartment off-the-plan.

The contract specifies that settlement is 30 days after the developer receives an occupancy certificate from the relevant authority.

The developer is issued with an occupancy certificate on 1 February 2018. Settlement occurs on 2 March 2018 at which time Aline can move into the apartment. Aline’s occupation day is 2 March 2017 and Aline’s vacancy year, in respect of this dwelling, is 2 March every subsequent year she owns the dwelling.

3.40               To create flexibility within the regime and take into account unexpected vacancies in relevant dwellings, a new regulation making power is inserted into the FATA which will allow the occupation day to be prescribed. This will enable regulations to be made which consider whether the occupation day has been affected by substantial renovations or repairs are taking place, or the legal ownership of the property changed during the year. [Schedule 3, item 7, paragraph 115C(3)(c) of the FATA]

3.41               Where a foreign person is liable to pay the vacancy fee, the Treasurer or Commissioner must give the person a notice which includes the amount of the fee payable and the reasons why the person is liable to pay the fee. [Schedule 3, item 7, subsection 115E(1) of the FATA]

3.42               The vacancy fee is payable on the date included in the notice form. It cannot be earlier than 21 days after the notice was given to the person. [Schedule 3, item 7, section 115E of the FATA]

3.43               The Commissioner, Secretary or Treasurer may service notices and other documents to the foreign person at any address of the person in Australia or in a foreign country. Address in this case also means any electronic address of the foreign person including a business address that is last known to the Commissioner, Secretary or Treasurer. [Schedule 3, item 8, subsection 135A of the FATA]

3.44               The Treasurer also has powers to waive or remit all or part of the vacancy fee. Where the Treasurer is satisfied that it is not contrary to the national interest, the Treasurer may, on behalf of the Commonwealth waive or remit all or part of the vacancy fee. [Schedule 3, item 7, section 115H of the FATA]

3.45               The Treasurer does not need to give reasons if he or she decides to waive or remit all or part of the vacancy fee. [ Schedule 3, item 7, subsection 115E(2) of the FATA]

Information that must be provided to the Commissioner of Taxation

3.46               A foreign person must give the Commissioner a return in respect of each dwelling on residential land which the foreign person holds an interest in. The ‘vacancy fee return’ must be in the approved form and be provided within 30 days after the end of a vacancy year. [Schedule 3, item 7, subsections 115D(1) and (2) of the FATA]

3.47               A person who owns residential land without a dwelling will not be required to submit a vacancy fee return until there is a dwelling on the land and an occupation day has occurred. Generally, where a foreign person is given approval to buy vacant residential land, it is on condition that a dwelling is built on the land within a specified period of time.

3.48               A person is also not required to submit a vacancy fee return if they have disposed of their interest in the residential dwelling before the end of the vacancy year. [Schedule 3, item 7, Note to section 115D of the FATA]

3.49               The vacancy year is explained at paragraph 1.28 above.

Example 3.6  

Steven purchased a new dwelling in Sydney. He will be entitled to occupy the dwelling on 23 September.

In this case, the first occupation day is 23 September, and it will be no later than 12 months and 30 days from this day that Steven will be required to submit a vacancy fee return.

3.50               The foreign person may be required to provide the Commissioner with evidence to establish that the minimum level of occupancy has been reached and that the person is not liable to pay a vacancy fee. This evidence might include leases, tenancy agreements or letting arrangements.  [Schedule 3, item 7, section 115G of the FATA]

3.51               In order to be able to produce this evidence, a foreign person is required to keep records that detail and explain all transactions and other steps in respect of each dwelling the person owns and that are relevant to establishing a vacancy fee liability. These records must be kept for five years following the disposal of the dwelling. [Schedule 3, item 7, subsection 115G(1) of the FATA].

3.52               However, a foreign person will not be required to retain a record if the Commissioner advises the person that the record does not need to be kept or the foreign person is a company that has been finally dissolved. [Schedule 3, item 7, subsection 115G(3) of the FATA)].

3.53               The records must be in English or readily accessible and easily convertible into English. [Schedule 3, item 7, subsection 115G(2) of the FATA].

3.54               A foreign person who fails to keep the required records for the required timeframe maybe subject to 250 penalty units.

3.55               Section 100 of the FATA is amended to provide that the Commissioner is able to issue an infringement notice if a person fails to keep the required records for the timeframe specified or fails to lodge a vacancy fee return by the due date. [Schedule 3, items 2 and 3, subsection 100(1) and subparagraph 100(5)(b)(iv) of the FATA].

Recovery of unpaid fees

3.56               A new term, unpaid vacancy fees, is inserted into the FATA . It refers to those vacancy fees which remain unpaid after the due date. [Schedule 3, item 1, section 4 of the FATA]

3.57               Unpaid vacancy fees for a dwelling may be recovered as a debt or by the creation of a charge over Australian land owned by the foreign person.

3.58               The Treasurer is able to recover a vacancy fee that is overdue on behalf of the Commonwealth, as a debt due to the Commonwealth, in a court of competent jurisdiction. [Schedule 3, item 7, section 115I of the FATA]

3.59               In addition, the Treasurer may declare that a charge applies in relation to any Australian land owned by the foreign person if the Treasurer is satisfied that the declaration is necessary to secure the payment of the unpaid vacancy fee. [Schedule 3, item 7, sections 115J and 115K of the FATA] .

3.60               In order to create a charge over the Australian land, a person must be liable to pay a vacancy fee or the person is deemed liable to pay the vacancy fee as they have not provided the Commissioner with an annual vacancy fee return, the vacancy fee is due and has not been paid, the interest in Australian land held by the person can be registered on a land register and the Treasurer makes a declaration in respect of the land. [Schedule 3, item 7, subsection 115K(1) of the FATA]

3.61               The Treasurer’s declaration is a notifiable instrument.   [Schedule 3, item 7, subsection 115L(1) of the FATA]

3.62               The charge is created at the time the declaration made by the Treasurer comes into force. [Schedule 3, item 7, subsection 115J(3) of the FATA]

3.63               However, a charge will not be created over the land if at the time the declaration made by the Treasurer comes into force a restraining order is in force in relation to the land under Part 2-1 of the Proceeds of Crime Act  2002 ; a forfeiture order is in force in relation to the land under Part 2-2 of that Act; or an order of a kind prescribed by the regulations is in force in relation to the land under a law of the Commonwealth, a State or a Territory. [Schedule 3, item 7, subsection 115J(4) of the FATA]

3.64               A declaration made by the Treasurer must specify the period during which the declaration is in force and the Australian land to which it applies. [Schedule 3, item 7, subsection 115L(2) of the FATA]

3.65               The charge created over the Australian land remains in force until the interest in the land is sold or all of the following are paid:

•        the unpaid amounts of vacancy fee that are due; and

•        any costs incurred by the Commonwealth in relation to recovering the vacancy fee.

[Schedule 3, item 7, subsection 115M(2) of the FATA]

3.66               A charge created on land has priority over other interest in the land and is not affected by any change in ownership of the land. [Schedule 3, item 7, subsections 115M(1) and (3) of the FATA]

3.67               The Treasurer has power, on behalf of the Commonwealth, to do, or authorise the doing of, anything necessary or convenient to obtain the registration of the charge on a land register. This includes executing any instrument that is required to be executed or signing any certificate that states that a charge is created on the land and specifies the land on which the charge is created. [Schedule 3, item 7, subsections 115M(4) and (5) of the FATA]

3.68               The Treasurer or the Commissioner of Taxation may apply to a court of competent jurisdiction (which will typically be the Federal Court or a Supreme Court of a State or Territory), seeking a court order to vest an interest in Australian land in the Commonwealth. [Schedule 3, item 7, subsection 115N(1) of the FATA]

3.69               Following the Commissioner or Treasurer’s application, a court may make the order sought if the Australian land is subject to a charge under section 115K of the FATA and the court considers that it is necessary to make the order to recover the unpaid vacancy fees. This provision again will not apply if certain actions including restraining or forfeiture orders are in place under the Proceeds of Crime Act 2002. [Schedule 3, item 7, subsections 115N(2) and 115N(3) of the FATA]

3.70               Once a court order is made in favour of the Treasurer or the Commissioner under section 115N of the FATA, the interest in the land will vest in equity in the Commonwealth but it will only vest at law in the Commonwealth once the applicable registration requirements have been complied with. [Schedule 3, item 7, subsection 115P(2) of the FATA]

3.71               The Treasurer is provided with the power to do anything necessary or convenient to give notice of or otherwise protect the Commonwealth’s equitable interest in the land. This includes executing any instrument or signing any certificate stating that the land has vested in the Commonwealth. [Schedule 3, item 7, subsections 115P(2) and (3) of the FATA]

3.72               After the period for lodgement of an appeal against the court’s order vesting equitable interest in the Australian land in the Commonwealth has expired, or an appeal against such an order has been determined in the Commonwealth’s favour, the Commonwealth will be entitled to begin dealing with interests in the land. [Schedule 3, item 7, subsection 115Q(1) of the FATA]

3.73               Once an interest in Australian land has been vested in the Commonwealth by operation of section 115P of the FATA, the Treasurer must dispose of that interest as soon as practicable after the time for lodgement of appeal against the court order has expired or an appeal has been finally determined in accordance with section 115Q of the FATA. [Schedule 3, item 7, subsection 115R(1) of the FATA]

3.74               Where the Treasurer sells the interest in the land, the Treasurer may give full and effective title to the land free of all other interests. This extinguishes all other interest in the land, allowing the purchaser to have full title. [Schedule 3, item 7, section 115R(2) of the FATA]

3.75               The Treasurer must apply the proceeds of the sale against any:

•        unpaid vacancy fees;

•        any costs incurred by the Commonwealth in relation to recovering the unpaid vacancy fees; and

•        costs incurred by the Commonwealth in relation to the sale.

3.76               If there are any proceeds remaining, the Treasurer must pay these in the following order, noting that not all persons listed may be paid if the proceeds are insufficient:

•        a person holding a mortgage, charge or other interest over the land if the mortgage, charge or interest relates to a debt due by the owner and it has been registered on a land register;

•        the Commonwealth in relation to any other penalty of debt that is due and payable to the Commonwealth by the owner;

•        the owner.

[Schedule 3, item 7, subsections 115R(3) and (6)]

3.77               If the remainder of the proceeds are insufficient to pay all the persons holding a mortgage, charge or other interest over the land, the Treasurer must pay each person proportionately. [Schedule 3, item 7, subsection 115R(5)]

3.78               Section 115 does not affect the right of the Commonwealth to recover debts or penalties by other means. [Schedule 3, item 7, subsection 115R(7)]

3.79               No stamp duty or other tax or fee is payable under a law of a State or Territory in respect of a vesting of an interest in Australian land under new section 115K, or anything connected with the vesting of that interest, if the Treasurer declares that the interest in the land has vested under new section 115K in an instrument which specifies the interest in the land. To assist the reader the Bill explicitly provides that an instrument made under new section 115M is not a legislative instrument. Such an instrument is of an administrative character, rather than a legislative character. [Schedule 3, item 7, section 115S of the FATA]

3.80               If the operation of Division 3 of Part 6A would result in an acquisition of property from a person otherwise than on just terms (within the meaning of section 51(xxxi) of the Constitution), the Commonwealth is liable to pay a reasonable amount of compensation to the person. If the Commonwealth and the person cannot agree on the amount of compensation, the person may institute proceedings in a court of competent jurisdiction. [Schedule 3, item 7, section 115T of the FATA]

3.81               These powers are provided to the Treasurer and Commissioner to be used in cases of systemic avoidance of payment of the vacancy fee. It is not envisaged that the powers will be used to recover unpaid vacancy fees for one or two years. If vacancy fees remain unpaid for several years, then the charge and disposal mechanism is provided to enable recovery of unpaid vacancy fees.

Other amendments

3.82               Minor editorial amendments are also made to the FATA to incorporate these changes. [Schedule 3, items 4 - 6, Part 6, section 115 and subsection 115(3) of the FATA]

Taxation Law

3.83               The Commissioner has the general administration of the vacancy fee and relevant provisions in the FATA. This means new Part 6A of the FATA will be a taxation law for the TAA 1953. [Schedule 3, item 7, subsection 115B(2) and Note to subsection 115B(2) of the FATA]

3.84               However, the provisions of the TAA 1953 mentioned in subsection 138(2) of the FATA do not apply to the newly inserted Part 6A with respect to vacancy fees which is consistent with other parts of the FATA. [Schedule 3, item 7, subsection 115B(3) of the FATA]

3.85               Existing subsection 138(2) is rewritten to further clarify that, while liabilities incurred under the FATA and the Fees Act are tax-related liabilities, some provisions in the TAA 1953 do not apply to application fees and vacancy fees under the FATA and Fees Act. [Schedule 3, item 9, subsection 138(2) of the FATA]

Persons who cannot be found in Australia

3.86               As noted above at paragraph 1.42, section 135A is inserted into the FATA to deal with those circumstances where a foreign person is not located in Australia and a notice or document needs to be served on the person for the purposes of this Act.

3.87               Where the Secretary, the Treasurer or the Commissioner are satisfied that the person is not in Australia, the document may be served by posting it to an Australian or international address, or sending it to an electronic address for the person. This insertion will provide administrative flexibility which is appropriate in the circumstances as the relevant persons the vacancy fees will apply to are necessarily foreign persons and may be easier to locate via an overseas address. [Schedule 3, item 8, section 135A of the FATA]

Consequential amendments

Amendments to the Taxation Administration Act 1953

3.88               Schedule 3 to this Bill also amends the TAA 1953 to include reference to fees payable under the FATA. This clarifies the circumstances in which provisions in the TAA 1953 will apply. [Schedule 3, items 10 and 11, Note to subsection 250-10(2) and subsection 250-10(2), of the TAA 1953]

Amendments to the Foreign Acquisitions and Takeovers Fees Imposition Act 2015

3.89               The Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017 (the Fees Amendment Bill) amends the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 ( Fees Act) to set out the fee payable by a foreign person in relation to a residential dwelling which is left vacant. [Schedule 1, item 10, Division 3, section 12A of the Fees Act]

3.90               Broadly, the vacancy fee amount is the same amount as the fee that was payable at the time a notice was submitted to acquire the land or the application for the exemption certificate which covered the acquisition was submitted. [Schedule 1, item 10, section 12A, of the Fees Act]

3.91               Where the person acquired their interest under an exemption certificate held by a developer, for example a new dwelling exemption certificate or a near-new dwelling exemption certificate, the fee payable is the amount of the fee that would have been payable if a notice of a notifiable action under section 81 of the FATA had been given for the action covered by the certificate, at the time of the action (regardless of any regulations made for the purposes of section 11 of the FATA).

Example 3.7  

Angela, a foreign person under the FATA, purchases an apartment in Melbourne from Jas Co, a property developer who obtained exemption certificates in July 2017 to cover sales of both new dwellings and near-new dwellings to foreign persons. The consideration paid by Angela, at the time of purchase (April 2018), was $550,000.

The vacancy fee payable is calculated as if Angela obtained an individual foreign investment approval herself without an exemption certificate.

In this case, Angela’s liability for the vacancy fee will be $5,500 (based on the consideration paid by her for the apartment at the time of purchase) should she leave the apartment vacant during a vacancy year for more than 183 days.

3.92               If a fee that would have been payable at the time of notifying of an action or applying for an  established dwelling exemption certificate was waived, the vacancy fee payable is the lowest fee that would have been payable for a residential land acquisition. [Schedule 1, item 10, section 12A, table items 1(b), 3(b), 4(b) and 6(b) of the Fees Act]

Example 3.8  

Levi and Tildy received a waiver of the $5,500 appplication fee in respect of their purchase of a house in Launceston, Tasmania. Levi and Tildy do not wish to rent their house while they are overseas.

As a result, they are liable to pay the vacancy fee for their Launceston house. Their fee is calculated  based on the lowest tier residential land fee payable at that time. As a result, Levi and Tildy have to pay $5,500 as a vacancy fee.

3.93               The vacancy fee payable by a person is not indexed but any changes to the fee structures within the FATA and the Fees Act will apply in future years.

3.94               The fee amounts are as follows:

Table 3.1  

Provision reference

Type of acquisition

Fee amount

Table item 1, section 12A

Acquiring the interest in land is a notifiable action

Where acquiring the interest in a dwelling or residential land is a notifiable action under section 47 of the FATA.

The amount of the fee that was payable in accordance with section 7 of the Fees Act at the time the notice was given.

If that fee was waived, the fee payable is equal to the lowest tier residential land fee that would have been payable at the time notice was given.

Table item 2, section 12A

New dwelling certificate

Where the acquisition meets the definition of ‘a new dwelling acquisition’.

Sub-section 113(4) of the FATA defines a ‘new dwelling acquisition’ as an acquisition by a foreign person of an interest in a new dwelling covered by an exemption certificate given to a developer.  

The amount of the fee that would have been payable for an acquisition of the same value in accordance with section 7 of the Fees Act, had the person applied individually for the acquisition outside of an exemption certificate.

Table item 2, section 12A

Near-new dwelling certificate

Where an acquisition occurs under a certificate issued under section 43A of the FATA Regulation.

Broadly, this is a dwelling in a development that otherwise would have been covered by a new dwelling exemption certificate except that the property sold but failed to settle before it was occupied.

The amount of the fee that would have been payable for an acquisition of the same value in accordance with section 7 of the Fees Act, had the person applied individually for the acquisition outside of an exemption certificate.

Table item 3, section 12A

Established dwelling certificate

Where a foreign person acquires an established dwelling under an exemption certificate. 

The amount of the fee that was payable in accordance with section 6 of the Fees Act when the application was submitted.

If that fee was waived, the fee payable is equal to the lowest tier residential land fee that would have been payable at the time notice was given.

Table item 3, section 12A

Residential land certificate

Where the residential land was acquired under a residential land (other than established dwellings) certificate within the meaning of the FATA Regulations.

This certificate allows the purchase of a new dwelling, near-new dwelling or vacant land.

The amount of the fee that was payable in accordance with section 6 of the Fees Act when the application was submitted.

If that fee was waived, the fee payable is equal to the lowest tier residential land fee that would have been payable at the time notice was given.

Table item 4, section 12A

Order under Subdivision A of Division 2 of Part 3

Where the action to acquire the interest residential land is specified in an order made under Subdivision A of Division 2 of Part 3 of the FATA or is specified in a no objections notification.

The amount of fee that was payable as worked out under section 8 of the Fees Act when the order or notification was given.

If that fee was waived, the fee payable is equal to the lowest tier residential land fee that would have been payable at the time notice was given.

Example 3.9  

Susie and Greg decide to buy a new house close to their Australian relatives in Brisbane to use as their residence when they visit each year.

On 22 August 2017 they apply for a no objections notification for a property they wish to buy in Mango Hill which is less than $1 million. The fee payable for the application is $5,500.

Susie and Greg leave the property vacant for nine months in a given vacancy year and are liable to pay the vacancy fee. The vacancy fee will be set at $5,500 for that vacancy year and each future vacancy year - they should be liable to pay the vacancy fee.

Example 3.10  

Ivan travels to Australia for business regularly and wants to buy a new apartment to live in while he is here in Australia. He never spends more than four months in a 12 month period in Australia.

On 11 July 2017 he buys a property off-the-plan for $1.5 million from a developer who has been issued with a new dwelling exemption certificate. Ivan does not need to separately seek an approval to purchase the property.

As Ivan does not occupy the apartment for at least 183 days each 12 month period, Ivan is liable to pay the vacancy fee.

The vacancy fee is calculated based on the application fee that Ivan would have paid had he applied for to the Foreign Investment Review Board individually to purchase the apartment. Regarding the purchase price that Ivan paid for the property, Ivan would have paid an $11,100 application fee.

Therefore Ivan’s vacancy fee is $11,100 for each vacancy year he is liable to pay the vacancy fee. 

Example 3.11  

Lola is on a temporary resident visa and applies for and is issued with an exemption certificate which allows her to purchase one established dwelling up to the value of $1.6 million. The application fee is $11,100.

If at any stage Lola is liable to pay the vacancy fee, it will be set at $11,100 for each vacancy year that Lola is liable to pay the vacancy fee.

Example 3.12  

Soh-Yeon owns a property in Melbourne which she bought for $1.7 million. Soh-Yeon is issued with a notice from the Commissioner of Taxation notifying her that a vacancy fee is owed on the property.

At the time that Soh-Yeon sought a no objections notification, the application fee for a new residential dwelling valued at more than $1 million was $11,100. However, this fee was waived.

The vacancy fee payable is determined not on the fee that Soh-Yeon paid ($0) but the lowest tier residential land fee that would have been payable at the time that the property was purchased. The lowest fee for a new residential dwelling at the time Soh-Yeon applied was $5,500.

The vacancy fee payable is set at $5,500 and any liability Soh-Yeon has to pay the vacancy fee in future vacancy years will be $5,500.

3.95               Editorial amendments have also been made to the Fees Act to incorporate these changes. [Schedule 1, items 1A to 9, sections 5 and 11 and subsections 4(1), 9(1), 11(1), 11(2), 12(1) and 12(8) and paragraphs 12(8)(a), (b), and (d) of the Fees Act]

Application and transitional provisions

3.96               The amendments included in this Schedule and in the Fees Amendment Bill will apply to foreign persons who submit a notice or an application to acquire residential dwelling or residential land from 7:30PM (AEST) on 9 May 2017.

3.97                Foreign persons who acquire an interest in residential land under a New Dwelling Exemption Certificate or a Near-new Dwelling Exemption Certificate which was approved prior to 7.30PM (AEST) on 9 May 2017 and who enter into the new contract after 7.30pm (AEST) on 9 May 2017 are not liable for the vacancy fee. [Schedule 3, item 12]

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Annual vacancy fee

3.98               This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

3.99               This Schedule aims to create a larger stock of available housing in Australia by creating an incentive for foreign persons who own residential property to either occupy that property or make it available for rent on the rental market through the creation of a vacancy fee which will apply if a residential property is not occupied for at least 183 days in a 12 month period.

Human rights implications

3.100           This Schedule engages the following human rights and freedoms:

•        the right to protection from unlawful or arbitrary interferences with an individual’s privacy; and

•        the right to be free from discrimination.

Right to privacy

3.101           Article 17 of the International Covenant on Civil and Political Rights (ICCPR) prohibits unlawful or arbitrary interferences with a person’s privacy, family, home or correspondence. It also provides that everyone has the right to the protection of the law against such interference or attacks. The Human Rights Committee has interpreted the term ‘unlawful’ to mean that no interference can take place except in cases envisaged by law, which itself must comply with the provisions, aims and objectives of the ICCPR. The Human Rights Committee has also indicated that an interference will not be considered to be ‘arbitrary’ if it is provided for by law and is in accordance with the provisions, aims and objectives of the ICCPR and is reasonable in the particular circumstances.

3.102           Privacy is a concept which is broad in scope and includes a right to information privacy. The Schedule directly engages the right to privacy under Article 17 of the ICCPR because it requires the provision of information to the Commissioner of Taxation (Commissioner).

3.103           It is anticipated that the approved form will require an individual who is a foreign person who has an interest in a residential dwelling in Australia to provide the Commissioner with information relevant to the dwelling’s occupancy during the 12 month period called the vacancy year.

3.104           If a person fails to submit a vacancy return the person may be liable to a civil penalty of 250 units. Further, a failure to submit the vacancy return will result in a deemed vacancy for that dwelling in the vacancy year. These measures are designed to encourage compliance with the vacancy fee regime.

3.105           The information collected under this statute may only be used or disclosed for the purposes authorised by the Privacy Act 1988 . This minimises the risk of information about identified or identifiable individuals being used or disclosed for an unauthorised purpose.

3.106           The circumstances in which information may be collected and used are clearly defined by the Bill and are therefore a lawful interference with the right to privacy. Moreover, as it would not be possible to achieve the objectives of the statute without collecting some information about identifiable individuals, these limitations on the right to privacy are reasonable in the circumstances and do not interfere with the right to privacy of those individuals more than is necessary to achieve the legitimate objective of determining that a residential property is occupied.

Right to be free from discrimination on prohibited grounds

3.107           Article 26 of the ICCPR recognises that all persons are equal before the law and are entitled without discrimination to the equal protection of the law. Article 26 further provides that ‘the law shall prohibit any discrimination and guarantee to all persons equal and effective protection against discrimination on any ground such as national origin. However, the Human Rights Committee has recognised that ‘not every differentiation of treatment will constitute discrimination, if the criteria for such differentiation are reasonable and objective and if the aim is to achieve a purpose which is legitimate under the Covenant’.

3.108           The Bill also generally engages the rights protected by the International Convention on the Elimination of All Forms of Racial Discrimination. Paragraph 1 of Article 1 of International Convention on the Elimination of All Forms of Racial Discrimination defines the term ‘racial discrimination’ to mean ‘any distinction, exclusion, restriction or preference based on race, colour descent, or national or ethnic origin which has the purpose or effect of nullifying or impairing the recognition, enjoyment or exercise, on an equal footing, of human rights and fundamental freedoms in the political, economic, social, cultural, or any other field of public life’. Under Article 2(a)(a) of the International Convention on the Elimination of All Forms of Racial Discrimination, [E]ach State Party undertakes to engage in no act or practice of racial discrimination against persons, groups of persons or institutions and to ensure that all public authorities and public institutions, national and local shall act in conformity with this obligation’. Under Article 5 of International Convention on the Elimination of All Forms of Racial Discrimination States Parties ‘undertake to prohibit and eliminate racial discrimination in all its forms and to guarantee the right of everyone, without distinction as to …national …origin, to equality before the law’ in the enjoyment of civil, political, economic, social and cultural rights, including the ‘right to own property alone as well as in association with others’.

3.109           The Bill limits Article 26 of the ICCPR and Articles 2 and 5 of International Convention on the Elimination of All Forms of Racial Discrimination because the core obligations imposed by the Bill only apply to a ‘foreign person’. While an Australian citizen who is not ordinarily resident in Australia may be a ‘foreign person’ for the purposes of this Act, it is anticipated that the majority of individuals who are directly affected by this Bill will not be Australian citizens.

3.110           While the Bill, if enacted, will primarily affect individuals who are citizens of countries other than Australia, there is no less restrictive way of achieving the objectives of the Bill. Accordingly those limitations are reasonable, necessary and proportionate.

Conclusion

3.111           This Schedule is compatible with human rights because to the extent that they may limit human rights, those limitations are reasonable, necessary and proportionate.