Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2019
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TREASURY LAWS AMENDMENT (REDUCING PRESSURE ON HOUSING
AFFORDABILITY MEASURES) BILL 2019
FOREIGN ACQUISITIONS AND TAKEOVERS FEES IMPOSITION
AMENDMENT (NEAR-NEW DWELLING INTERESTS) BILL 2019
EXPLANATORY MEMORANDUM
(Circulated by authority of the Minister for Housing and
Assistant Treasurer, the Hon Michael Sukkar MP)
Table of contents
Glossary................................................................................................. 5
General outline and financial impact ...................................................... 7
Chapter 1 Capital gains tax changes for foreign residents ......... 11
Chapter 2 Additional capital gains discount for affordable
housing ...................................................................... 35
Chapter 3 Near-new dwelling interests ....................................... 57
Chapter 4 Statement of Compatibility with Human Rights .......... 63
Glossary
The following abbreviations and acronyms are used throughout this
Explanatory Memorandum.
Abbreviation Definition
ACT Australian Capital Territory
AMIT attribution managed investment trust
CGT capital gains tax
Commissioner Commissioner of Taxation
GST goods and services tax
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
MIT managed investment trust
NRAS National Rental Affordability Scheme
Primary Bill Treasury Laws Amendment (Reducing
Pressure on Housing Affordability Measures)
Bill 2019
TAA 1953 Taxation Administration Act 1953
TARP taxable Australian real property
5
General outline and financial impact
Capital gains tax changes for foreign residents
Schedule 1 to the Primary Bill amends the ITAA 1997 to:
• remove the entitlement to the CGT main residence exemption
for foreign residents other than where certain life events
occur during the period that a person is a foreign resident
where that period is six years or less; and
• modify the foreign resident CGT regime to clarify that, for
the purpose of determining whether an entity's underlying
value is principally derived from TARP, the principal asset
test is applied on an associate inclusive basis.
Date of effect: These measures apply from 7.30pm by legal time in the
ACT on 9 May 2017.
Proposal announced: These amendments implement two of the measures
announced by the Treasurer in the 2017-18 Budget as part of 'Reducing
pressure on housing affordability - capital gains tax changes for foreign
investors' and forms part of a package of measures concerning housing
affordability.
Financial impact: These measures, together with the associated measure
relating to foreign resident capital gains withholding payments that was
announced as part of the 2017-18 Budget but enacted separately in the
Treasury Laws Amendment (Foreign Resident Capital Gains Withholding
Payments) Act 2017, have these revenue implications:
2016-17 2017-18 2018-19 2019-20 2020-21
* $150m $100m $105m $155m
* Unquantifiable
Note that the revenue gain over the forward estimates period has been
updated since the 2017-18 Budget announcement to reflect a minor policy
change to the measure that will ensure only Australian residents for tax
purposes can access the main residence exemption, as well as extending
the application of the transitional arrangements for the main residence
exemption for a further 12 months to 30 June 2020.
Human rights implications: This Schedule does not raise any human
rights issues. See Statement of Compatibility with Human Rights --
Chapter 4, paragraphs 4.1 to 4.4.
7
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
Compliance cost impact: These measures are expected to result in a
minor overall compliance cost impact, comprising a small implementation
impact and a small increase in on-going costs for taxpayers that are
foreign residents.
Capital gains tax incentive for investments in affordable
housing
Schedule 2 to the Primary Bill amends the ITAA 1997 to provide an
additional affordable housing capital gains discount. The additional
discount of up to 10 per cent applies if a CGT event occurs to an
ownership interest in residential premises that has been used to provide
affordable housing.
Date of effect: This measure applies to capital gains realised by investors
from CGT events occurring on or after 1 January 2018 for affordable
housing tenancies that start before, on or after 1 January 2018.
Proposal announced: This measure was announced by the Treasurer on
9 May 2017 in the 2017-18 Budget as 'Reducing pressure on housing
affordability -- expanding tax incentives for investments in affordable
housing'.
Financial impact: This measure is estimated to result in a cost to revenue
of $15 million over the forward estimates period comprising:
2016-17 2017-18 2018-19 2019-20 2020-21
- - .. -$5m -$10m
.. Not zero, but rounded to zero
- Nil
Human rights implications: This Schedule engages human rights. See
Statement of Compatibility with Human Rights -- Chapter 4,
paragraphs 4.5 to 4.15.
Compliance cost impact: This measure is expected to result in a small
overall compliance cost impact, comprising a small implementation
impact and a small increase in on-going costs.
Near-new dwelling exemption certificates
Schedule 3 to the Treasury Laws Amendment (Reducing Pressure on
Housing Affordability Measures) Bill 2019 enables a reconciliation
8
General outline and financial impact
payment to be made by developers who sell dwellings to foreign persons
under a near-new dwelling exemption certificate.
Date of effect: 1 July 2017
Proposal announced: Budget 2017-18
Financial impact: This formed part of the 2017-18 Budget measure
Streamlining and enhancing the foreign investment framework, and that
measure has the following revenue implications:
2016-17 2017-18 2018-19 2019-20 2020-21
- -$5.1m -$5.1m -$5.1m -$5.1m
Human rights implications: This Schedule does not give rise to any
human rights issue. See Statement of Compatibility with Human Rights --
Chapter 4, paragraphs 4.16 to 4.28.
9
Chapter 1
Capital gains tax changes for foreign
residents
Outline of chapter
1.1 Schedule 1 to the Primary Bill amends the ITAA 1997 to:
• remove the entitlement to the CGT main residence exemption
for foreign residents other than where certain life events
occur during the period that a person is a foreign resident
where that period is six years or less; and
• modify the foreign resident CGT regime to clarify that, for
the purpose of determining whether an entity's underlying
value is principally derived from TARP, the principal asset
test is applied on an associate inclusive basis.
1.2 All legislative references in this Chapter, unless otherwise
stated, are to the ITAA 1997 and that referencing at the end of paragraphs,
unless otherwise stated, is to the Primary Bill.
Context of amendments
1.3 As part of the 2017-18 Budget, the Government announced a
range of reforms to reduce pressure on housing affordability. Schedule 1
to the Primary Bill implements two of the reforms to the operation of the
CGT rules for foreign residents.
1.4 Another reform to the CGT rules for foreign residents is
contained in the Treasury Laws Amendment (Foreign Resident Capital
Gains Withholding Payments) Act 2017. That Act modified the foreign
resident capital gains withholding payments regime from 1 July 2017 to:
• increase the withholding rate to 12.5 per cent; and
• reduce the withholding threshold to $750,000.
Main residence exemption
1.5 The amendments in Part 1 of Schedule 1 to the Primary Bill
generally remove the entitlement to the CGT main residence exemption
for foreign residents that have dwellings that qualify as their main
residence. Therefore any such capital gain or loss arising upon disposal of
a foreign resident's main residence generally needs to be recognised.
11
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
1.6 However, an individual who has been a foreign resident for six
years or less at the time of the CGT event, may still be entitled to the main
residence exemption if certain life events occur.
1.7 The main residence exemption disregards a taxpayer's capital
gain or loss for CGT purposes (providing an exemption) if:
• the taxpayer is an individual; and
• the dwelling was the taxpayer's main residence throughout
the ownership period.
1.8 The main residence exemption also provides a partial exemption
if the dwelling was the taxpayer's main residence for only part of the
ownership period or if it was also used in part to produce assessable
income.
1.9 For the purpose of the main residence exemption, a dwelling
includes:
• a building (for example a house) or part of a building (for
example, an apartment or townhouse) that consists wholly or
mainly of accommodation;
• a caravan, houseboat or other mobile home; and
• any land immediately under the unit of accommodation.
1.10 It also includes adjacent land that, together with the land under
the dwelling, does not exceed two hectares, and adjacent structures (for
example a storeroom, shed or garage) to the extent that they are used
mainly for domestic or private purposes.
1.11 The main residence exemption may also apply to:
• an individual who is a beneficiary in, or any entity that is a
trustee of, a deceased estate of a deceased person who used
the dwelling as a main residence; and
• the trustee of a trust that is or has been a special disability
trust where the dwelling was the main residence of the
individual who is or has been:
- the principal beneficiary of the trust; or
- another beneficiary who inherits the dwelling upon the
death of the principal beneficiary.
Principal asset test
1.12 The amendments in Part 2 of Schedule 1 to the Primary Bill
modify the foreign resident CGT regime to clarify that, for the purpose of
12
Capital gains tax changes for foreign residents
determining whether an entity's underlying value is principally derived
from TARP, the principal asset test is applied on an associate inclusive
basis.
1.13 Under the foreign resident CGT regime, a capital gain or capital
loss made by a foreign resident in respect of a membership interest is
disregarded unless both the non-portfolio interest test and the principal
asset test are satisfied in relation to the interest.
1.14 The purpose of the non-portfolio interest test is to establish
whether a foreign resident entity has sufficient interest in another entity.
The test is satisfied if the sum of the direct participation interests held in
the other entity by the foreign resident entity and its associates is
10 per cent or more.
1.15 The purpose of the principal asset test is to determine when an
entity's underlying value is principally derived from TARP.
A membership interest held by a foreign resident in another entity will
pass the principal asset test if the sum of the market values of that entity's
assets that are TARP exceed the sum of the market values of its assets that
are non-TARP.
Summary of new law
1.16 Schedule 1 to the Primary Bill amends the ITAA 1997 to:
• remove the entitlement to the CGT main residence exemption
for foreign residents, other than where certain life events
occur during the period that a person is a foreign resident
where that period is six years or less; and
• clarify that, for the purpose of determining whether an
entity's underlying value is principally derived from TARP
under the foreign resident CGT regime, the principal asset
test is applied on an associate inclusive basis.
Comparison of key features of new law and current law
New law Current law
Main residence exemption -- individuals
Generally, individuals who are Individuals who are foreign residents
foreign residents at the time a CGT are entitled to the CGT main
event occurs to a dwelling (or for a residence exemption in the same way
compulsory acquisition, a part of a as individuals who are residents of
dwelling) in which they have an Australia for taxation purposes.
ownership interest are not entitled to
13
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
New law Current law
the CGT main residence exemption.
However, individuals who have been
foreign residents for a period of six
years or less may be able to access
the CGT main residence exemption
if, during the period of that foreign
residency, certain life events
occurred.
Main residence exemption -- deceased is foreign resident at time of death
A trustee of a deceased estate is not A trustee of a deceased estate is
entitled to the CGT main residence entitled to the CGT main residence
exemption in respect of an ownership exemption in respect of an ownership
interest in a dwelling of a deceased interest in a dwelling of a deceased
individual if the deceased was an individual who was a foreign resident
excluded foreign resident at the time at the time of death in the same way
of death. as if the deceased had been a resident
at that time.
A beneficiary of a deceased estate is
not entitled to the portion of the CGT A beneficiary of a deceased estate is
main residence exemption in respect entitled to the CGT main residence
of an ownership interest in a dwelling exemption in respect of an ownership
of a deceased individual if the interest in a dwelling of a deceased
deceased was an excluded foreign individual who was a foreign resident
resident at the time of death. at the time of death in the same way
as if the deceased had been a resident
at that time.
Main residence exemption -- beneficiary of deceased estate is a foreign
resident
A beneficiary of a deceased estate is A beneficiary of a deceased estate is
entitled to the portion of the CGT entitled to the CGT main residence
main residence exemption in respect exemption in respect of an ownership
of an ownership interest in a dwelling interest in a dwelling of a deceased
of a deceased individual if the individual if the beneficiary is a
deceased was not an excluded foreign foreign resident in the same way as
resident at the time of death. This individuals who are residents of
applies even if the beneficiary is a Australia for taxation purposes.
foreign resident at the time a CGT
event occurs to the dwelling.
However, the beneficiary is denied
any additional component of the main
residence exemption that they are
otherwise entitled to in their own
right if they are a foreign resident at
the time a CGT event occurs to the
14
Capital gains tax changes for foreign residents
New law Current law
dwelling.
Main residence exemption -- special disability trusts
A trustee of a special disability trust A trustee of a special disability trust
is not entitled to the CGT main is entitled to the CGT main residence
residence exemption in respect of an exemption in respect of an ownership
ownership interest in a dwelling if the interest in a dwelling if the principal
principal beneficiary of the trust was beneficiary of the trust was a foreign
a foreign resident and did not satisfy resident at the time a CGT event
the life events test concerning the occurs to the dwelling. This applies in
dwelling. the same way as if the principal
beneficiary had been a resident at that
A trustee of a special disability trust
time.
is not entitled to the CGT main
residence exemption in respect of an A trustee of a special disability trust
ownership interest in a dwelling if the is entitled to the CGT main residence
principal beneficiary was an excluded exemption in respect of an ownership
foreign resident at the time of their interest in a dwelling if the principal
death. beneficiary of the trust was a foreign
resident at the time of their death.
A beneficiary who receives an
This applies in the same way as if the
ownership interest in a main
principal beneficiary had been a
residence at the time of death of the
resident at that time.
principal beneficiary of a special
disability trust is not entitled to the A beneficiary who receives an
CGT main residence exemption ownership interest in a main
accrued by the special disability trust residence by the principal beneficiary
if the principal beneficiary was an of a special disability trust is entitled
excluded foreign resident at the time to the CGT main residence exemption
of their death. accrued by the special disability trust.
This includes where the principal
beneficiary was a foreign resident at
the time of their death. The
exemption applies in the same way as
if the principal beneficiary had been a
resident at that time.
Principal asset test
Under the foreign resident CGT Under the foreign resident CGT
regime, a capital gain or capital loss regime, a capital gain or capital loss
made by a foreign resident in respect made by a foreign resident in respect
of a membership interest is of a membership interest is
disregarded unless both the disregarded unless both the
non-portfolio interest test and the non-portfolio interest test and the
principal asset test are satisfied in principal asset test are satisfied in
relation to the interest. relation to the interest.
The principal asset test applies in The principal asset test applies in
relation to certain membership relation to certain membership
interests held by a foreign resident interests held by a foreign resident
15
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
New law Current law
entity in another entity and is satisfied entity in another entity and is satisfied
if the market value of the other if the market value of the other
entity's TARP assets exceeds the entity's TARP assets exceeds the
market value of its non-TARP assets. market value of its non-TARP assets.
For these purposes, if the entity being For these purposes, if the entity being
tested holds a membership interest in tested holds a membership interest in
another entity, the membership another entity, the membership
interest is treated as if it were two interest is treated as if it were two
assets -- a TARP asset and a assets -- a TARP asset and a
non-TARP asset. However, the non-TARP asset. However, the
market value of the TARP asset is market value of the TARP asset is
taken to be nil if the total taken to be nil if the entity's direct
participation interests held by the participation interest, or the holding
holding entity and its associates in the entity's total participation interest, in
other entity is less than 10 per cent. the other entity is less than
10 per cent.
Detailed explanation of new law
Main residence exemption
1.17 The amendments to the main residence exemption are contained
in Part 1 of Schedule 1 to the Primary Bill. Individuals who are foreign
residents at the time a CGT event occurs to a dwelling in which they have
an ownership interest are generally not entitled to the main residence
exemption for any part of the exemption that arises from their use of the
dwelling.
1.18 For individuals that have an ownership interest in a dwelling, the
most common CGT event is CGT event A1 which occurs on the sale or
disposal of that interest. CGT event A1 occurs at the time a contract is
entered into. Other CGT events that may apply are listed in
section 118-110 and the details and timing of when they occur are
contained in Division 104.
1.19 As the main residence exemption does not generally apply,
affected foreign residents need to recognise the capital gain or loss that
arises from the CGT event. If it is:
• a capital gain -- the amount of the capital gain would be
determined, then offset by any current year and prior year
capital losses, then the remaining capital gain would be
reduced by any discount capital gain, after which the
remaining capital gain would be added with any other capital
16
Capital gains tax changes for foreign residents
gains for the income year and included in assessable income
(refer to section 102-5 for further details); or
• a capital loss -- the amount of that loss would be determined
and then be available to offset first against the current income
year and then future income years' capital gains (refer to
section 102-10 for further details).
1.20 An individual who has been a foreign resident for six years or
less may be able to access the main residence exemption if certain life
events occur during that period of foreign residency. There are no other
changes to the CGT main residence exemption provisions.
1.21 For the purposes of the main residence exemption a dwelling
includes the land on which the dwelling is located.
1.22 An individual is a foreign resident if they are not an Australian
resident for taxation purposes (as defined in section 6 of the ITAA 1936).
Individuals who are Australian residents for taxation purposes at the time
a CGT event occurs to a dwelling are not affected by this measure.
Example 1.1 -- Residency status of working visa holder
James, a New Zealander, moves to Australia in July 2018 and obtains a
special category visa. He purchases a dwelling in Australia and
establishes it as his main residence. He is a resident of Australia for
taxation purposes while he resides here. James continues to reside in
the dwelling for several years. He signs a contract to sell the dwelling,
departing Australia several months later (to return to live in New
Zealand).
James was an Australian resident for taxation purposes at the time
CGT event A1 occurs to the dwelling -- that is, when he signs the
contract to sell it. As James was not a foreign resident at the time CGT
event A1 occurred he is entitled to the main residence exemption in
respect of his ownership of the dwelling.
1.23 To give effect to this measure amendments are made to the main
residence exemption provisions in Subdivision 118-B.
General anti-avoidance provisions
1.24 The main residence exemption that may otherwise apply, does
not apply if the Commissioner makes a determination that the general
anti-avoidance provisions apply. This will occur where, based on an
objective consideration by the Commissioner, the Commissioner
determines that an arrangement has been entered into by a person for the
sole or dominant purpose of enabling that person or another person to
obtain the main residence exemption.
17
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
Main residence for the whole of the ownership period
1.25 The main residence exemption does not generally apply if, at the
time a CGT event occurs to an ownership interest in a dwelling, the
individual that owns it was a foreign resident. However, an individual
who has been a foreign resident for six years or less may be able to access
the CGT main residence exemption if certain life events occur during their
period of foreign residency. [Schedule 1, item 4, subsection 118-110(3)]
1.26 Furthermore, if at the time the CGT event occurs the individual
is a resident for taxation purposes in Australia, they continue to be eligible
for the CGT main residence exemption (provided they satisfy the other
existing requirements).
1.27 The main residence exemption applies to disregard a capital gain
or loss in relation to a CGT event that happens to a CGT asset that is an
ownership interest in a dwelling if:
• it is held by an individual;
• the dwelling was, or was taken to be, the main residence of
the individual throughout their ownership period; and
• the interest did not pass to the individual as a beneficiary in,
or as trustee of, the estate of a deceased person.
1.28 The main residence extension provisions that allow a dwelling to
be taken to be a main residence in certain circumstances continue to
apply. They include moving into a dwelling, changing main residences,
absences and repairing or renovating a dwelling.
1.29 The main residence exemption continues to be apportioned if
part of the dwelling to which the main residence exemption would
otherwise apply was used for income producing purposes.
Example 1.2 -- Main residence exemption denied
Vicki acquired a dwelling in Australia on 10 September 2010, moving
into it and establishing it as her main residence as soon as it was first
practicable to do so.
On 1 July 2018 Vicki vacated the dwelling and moved to New York.
Vicki rented the dwelling out while she tried to sell it. On
15 October 2020 Vicki finally signs a contract to sell the dwelling with
settlement occurring on 13 November 2020. Vicki was a foreign
resident for taxation purposes on 15 October 2020.
The time of CGT event A1 for the sale of the dwelling is the time the
contract for sale was signed, that is 15 October 2020. As Vicki was a
foreign resident at that time she is not entitled to the main residence
exemption in respect of her ownership interest in the dwelling.
18
Capital gains tax changes for foreign residents
Note: This outcome is not affected by:
• Vicki previously using the dwelling as her main residence; and
• the absence rule in section 118-145 that could otherwise have
applied to treat the dwelling as Vicki's main residence from
1 July 2018 to 15 October 2020 (assuming all of the requirements
were satisfied).
Example 1.3 -- Main residence exemption applies
Amita acquired a dwelling in Australia on 20 February 2003, moving
into it and establishing it as her main residence as soon as it was first
practicable to do so. On 15 August 2021 Amita signs a contract to sell
the dwelling and settlement occurs on 12 September 2021.
Amita used the dwelling as follows during the period of time for which
she owned it:
• residing in the dwelling from when she acquired it until
1 October 2007;
• renting it out from 2 October 2007 until 5 March 2011 while she
lived in a rented home in Paris as a foreign resident (assume the
absence provision applies to treat the dwelling as her main
residence);
• residing in the dwelling and using it as a main residence from
6 March 2011 until 15 April 2012;
• renting it out from 16 April 2012 until 10 June 2017 while she lived
in a rented home in Hong Kong as a foreign resident (assume the
absence provision applies to treat the dwelling as her main
residence); and
• residing in the dwelling from 11 June 2017 until it was sold.
The time of CGT event A1 for the sale of the dwelling is the time the
contract for sale was signed, that is 15 August 2021. As Amita was an
Australian resident for taxation purposes at that time (as she had
re-established her Australian residency) she is entitled to the full main
residence exemption for her ownership interest in the dwelling as it is,
or is taken to be, her main residence for the whole of the time that she
owned it.
Main residence for part of the ownership period
1.30 The partial main residence exemption generally no longer
applies if, at the time a CGT event occurs to the ownership interest in a
dwelling, the individual that owns it is a foreign resident. [Schedule 1,
item 11, paragraphs 118-185(3)(a) and (b)]
1.31 An individual who has been a foreign resident for six years or
less may be able to access the partial main residence exemption if certain
life events occur during that period of foreign residency. [Schedule 1, item 11,
paragraphs 118-185(3)(a) and (b)]
19
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
1.32 The main residence exemption continues to apply to Australian
residents to partially disregard a capital gain or loss from a CGT event
that happens to a CGT asset that is an ownership interest in a dwelling if:
• it is held by an individual;
• the dwelling was, or was taken to be, the main residence of
the individual for part of their ownership period; and
• the interest did not pass to the individual as a beneficiary in,
or as trustee of, the estate of a deceased person.
1.33 The partial main residence exemption applies to exempt the
portion of the capital gain or loss that relates to the period when the
dwelling was the individual's main residence. The individual accounts for
the portion of the capital gain or loss for the period they owned the
dwelling for which it was not their main residence in the manner set out in
paragraph 1.19 (apportioned on a number of days basis).
1.34 The special rule in section 118-192 where a dwelling that is a
main residence is first used to produce income to assist in working out a
capital gain or loss made from a dwelling generally does not apply if at
the time a CGT event occurs to the ownership interest in a dwelling, the
individual that owns it is a foreign resident. This is because the
requirement for the rule to apply -- that the individual is entitled to a
partial main residence exemption at the time a CGT event occurs to the
dwelling -- is generally not satisfied in such cases.
1.35 In other respects the partial main residence exemption applies in
the same way as the full main residence exemption.
Example 1.4 -- Partial main residence exemption denied
Terry acquired a dwelling on 20 August 2008.
On 13 November 2020 Terry signs a contract to sell the dwelling and
settlement occurs on 11 December 2020. At this time he was a foreign
resident.
Terry used the dwelling as follows during the period of time for which
he owned it:
• establishing the dwelling as a main residence and residing there
from when he acquired the property until 31 January 2010;
• renting it out from 1 February 2010 until 5 June 2011;
• re-establishing the dwelling as his main residence and residing
there from 6 June 2011 until 17 June 2020; and
• leaving the property vacant from 18 June 2020 until it was sold.
From 19 June 2020 Terry resided in London as a foreign resident.
20
Capital gains tax changes for foreign residents
The time of CGT event A1 for the sale of the dwelling is the time the
contract for sale was signed, that is 13 November 2020. As Terry was a
foreign resident at that time he is not entitled to the main residence
exemption in respect of his ownership interest in the dwelling, even
though he used the dwelling as his main residence for part of the time
that he owned it.
Terry first used the dwelling to produce assessable income, by renting
it out, on 1 February 2010. However, the special rule for when a
dwelling is first used to produce assessable income (which would
allow him to be taken to have acquired the dwelling for its market
value at that time) will not apply. This because he is not entitled to a
partial main residence exemption at the time the CGT event occurs.
This is because Terry was a foreign resident at the time CGT event A1
occurs to the dwelling.
Part of the property on which the main residence is located is
compulsorily acquired
1.36 The main residence exemption also no longer applies if the
individual is a foreign resident at the time a CGT event occurs to part of
their ownership interest in a dwelling as a result of a compulsory
acquisition. An individual who has been a foreign resident for six years or
less at the time a CGT event occurs to part of their ownership interest in a
dwelling as a result of a compulsory acquisition may still be able to access
the CGT main residence exemption if certain life events occur. [Schedule 1,
item 29, paragraphs 118-245(3)(a) and (b)]
1.37 This component of the main residence exemption applies where
a part, but not the whole, of an ownership interest in a dwelling that is a
main residence is being compulsorily acquired. Examples where this may
occur include a compulsory acquisition of:
• adjacent land, for example for a transport corridor; and
• rights over the adjacent land that restrict its use, for example
placing an easement over part of the property to use it as a
corridor for utilities or drainage.
Example 1.5 -- Compulsory acquisition of land adjacent to dwelling
that is a main residence
Samuel acquired a dwelling on 23 July 2016 on a 1,000 square metre
block of land. He moved into it and established it as his main residence
as soon as it was first practicable to do so.
Samuel used the dwelling as follows from when he acquired it:
• residing in the dwelling until 24 June 2018; and
• renting it out from 25 June 2018, when he started living in a rented
residence in Los Angeles as a foreign resident (assume the absence
rule applies to treat the dwelling as his main residence).
21
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
On 16 June 2021 the local council compulsorily resumed 100 square
metres of the land on which Samuel's dwelling was situated.
Settlement occurred on 14 July 2021.
The time of the CGT event for the compulsory acquisition of the land
occurred on 16 June 2021. As Samuel was a foreign resident at that
time he is not entitled to the main residence exemption for the
compulsory acquisition of part of his ownership interest in the adjacent
land.
Deceased estate -- where the beneficiary was a foreign resident
beneficiary
1.38 If the deceased was a resident of Australia (or was a foreign
resident for six years or less) for taxation purposes at the time of death,
then the main residence exemption accrued by the deceased for the
dwelling continues to be available to the trustee or beneficiary or
beneficiaries of the deceased estate that are bequeathed the property. This
includes the exemption attributable to:
• the period during the deceased person's lifetime they used
the dwelling as their main residence;
• the period that occurs within two years of the deceased's
death (or within such longer period allowed by the
Commissioner); and
• the period following the deceased's death where the dwelling
was the main residence of an individual who was the spouse
of the deceased immediately before their death and/or an
individual who had a right to occupy the dwelling under the
deceased's will (regardless of the residency status of that
spouse or individual).
1.39 However, the beneficiary is denied any additional component of
the main residence exemption that they accrued in their own right if they
were a foreign resident at the time at which a CGT event occurred to the
dwelling. [Schedule 1, item 13, paragraph 118-195(1A)(b)]
Example 1.6 -- Foreign resident beneficiary inherits main residence
from a deceased person -- Australian resident at time of death
Con acquired a dwelling on 7 February 2001, moving into it and
establishing it as his main residence as soon as it was first practicable
to do so. He continued to reside in the property and it was his main
residence until his death on 9 August 2017. He was at all times a
resident of Australia.
Jacqui, Con's daughter, inherited the dwelling following Con's death.
Upon inheriting the dwelling, Jacqui rented it out. It was not her main
22
Capital gains tax changes for foreign residents
residence at any time. On 25 January 2021 Jacqui signs a contract to
sell the dwelling and settlement occurs on 23 February 2021.
Jacqui resides in Buenos Aires and was a foreign resident in the period
from 2010 until the time of sale of her ownership interest in the
dwelling.
Jacqui is entitled to a partial main residence exemption for the
ownership interest that she has in the dwelling at the time she sells it,
being the exemption that accrued while Con used the residence as his
main residence (7 February 2001 until 9 August 2017). She is not
entitled to any main residence exemption that she accrued in respect of
the dwelling (9 August 2017 until 25 January 2021). This is because
she was an excluded foreign resident on 25 January 2021, the day on
which she signed the contract to sell her ownership interest, which is
the day on which CGT event A1 occurred.
Note: Jacqui will need to apply section 118-200 to work out the
amount of the capital gain or loss that she realises from the sale of the
ownership interest in the dwelling.
If Jacqui had instead sold the dwelling on or before 9 August 2019 she
would have been entitled to a full main residence exemption. This is
because the whole of the main residence exemption would have, or
would be taken to have, accrued from Con's use of the residence. This
includes the two year period following Con's death.
Deceased estate -- deceased was foreign resident
1.40 If the deceased person was an excluded foreign resident at the
time of their death then the portion of the main residence exemption
accrued by the deceased in respect of the dwelling (see paragraph 1.38) is
not available to the beneficiary. [Schedule 1, items 12 and 13, paragraphs
118-195(1)(c) and 118-195(1A)(a)]
1.41 Beneficiaries continue to be entitled to the main residence
exemption for any part of the exemption that they accrue in their own
right (provided that they are not a foreign resident at the time the CGT
event for the ownership interest in the dwelling occurs). For the purposes
of calculating a capital gain or loss, to ensure that no portion of the main
residence exemption of the deceased is included, the following apply:
• cost base and reduced cost base -- the first element of the
dwelling's cost base and reduced cost base for the beneficiary
is the cost base and reduced cost base of the deceased as they
were immediately before the deceased's death;
• building, repairing or renovating a dwelling -- a surviving
joint tenant of a dwelling is not able to treat the dwelling as
the deceased's main residence where that dwelling was being
built, repaired or renovated if the deceased was a foreign
resident at the time of their death; and
23
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
• the apportionment calculation -- the days for which the
deceased person (or any deceased person if the property has
been bequeathed more than once) held the ownership interest
in the dwelling are treated as non-main residence days. This
ensures that no component of the main residence exemption
applies for this period.
[Schedule 1, items 6, 15, 16, 17, 18 and 30, subsection 118-155(5),
paragraphs 118-200(2)(aa), (3)(d), (4)(c) and subsection 118-205(4) and table item 3 in
subsection 128-15(4)]
1.42 The main residence exemption does not apply if:
• the deceased person was an excluded foreign resident at the
time of their death; and
• the beneficiary that inherits the ownership interest in the
dwelling was a foreign resident at the time the CGT event
occurs.
1.43 If the main residence exemption does not apply, the beneficiary
must account for the whole of the capital gain or loss (see paragraph 1.19)
that accrues on the ownership interest in the dwelling.
1.44 The main residence exemption also does not apply to a trustee
that acquires a dwelling under a will from an excluded foreign resident.
[Schedule 1, item 20, subsection 118 210(6)]
1.45 In particular, the main residence exemption does not apply to a
trustee of a deceased estate if:
• the deceased person was an excluded foreign resident at the
time of their death;
• the trustee of the deceased estate acquired a dwelling after
the deceased person's death for an individual to occupy
under the terms of the will; and
• the dwelling was later disposed of by the trustee of the
deceased estate.
[Schedule 1, item 20, subsection 118-210(6)]
Example 1.7-- Resident beneficiary inheriting a dwelling from a
deceased person who was a foreign resident at the time of death
Edwina acquired a dwelling on 7 February 2011, moving into it and
establishing it as her main residence as soon as it was first practicable
to do so. Edwina used the property as follows:
• residing in the dwelling until 25 September 2016 whilst an
Australian resident; and
24
Capital gains tax changes for foreign residents
• renting the property out from 26 September 2016 at which time
Edwina moved to Johannesburg.
Edwina passed away on 20 January 2018. At the time of her death,
Edwina was a foreign resident for taxation purposes. However, as
Edwina was a foreign resident for less than six years, she is not an
excluded foreign resident.
Rebecca, an Australian resident, inherits the dwelling from Edwina.
Rebecca moves into the dwelling and establishes it as her main
residence on 21 April 2018. She continues to reside in it and use it as
her main residence until she sells it. She signs the contract to sell the
dwelling on 2 February 2021 with settlement occurring on
2 March 2021.
Rebecca is able to access the main residence exception for the whole
period of ownership because:
• Edwina was not an excluded foreign resident at the time of her
death. This means that the main residence exemption she accrued
while she used the dwelling as her main residence is available to
Rebecca; and
• the whole period between when Edwina passed away and when
Rebecca moved into the dwelling and established it as her main
residence is less than two years.
Rebecca is also able to access the main residence exemption for the
period from when she moved into the property until she signed the
contract for sale as she used the property as her main residence at all
times and was an Australian resident at the time of the sale.
Therefore Rebecca is able to access the main residence exemption for
the entire ownership period.
Australian residency ends
1.46 Schedule 1 to the Primary Bill amends the main residence
exemption so it does not apply if CGT events I1 or I2 occur to an
ownership interest in a dwelling. [Schedule 1, items 3, 14 and 19,
paragraphs 118-110(2)(a), 118-195(2)(a) and 118-210(5)(a)]
1.47 CGT event I1 and I2 may occur to dwellings that are a unit of
accommodation that is a caravan, houseboat or other mobile home
(mobile homes). They do not apply to dwellings that are TARP (which for
this measure is real property situated in Australia (including leases of
land)).
1.48 CGT events I1 and I2 happen at the time an individual or trust
stops being a resident of Australia for taxation purposes. When the CGT
event happens:
• for CGT events I1 and I2 -- the individual or trustee of the
trust must consider each CGT asset that they owned just
25
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
before Australian residency ended, determine if a capital gain
or loss has been made on them and account for any capital
gains or losses (in the way outlined in paragraph 1.19). For
the purpose of working out that capital gain or loss the
taxpayer is taken to have disposed of the CGT asset for its
market value at that time; or
• for CGT event I1 -- an individual may also defer the CGT
liability by choosing to disregard the capital gain or loss that
arises from CGT event I1 occurring. However, if they choose
to do so the CGT asset will be taken to be TARP until either
another CGT event occurs to that asset or the person once
again becomes an Australian resident.
1.49 The amendments that affect the entitlement to the main
residence exemption where CGT events I1 and I2 occur ensure consistent
application of the exemption, whether a foreign resident has an ownership
interest in a dwelling that is real property or a mobile home. Without this
change, the main residence exemption would be available for a mobile
home at the time the owner changes their residency (as CGT events I1 or
I2 occur at this time), but not for real property in the same circumstances
(as no CGT event occurs at this time).
Special disability trusts
1.50 The main residence exemption applies to a dwelling held by a
special disability trust for the benefit of its principal beneficiary provided
this beneficiary uses it as their main residence. The main residence
exemption applies in this way to enable it to apply to a special disability
trust in the same way as it would if the principal beneficiary had directly
owned the dwelling.
1.51 The main residence exemption no longer applies if:
• at the time a CGT event occurs to the ownership interest in a
dwelling of a special disability trust, the principal beneficiary
of that trust was a foreign resident (unless that principal
beneficiary satisfies the life events test); or
• a CGT event occurs to a dwelling while it is held by the
trustee of the special disability trust after the death of the
principal beneficiary and at the time of death the principal
beneficiary was an excluded foreign resident.
[Schedule 1, items 23 and 25, note to subsection 118-218(1) and subsection 118-225(5)]
26
Capital gains tax changes for foreign residents
1.52 Any component of the main residence exemption that was
accrued by the special disability trust while it held the dwelling on behalf
of the principal beneficiary is denied to a beneficiary1 that acquires the
dwelling after the principal beneficiary's death if, at the time of death, the
principal beneficiary was an excluded foreign resident. The first element
of the dwelling's cost base and reduced cost base for the beneficiary are
the cost base and reduced cost base of the special disability trust as they
were immediately before the deceased's death. [Schedule 1, items 25 and 26,
subsection 118-225(5) and paragraph 118-227(1)(ca)]
1.53 This ensures that the main residence exemption for a special
disability trust that holds a dwelling on behalf of a principal beneficiary
continues to operate in the same way as the main residence exemption
does for an individual that holds a dwelling in their own right.
Consequential amendments
1.54 Schedule 1 to the Primary Bill also makes consequential
amendments to the guide material, examples and notes contained in the
law for the main residence exemption to reflect the substantive
amendments. [Schedule 1, items 1, 2, 5, 7 to 10, 21, 22, 27 and 28, section 118-100,
examples following subsections 118-145(4), 118-170(4), 118-178(2) and 118-185(2) and
notes to sections 118-105, 118-215 and 118-240]
Certain life events
1.55 The amendments in Schedule 1 to the Primary Bill allow a
foreign resident to continue to access the main residence CGT exemption
for CGT events concerning certain life events if they have been a foreign
resident for a continuous period of six years or less at the time of the CGT
event (ie they are not an 'excluded foreign resident'). [Schedule 1, item 4,
subsections 118-110(3), (4) and (5)]
Excluded foreign resident
1.56 An 'excluded foreign resident' is a person who, at the time of
the CGT event, has been a foreign resident for a continuous period of
more than six years. A person who is an 'excluded foreign resident' (eg a
long term non-resident) is not able to access the CGT main residence
exemption even if certain life events occur. [Schedule 1, item 4, subsection
118-110(4)]
1.57 A beneficiary of a person's estate, or a person surviving the
foreign resident, may be able to access the main residence exemption,
provided that at the time of the foreign resident's death they were not an
'excluded foreign resident' (i.e. they had not been a foreign resident for a
1
This includes a beneficiary of the special disability trust and a beneficiary under the deceased
estate.
27
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
continuous period of more than six years). [Schedule 1, items 6, 12, 13, 15, 16,
17, 18, 20, 25, 26, 30, subsections 118-155(5), 118-195(1A), 118-205(4), 118-210(6),
118-225(5) and 128-15(4), paragraphs 118-195(1)(c), 118-200(2)(aa), 118-200(3)(d),
118-200(4)(c) and 118-227(1)(ca)]
The life events test
1.58 A foreign resident may be able to access the CGT main
residence exemption if they satisfy the 'life events test'. [Schedule 1, item 4,
subsection 118-110(5)]
1.59 The first element of the life events test requires that at the time
of the CGT event, the person has been a foreign resident for a continuous
period of six years or less. [Schedule 1, item 4, paragraph 118-110(5)(a)]
1.60 The second element of the life events test is that during the
person's period of foreign residency, one of the specified circumstances
occurred or the CGT event occurred in relation to a family law matter.
[Schedule 1, item 4, paragraph 118-110(5)(b)]
Terminal medical condition
1.61 If, during all or part of the period of a person's foreign
residency, either they, their spouse or their child who was under 18 years
of age had a 'terminal medical condition', then they will satisfy this
element of the test. [Schedule 1, item 4, subparagraphs 118-110(5)(b)(i) and (ii)]
1.62 A 'terminal medical condition' has the meaning given by
regulation 303-10.01 of the Income Tax Assessment Regulations 1997.
This requires, amongst other things, that two medical practitioners, jointly
or separately, have certified that the illness, or injury, the affected person
suffers from is likely to result in their death within 24 months of the
certification. [Schedule 1, item 4, subparagraphs 118-110(5)(b)(i) and (ii)]
1.63 For a child of the foreign resident, it is necessary that during at
least part of the period of foreign residency the child was suffering from a
terminal medical condition. [Schedule 1, item 4, subparagraph 118-110(5)(b)(ii)]
Death
1.64 If, during a person's period of foreign residency, their spouse, or
their child who is under 18 years of age at the time of their death dies,
then the person will satisfy this element of the test. [Schedule 1, item 4,
subparagraph 118-110(5)(b)(iii)]
Divorce or separation
1.65 If the CGT event occurs because of a matter referred to in a
paragraph of subsection 126-5(1) (family law) involving the person or
their spouse (or former spouse) the person will satisfy this element of the
28
Capital gains tax changes for foreign residents
test. The matters referred to in subsection 126-5(1) involve the
distribution of assets between the person and their spouse in a family law
context, such as in the event of divorce or separation or similar
maintenance agreements. This includes where an enforceable distribution
takes place under a corresponding foreign law. [Schedule 1, item 4,
subparagraph 118-110(5)(b)(iv)]
1.66 If the CGT event has not occurred because of one of the matters
in subsection 126-5(1), then the person is not able to access the main
residence exemption even if the matter has occurred during their period of
foreign residency. [Schedule 1, item 4, subparagraph 118-110(5)(b)(iv)]
Consequential amendments
1.67 The terms 'excluded foreign resident' and 'life events test' are
included in the dictionary in subsection 995-1(1). [Schedule 1, item 31,
subsection 995-1(1) definitions of 'excluded foreign resident' and 'life events test']
Example 1.8-- Main residence exemption - life events test
Joan acquired a dwelling on 7 February 2015, moving into it with her
spouse John and establishing it as their main residence as soon as it
was first practicable to do so. Joan and John are residents of Australia
at the time of the purchase of the property. In 2020 they retire to live in
the Bahamas and acquire a new residence there. They become foreign
residents at this time. They rent out their former Australian residence
after they leave Australia and it is not maintained as their main
residence in the rental period. In 2021 John dies and Joan decides to
sell their former residence. As Joan has been a foreign resident for less
than six years at the time of entering into the CGT event for the sale
and her spouse has passed away during the period of her foreign
residency, she is entitled to a partial main residence exemption for the
sale of the residence based on the period that it was her main residence.
Principal asset test
1.68 The amendments in Part 2 of Schedule 1 to the Primary Bill
modify the foreign resident CGT regime to clarify that, for the purpose of
determining whether an entity's underlying value is principally derived
from TARP, the principal asset test is applied on an associate inclusive
basis. This will remove any doubt that disaggregated holdings of
membership interests are properly taken into account when applying the
principal asset test.
1.69 Under the foreign resident CGT regime, a capital gain or capital
loss made by a foreign resident in respect of a membership interest is
disregarded unless both the non-portfolio interest test (section 960-195)
and the principal asset test (section 855-30) are satisfied in relation to the
interest.
29
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
1.70 The principal asset test applies in relation to certain membership
interests held by a foreign resident entity in another entity. The test is
satisfied if the market value of the other entity's TARP assets exceeds the
market value of its non-TARP assets.
1.71 For these purposes, if the entity being tested holds a membership
interest in another entity, the membership interest is treated as if it were
two assets -- a TARP asset and a non-TARP asset. However, the market
value of the deemed TARP asset is taken to be nil if the total participation
interests (as defined in section 960-180) held in the other entity by the
foreign resident holding entity and its associates (as defined in
section 318 of the ITAA 1936) is less than 10 per cent. That is, the
holding entity's total participation interests are worked out on an associate
inclusive basis. [Schedule 1, item 34, item 1 of the table in subsection 855-30(4)]
1.72 In determining the holding entity's total participation interests in
the other entity on an associate inclusive basis, the following amounts will
be added together:
• the holding entity's direct participation interest (as defined
in section 960-190) and indirect participation interest (as
defined in section 960-185) in the other entity; and
• if an entity is an associate of the holding entity, the associate
entity's direct participation interest and indirect participation
interest in the other entity.
1.73 However, applying the principal asset test on an associate
inclusive basis may result in a particular direct participation interest or
indirect participation interest being counted more than once. Therefore,
for the purposes of working out the total participation interests held by the
holding entity and its associates, each particular direct participation
interest and indirect participation interest held in the other entity is
counted only once. [Schedule 1, item 35, subsection 855-30(4A)]
Example 1.9 -- Operation of the principal asset test
An Australian entity, Aus Land Rich Co, holds land (which is TARP).
Foreign Resident has an indirect interest in Aus Land Rich Co through
its wholly owned subsidiaries:
• A Co -- which holds 9 per cent of the membership interests in
Aus Land Rich Co; and
• B Co -- which holds 7 per cent of the membership interests in
Aus Land Rich Co.
30
Capital gains tax changes for foreign residents
Foreign Resident simultaneously disposes of its interests in A Co and
B Co.
Foreign Resident
100% 100%
A Co B Co
9% 7%
Aus Land Rich Co
The non-portfolio interest test (section 960-195) is satisfied in relation
to each of these holdings as Foreign Resident holds more than
10 per cent of the membership interests in A Co and B Co respectively.
The principal asset test (section 855-30) will be satisfied in relation to
each of these holdings if the market value of A Co's and B Co's TARP
assets exceeds the market value of their non-TARP assets.
In applying the principal asset test, the membership interests A Co and
B Co hold in Aus Land Rich Co are treated as if they were two
assets -- a TARP asset and a non-TARP asset.
Under item 1 of the table in subsection 855-30(4), the market value of
the deemed TARP asset will be taken to be nil if the total participation
interests Foreign Resident and its associates hold in Aus Land Rich Co
is less than 10 per cent. However, the item does not apply because the
total participation interests Foreign Resident and its associates (A Co
and B Co) hold in Aus Land Rich Co is 16 per cent.
Consequently, for the purpose of applying the principal asset test in
relation to the interests Foreign Co holds in A Co and B Co, the market
value of the deemed TARP asset and the deemed non-TARP asset
must be worked out under item 2 of the table in subsection 855-30(4).
Application and transitional provisions
1.74 Schedule 1 to the Primary Bill commences on the first day of the
next quarter following the day of Royal Assent. [Clause 2]
31
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
Main residence exemption
1.75 The amendments to the main residence exemption in Part 1 of
Schedule 1 to the Primary Bill generally apply to CGT events happening
at or after their announcement at 7.30 pm, by legal time in the ACT, on
9 May 2017 (application time). Accordingly, the amendments to the main
residence exemption do not apply prior to its announcement date to ensure
that taxpayers are not adversely affected by a retrospective change before
being made public. However, the measure needs to generally apply from
the date of announcement (subject to a transitional period for some
taxpayers see paragraph 1.76) to prevent opportunities for affected
taxpayers to dispose of their dwelling and avoid the application of the
measure. [Schedule 1, item 33]
1.76 The amendments to the main residence exemption do not apply
for certain dwellings held before the application time (see paragraph
1.75). The amendments do not apply to a capital gain or loss from a CGT
event that occurs to a dwelling if the CGT event occurs on or before
30 June 2020 if:
• an individual, or trustee of a special disability trust held an
ownership interest in the dwelling to which the CGT event
relates at all times from immediately before the application
time until immediately before the CGT event happens; or
• an individual acquired the property as a beneficiary of a
deceased estate and at all times from immediately before the
application time until immediately before the CGT event
happens to the dwelling, the following entities held the
ownership interest in the dwelling:
- that individual;
- the deceased person;
- the trustee of the deceased estate of the deceased
person;
- the trustee of a special disability trust on behalf of a
principal beneficiary; or
- a combination of these entities.
[Schedule 1, item 32, section 118-110 of the Income Tax (Transitional Provisions)
Act 1997]
Example 1.10 -- Dwelling that is a main residence that was owned
before 9 May 2017 is disposed of on or before 30 June 2020
Samantha acquired a dwelling on 13 April 2013 moving into it and
establishing it as her main residence as soon as it was first practicable
32
Capital gains tax changes for foreign residents
to do so. On 10 January 2019 Samantha signs a contract to sell the
dwelling and settlement occurs on 7 February 2019.
Samantha used the dwelling as follows when she owned it:
• residing there until 15 September 2016; and
• renting the property out from 16 September 2016 until it was sold
(assume the absence provision applies to treat the dwelling as her
main residence during this later period).
From 16 September 2016 Samantha resided in rented accommodation
in Bahrain and was a foreign resident.
CGT event A1 for the sale of the dwelling occurs when the contract for
sale was signed, that is 10 January 2019. As Samantha held her
ownership interest in the dwelling on or before 9 May 2017, she
continued to own it until it was sold and as it was sold before
1 July 2020 she is entitled to the main residence exemption under the
transitional rule.
Principal asset test
1.77 The amendments in Part 2 of Schedule 1 to the Primary Bill
clarify that, for the purpose of determining whether an entity's underlying
value is principally derived from TARP under the foreign resident CGT
regime, the principal asset test is applied on an associate inclusive basis.
These amendments apply in relation to CGT events happening on or after
announcement at 7.30 pm, by legal time in the ACT, on 9 May 2017.
Accordingly, the amendments to the principal asset test do not apply prior
to the announcement date to ensure that taxpayers are not adversely
affected by a retrospective change. However, the amendments need to
apply from the date of announcement to prevent opportunities for
multinational entities to dispose of assets and avoid the application of the
amendments after the date of announcement. [Schedule 1, item 34]
33
Chapter 2
Additional capital gains discount for
affordable housing
Outline of chapter
2.1 Schedule 2 to the Primary Bill amends the ITAA 1997 to
provide an additional affordable housing capital gains discount. The
additional discount of up to 10 per cent applies if a CGT event occurs to
an ownership interest in residential premises that has been used to provide
affordable housing.
2.2 All legislative references in this Chapter, unless otherwise
stated, are to the ITAA 1997 and that referencing at the end of paragraphs,
unless otherwise stated, is to the Primary Bill.
Context of amendments
2.3 In the 2017-18 Budget, the Government announced a package of
measures to improve outcomes across the housing sector, from
Australians struggling to put a roof over their head to those in affordable
housing, private renters and first home buyers.
2.4 Several of these measures specifically address housing
affordability for members of the community earning low to moderate
incomes by providing incentives for investors to increase the supply of
affordable housing that is available. Having access to affordable housing
on a long-term basis will help to support Australian households manage
life's challenges and assist in relieving the pressure from rising cost of
living.
2.5 The Government recognises that increased private investment is
required to provide more Australians with access to affordable rental
housing. This measure provides a CGT incentive for investment in
affordable housing.
2.6 This measure provides an additional incentive to individual and
institutional investors to increase the supply of affordable housing by
allowing investors (including resident investors in MITs) to retain an
increased amount of the capital gains they realise from their investments
in affordable housing. Individual investors may invest by holding an
ownership interest in affordable housing directly or through certain trusts.
35
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
2.7 States and territories have their own affordable housing policies
which are designed to encourage housing investment and the
Government's affordable housing measures are intended to complement
these existing policies. In this regard, the intent is not to duplicate or
interfere with existing state and territory housing policies that operate to
define affordable housing in each jurisdiction, including in relation to
tenant eligibility and rent setting.
2.8 Capital gains arising from CGT assets of individuals that they
hold for at least 12 months generally receive a 50 per cent capital gains
discount. The individual's net capital gain (including a discounted capital
gain) forms part of their assessable income. This amount, and the
individual's other assessable income less allowable deductions forms their
taxable income which is taxed at marginal tax rates.
Summary of new law
2.9 Schedule 2 to the Primary Bill encourages investment in
affordable housing for members of the community earning low to
moderate incomes. This is achieved by allowing investors to have an
additional affordable housing capital gains discount of up to 10 percent in
relation to an ownership interest in a dwelling that is residential premises
that has been used to provide affordable housing. By reducing the CGT
that is payable upon disposal of affordable housing, it ensures that a
greater proportion of the gain realised at disposal is retained by the
investor.
2.10 The additional capital gains discount applies to investments by
individuals directly in affordable housing or investments in affordable
housing by individuals through trusts (other than public unit trusts and
superannuation funds), including MITs to the extent the distribution or
attribution is to the individual and includes such a capital gain.
36
Additional capital gains discount for affordable housing
Comparison of key features of new law and current law
New law Current law
Individuals -- direct investment: additional 10 per cent capital gains
discount
Individuals are generally entitled to a Individuals are generally entitled to a
50 per cent discount on capital gains 50 per cent discount on capital gains
for assets held for at least 12 months. for assets held for at least 12 months.
Individuals also are entitled to an
additional capital gains discount of
up to 10 per cent for capital gains on
such assets to the extent they are
attributable to capital gains on
dwellings used to provide affordable
housing for a period or periods
totalling at least three years.
Individual -- indirect investment through trusts and MITs: additional
10 per cent capital gains discount
Individuals are generally entitled to a Individuals are generally entitled to a
50 per cent capital gains discount on 50 per cent capital gains discount on
capital gains that are distributed or capital gains that are distributed or
attributed to them directly or through attributed to them directly or through
an interposed entity from a trust or an interposed entity from a trust or
MIT (if the trust or MIT is entitled to MIT (if the trust or MIT is entitled to
a discount capital gain). a discount capital gain).
Individuals are also entitled to an
additional capital gains discount of
up to 10 per cent on capital gains:
• that are distributed or attributed
to them directly or through an
interposed entity from a trust or
MIT; and
• to the extent they are attributable
to capital gains on dwellings used
to provide affordable housing.
However, the trust or MIT must have
used the dwelling to provide
affordable housing for a period or
periods totalling at least three years.
The interposed entity or trust may be
a trust or partnership (other than a
public unit trust or superannuation
fund).
37
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
Detailed explanation of new law
2.11 The additional affordable housing capital gains discount may
apply to reduce an individual's capital gain from a CGT event occurring
to a dwelling that was either owned by the individual or a trustee of
certain types of trusts in which the individual is a beneficiary (directly or
through a partnership or a trust of any of those types). If the individual is
eligible for an additional affordable housing capital gains discount it is
applied to reduce the capital gain in working out their net capital gain for
the income year.
Eligibility for an additional affordable housing capital gains discount
2.12 The additional affordable housing capital gains discount applies
separately to each capital gain from affordable housing made by an
individual, or distributed or attributed to an individual by certain trusts, if
eligibility conditions are met. [Schedule 2, item 2, subsection 115-125(1)]
2.13 An individual is eligible for an additional affordable housing
capital gains discount (direct investment) on a capital gain if they:
• make a discount capital gain from a CGT event happening in
relation to a CGT asset that is their ownership interest in a
dwelling; and
• used the dwelling to provide affordable housing for at least
three years (1095 days) which may be aggregate usage over
different periods.
[Schedule 2, item 2, subsection 115-125(2)]
2.14 An individual will also be eligible for an additional affordable
housing capital gains discount on a capital gain (trust investment) if:
• that capital gain was distributed or attributed to them:
- directly from a trust; or
- from a trust through a partnership or another trust;
• the capital gain was a discount capital gain for the trust that
realised that gain;
• the dwelling was used to provide affordable housing for at
least three years (1095 days) which may be aggregated use in
different periods; and
• the trust which used the dwelling to provide affordable
housing and any interposed entities (if any) through which
38
Additional capital gains discount for affordable housing
the capital gain was distributed or attributed to the individual
was one of the following specified entities:
- a trust (other than a public unit trust or a superannuation
fund);
- a MIT; or
- a partnership.
[Schedule 2, item 2, subsections 115-125(2) and (3)]
2.15 This Chapter first explains the requirements to qualify for the
capital gains discount for direct investment in affordable housing. Where
these differ for trust investments in affordable housing, they are explained
later in this Chapter.
CGT event happening in relation to a CGT asset that is an ownership
interest in a dwelling
2.16 The CGT event that generally applies to ownership interests in
dwellings is CGT event A1 disposals (see section 104-10). However other
CGT events can also apply to an ownership interest in a dwelling.
2.17 For this measure, dwelling takes its existing meaning as defined
in section 118-115, that is a dwelling includes:
• a building (for example a house) or part of a building (for
example an apartment or townhouse) that consists wholly or
mainly of accommodation; and
• any land immediately under the unit of accommodation.
2.18 It also includes adjacent land that, together with the land under
the dwelling, does not exceed two hectares, and adjacent structures (for
example, a storeroom, shed or garage).
2.19 While caravans, houseboats and other mobile homes are
included in the definition of dwelling for CGT purposes, only dwellings
that are residential premises that are not commercial residential premises
can be used to provide affordable housing for the purposes of this
measure. Therefore this measure does not apply to caravans, mobile
homes and houseboats as they are not residential premises (see
paragraph 2.32).
2.20 Section 118-130 provides that an ownership interest in a
dwelling is:
• for land -- a legal or equitable interest in it or a right to
occupy it;
• for a dwelling that is not a flat or home unit -- a legal or
equitable interest in the land on which it is erected, or a
licence or right to occupy it; or
39
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
• for a flat or home unit -- a legal or equitable interest in a
stratum unit in it, a licence or right to occupy it, or a share in
a company that owns a legal or equitable interest in the land
on which the flat or home is erected and provides a right to
occupy it.
Discount capital gain
2.21 For the purposes of this measure a discount capital gain is a
capital gain of an individual that:
• resulted from a CGT event happening to an ownership
interest in a dwelling which the individual has owned for at
least 12 months; and
• the cost base was worked out without the application of
indexation.
2.22 A discount capital gain includes an amount that is treated as a
capital gain of an individual under section 115-215 for the purposes of
calculating their net capital gain where that individual is entitled to the
capital gains tax discount. An individual's capital gains from the
application of section 115-215 are those capital gains realised by trusts
that have been distributed, either directly or through an interposed entity
to that individual (see paragraphs 2.51 to 2.53 below).
2.23 Capital gains realised by trusts include capital gains that have
been attributed to a resident individual by an AMIT to which
subsection 276-80(2) has applied. This provision treats the member as
having derived, received or made the amount reflected in the determined
member component in the same circumstance as the AMIT derived,
received or made it.
Used the dwelling to provide affordable housing
2.24 The additional affordable housing capital gains discount only
applies to certain capital gains if the dwelling in which the ownership
interest was held was used to provide affordable housing for a period or
periods totalling three (1095 days) or more years after 1 January 2018.
The capital gain must have been realised by an individual or be a capital
gain that was distributed or attributed (directly or via a partnership or
certain trusts) to an individual by certain trusts. The period that the
dwelling was used to provide affordable housing may be a continuous
period or an aggregation of periods totalling three or more years.
[Schedule 2, item 2, subsection 115-125(2)]
40
Additional capital gains discount for affordable housing
Example 2.1 -- Aggregated period of affordable housing use
Lisa signs a contract to acquire a dwelling that is residential premises
(but not commercial residential premises) on 15 August 2018.
Lisa used the dwelling as follows when she owned it:
• left it vacant and undertook repairs from when she acquired it on
15 August 2018 (the acquisition date for CGT purposes) until
1 December 2018 (109 days);
• rented it out by providing affordable housing from
2 December 2018 until 20 August 2020 (628 days);
• rented it out through a real estate property manager at market rates
(that is not providing affordable housing) from 21 August 2020
until 31 August 2021 (376 days);
• rented it out by providing affordable housing from
1 September 2021 until 15 January 2023 (502 days); and
• vacated the property and prepared it for sale on and after
16 January 2023 (57 days).
On 13 March 2023 Lisa signed a contract to sell the dwelling with
settlement occurring on 11 April 2023.
Lisa has held the dwelling for a total of 1,672 days of which it was
used to provide affordable housing for 1,130 days. As the dwelling was
used to provide affordable housing for more than 1,095 days, Lisa is
eligible for the additional affordable housing capital gains discount
(assuming the dwelling meets the other requirements).
2.25 Under section 980-5, a dwelling is used to provide affordable
housing on a day if the following conditions are satisfied:
• residential premises condition -- the dwelling is TARP and
is residential premises that is not commercial residential
premises and is tenanted or available to be tenanted;
• property management condition -- the tenancy of the
dwelling or its occupancy is exclusively managed by an
eligible community housing provider;
• providing affordable housing certification condition -- the
eligible community housing provider has given each entity
that holds an ownership interest in the dwelling certification
that the dwelling was used to provide affordable housing;
• NRAS condition -- no entity that has an ownership interest
in the dwelling is entitled to receive an NRAS incentive for
the NRAS year; and
41
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
• MIT membership condition -- if the ownership interest in
the dwelling is owned by a MIT the tenant does not have an
interest in the MIT that passes the non-portfolio test.
2.26 To satisfy the requirements to receive the additional affordable
housing CGT discount, the affordable housing use must have occurred on
or after 1 January 2018 (the day this measure applies from).
Residential premises condition
2.27 Under paragraph 980-5(a), the residential premises condition is
satisfied if the dwelling is:
• TARP;
• residential premises that are not commercial residential
premises; and
• tenanted or available to be tenanted.
2.28 The term 'TARP' is defined in section 855-20. For the purposes
of section 980-5, TARP is real property situated in Australia (including a
lease of land, if the land is situated in Australia). While mining, quarrying
and prospecting rights are also TARP if the minerals, petroleum or quarry
materials are situated in Australia, they are excluded from this measure
because they are not real property that are dwellings (see paragraph 2.17
regarding dwellings).
2.29 The term 'residential premises' is defined in subsection 995-1(1)
of the ITAA 1997 as having the same meaning as in the GST Act. Section
195-1 of the GST Act provides that the term '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.
2.30 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 the term
residential premises includes a floating home.
2.31 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 will be residential premises if it provides, at
minimum, shelter and basic living facilities and is either occupied by a
person or designed for occupation. This is to be ascertained by an
42
Additional capital gains discount for affordable housing
objective consideration of the character of the property -- the purpose for
which an entity may hold the property is not relevant.
2.32 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 or mobile home.
2.33 The term 'commercial residential premises' is defined in
subsection 995-1(1) of the ITAA 1997 as having the same meaning as in
the GST Act. Section 195-1 of the GST Act defines commercial
residential premises as:
• a hotel, motel, inn, hostel or boarding house;
• premises used to provide accommodation in connection with
a school;
• a ship that is mainly let out on hire in the ordinary course of a
business of letting ships out on hire;
• a ship that is mainly used for entertainment or transport in the
ordinary course of a business of providing ships for
entertainment or transport;
• a marina at which one or more of the berths are occupied, or
are to be occupied, by ships used as residences;
• a caravan park or a camping ground; or
• anything similar to residential premises described in the
preceding dot points.
2.34 The definition of commercial residential premises also expressly
excludes premises to the extent that they are used to provide
accommodation to students in connection with an educational institution
that is not a school. For further information about commercial residential
premises refer to Goods and Services Tax Taxation Ruling
GSTR 2012/6 -- Goods and services tax: commercial residential
premises.
2.35 A vacant dwelling would generally be regarded as being
available to be tenanted if the property is advertised or otherwise features
in relevant rental vacancy websites so it has broad exposure to potential
eligible tenants and, having regard to all of the circumstances; tenants are
reasonably likely to rent it. It must also not be advertised as being
available for other tenants who would not be eligible tenants at the same
time. For example, advertising a property for short term holiday
accommodation at market rates (for ineligible tenants) at the same time it
is advertised as vacant by a community housing provider would breach
this rule.
43
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
2.36 A vacant dwelling would not be regarded as being available to
be tenanted if it is in a state where it cannot be rented out. This would
include, for example, situations where construction or extensive repairs
and renovations are being undertaken where it is in a state that it is not
suitable for occupation.
Property management condition
2.37 The property management condition set out in
paragraph 980-5(b) requires the tenancy of the dwelling or its availability
for rent to be exclusively managed by an eligible community housing
provider.
2.38 Community housing providers provide rental housing to tenants
who are members of the community earning low to moderate incomes.
Community housing providers may own some of the dwellings, however
they also manage dwellings on behalf of investors, institutions and state
and territory governments. Many community housing providers specialise
in providing accommodation to particular client groups which may
include disability housing, aged tenants and youth housing.
2.39 Community housing providers are regulated by the states and
territories. For the purposes of section 980-5, section 980-10 defines an
eligible community housing provider as an entity that is registered as a
community housing provider to provide community housing services
under a law of the Commonwealth, state or territory or is registered by an
Australian government or government entity.
2.40 Under the definition in section 980-10, an organisation that was
a community housing provider will continue to be recognised as an
eligible community housing provider for a period of 90 days from when
its registration as a community housing provider is cancelled by a state or
territory registrar. This ensures that investors do not immediately lose
access to the additional capital gains discount for the dwelling by giving
them a transition period to find a new community housing provider.
2.41 The management of a tenancy generally includes being the point
of contact for the property for tenants, collecting rent from the tenants,
conducting property inspections, scheduling and managing the carrying
out of repairs and maintenance for the dwelling, keeping of records,
giving of notices to tenants on behalf of the owner (if required) and, if the
dwelling is vacant, advertising it as being available for rent and arranging
tenancy agreements. A dwelling is available for rent if it is advertised so it
has broad exposure to potential eligible tenants and having regard to all of
the circumstances, tenants are reasonably likely to rent it.
2.42 The part of the condition that the dwelling is 'exclusively
managed by a community housing provider' requires the community
44
Additional capital gains discount for affordable housing
housing provider to have exclusive responsibility and oversight of the
management of the dwelling. However the community housing provider
does not have to perform all aspects of the management of the dwelling
themselves and could subcontract out any or all of the responsibilities
provided they retain oversight of decisions. For example they may
contract out the scheduling and carrying out of repairs and maintenance or
advertising of vacant properties for rent.
Example 2.2 -- Property management -- direct management
ACF Community Housing is a community housing provider registered
under a state law that manages the tenancy and occupancy of dwellings
on behalf of owners to eligible tenants.
Eligible tenants are tenants that ACF Community Housing assesses as
being eligible to live in affordable housing properties.
ACF Community Housing undertakes the assessment. It applies
guidelines and criteria in operation in the applicable state or territory in
making eligibility decisions.
In managing the tenancy or occupancy of dwellings ACF Community
Housing manages the tenancy and occupation of dwellings, deals with
tenants and property owners, collects rent, undertakes property
inspections, organises repairs and maintenance of properties, keeps
records, gives notices to tenants for owners and advertises vacant
properties for rent.
As such ACF Community Housing is exclusively managing the
tenancy and occupancy of the dwellings.
Example 2.3 -- Property management -- outsourcing
BDG Community Housing is a community housing provider registered
under a state law that manages the tenancy and occupancy of dwellings
on behalf of owners to eligible tenants.
Eligible tenants are tenants that BDG Community Housing assesses as
being eligible to live in affordable housing properties.
BDG Community Housing undertakes the assessment applying
guidelines and criteria in operation in the applicable state or territory in
making eligibility decisions.
To assist it in managing the tenancy or occupancy of the dwellings
BDG Community Housing contracts JKL property management
agency to undertake some tenancy and occupancy related tasks, that is
the managing of property repairs and maintenance and engagement
with tenants and owners and advertising properties that are vacant on
its behalf (with BDG Community Housing having oversight).
As BDG Community Housing has full oversight of the property
management services that JKL property management agency provides,
BDG Community Housing is accepted as exclusively managing the
dwellings itself. Therefore BDG Community Housing satisfies the
property management condition.
45
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
Providing affordable housing certification condition
2.43 Under paragraph 980-5(c), a dwelling can only be taken to be
used for providing affordable housing use for a day if the community
housing provider has provided an affordable housing certificate that meets
the requirements set out in section 980-15. This means the certificate must
state that it declares that the residential premises and property
management conditions have been satisfied on that day.
2.44 Section 980-15 also requires that the affordable housing
certificate must be provided in the approved form. This will allow the
Commissioner to specify the information that is required to be included in
affordable housing certificates and to review and update it as required.
The certificate will need to state the number of days the dwelling was
used to provide affordable housing in the income year.
2.45 The community housing provider must provide the affordable
housing certificate to the individuals or trusts that hold an ownership
interest in the property on or before the 31st day after the end of the
individuals' or trusts' income year (31 July for most individuals and
trusts).
NRAS condition
2.46 Under paragraph 980-5(d) a dwelling can only be taken to
provide affordable housing for a day if no entity that has an ownership
interest in the dwelling is entitled to an NRAS incentive for the NRAS
year that includes that day.
2.47 The National Rental Affordability Scheme Regulations 2008 set
out the benefits that can be provided to an entity under the NRAS for
making a dwelling available to be used as part of the scheme. They are:
• a tax offset -- as set out in the tax offset certificate provided
to the approved participant in relation to the dwelling by the
Secretary of the Department of Social Services; or
• a payment or other non-cash benefit -- a payment made by
the Secretary of the Department of Social Services to an
entity in relation to the use of that dwelling under the NRAS.
2.48 For this condition, the NRAS year is the year that begins on
1 May in which the day under consideration occurs.
MIT membership condition
2.49 The final condition in section 980-5, the MIT membership
condition set out in paragraph 980-5(e), only applies if the ownership
interest in the dwelling is owned by a MIT. It is satisfied if the tenant does
46
Additional capital gains discount for affordable housing
not have an interest in the MIT that passes the non-portfolio test (that is
broadly with associates has a less than 10 per cent interest in the MIT).
2.50 Section 960-195 provides that an interest passes the
non-portfolio test if the holding entity (in this case the tenant) holds in
another entity (in this case the MIT) and the sum of the direct
participation interests held by the holding entity and its associates in that
other entity at that time is 10 per cent or more.
Capital gain that was distributed or attributed to them directly or
through an interposed entity by a trust
2.51 A capital gain is distributed or attributed by a trust directly to an
individual if the trust:
• realises that capital gain itself, that is the CGT event occurs
to a CGT asset of the trust (the ownership interest in the
dwelling); and
• the gain is distributed or attributed by the trust directly to the
individual (with there being no intervening entity).
2.52 A capital gain is distributed or attributed by a trust through an
interposed entity to an individual if a trust (the first trust):
• realises that capital gain, that is the CGT event occurs to a
CGT asset of the first trust (the ownership interest in the
dwelling);
• the gain is distributed or attributed by the first trust (or a
subsequent trust) to another entity that is another trust or a
partnership; and
• the other trust or partnership then distributes the capital gain
to the individual.
2.53 A capital gain of an individual that resulted from a CGT event
occurring to units in a unit trust (including a MIT) that holds affordable
housing will not qualify for an additional discount capital gain for
affordable housing. The capital gain may have been realised by the
individual or by another entity and be distributed or attributed to the
individual. However as this capital gain arose from the sale of units in a
unit trust, and not from a holding by an entity in an ownership interest in a
dwelling, it will not qualify as it does not satisfy this requirement.
Example 2.4 -- Trust distributing capital gain to an individual
through an interposed entity
BDF Unit Trust signs a contract on 5 September 2022 to sell a
dwelling. The settlement of the sale of the dwelling is on
3 October 2022. It had acquired the dwelling on 1 March 2018.
47
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
The BDF Unit Trust used the dwelling to provide affordable housing
for more than 1095 days (3 years) during its ownership period.
The BDF Unit Trust realised a capital gain of $200,000 from the sale
of the dwelling, which was reduced to $100,000 following application
of the discount capital gain of 50 per cent. The trust did not realise any
other capital gains or losses during the income year.
The BDF Unit Trust distributed this capital gain in equal proportion to
its unit holders, including the HLJ Trust (a discretionary trust) which
received a distribution of $50,000. The HLJ Trust distributes the whole
of this capital gain of $50,000 to Martin. (In doing so the HLJ Trust
grossed up the distribution and re-applied the capital gains discount.)
Martin's capital gain has been distributed to him by a trust (BDF Unit
Trust) through an interposed entity (the HLJ Trust). Martin therefore
satisfies this requirement for claiming the additional 10 per cent capital
gains discount for affordable housing.
Capital gains distributed by or attributed by a trust covered by the
specified entities
2.54 The incentive to invest in affordable housing provided by this
measure is directed at individuals, who either invest directly in affordable
housing (that is they directly have an ownership interest in the property
used to provide affordable housing) or through trusts, but only closely
held trusts or MITs.
2.55 For investments by individuals made through other entities, the
entity that realises the capital gain from a CGT event occurring to an
ownership interest in the property used to provide the affordable housing
and any entity through which the capital gain is distributed or attributed to
the individual must be either a certain type of trust or a partnership. For
this purpose these trusts must not be:
• a public unit trust (other than a MIT); or
• a superannuation fund.
[Schedule 2, item 2, subsection 115-225(3)]
2.56 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 a 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).
48
Additional capital gains discount for affordable housing
Working out the net capital gain where additional affordable housing
capital gains discount applies
2.57 The additional affordable housing capital gains discount is taken
into account in working out an individual's capital gain:
• from a CGT event occurring to an ownership interest in
residential premises that has been used to provide affordable
housing they held, or
• that was distributed or attributed to them directly or through
an interposed entity by a trust.
2.58 Section 102-5 sets out five steps to work out the net capital gain
for an income year. They are:
• Step 1 -- reduce the capital gains made during the income
year by the capital losses (if any) made during the income
year;
• Step 2 -- reduce the capital gains remaining at the end of
Step 1 by any previously unapplied net capital losses from
earlier income years;
• Step 3 -- reduce by the discount percentage each amount of a
discount capital gain remaining after Step 2;
• Step 4 -- apply the small business concession to any capital
gain to which they apply (if applicable);
• Step 5 -- Add up the amounts of any capital gains (if any)
remaining after step 4. The sum is the net capital gain for the
income year.
2.59 Following the amendments made by this measure, at Step 3, the
capital gain is reduced by the discount percentage. The discount
percentage is the discount percentage that would ordinarily apply plus the
additional affordable housing discount percentage. [Schedule 2, item 2,
subsection 115-125(4)]
2.60 The affordable housing discount percentage is equal to:
= Subdiv 115-B discount percentage x Affordable housing days
5 Total ownership days
where:
Subdivision 115-B discount percentage is the discount
percentage that applies under Subdivision 115-B.
Affordable housing days are the number of days the dwelling
was used to provide affordable housing during its ownership
period less the number of days when the individual receiving the
49
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
affordable housing capital gains discount was a foreign or
temporary resident.
Total ownership days are the number of days the dwelling was
held from the time it was acquired until a CGT event occurred to
it.
[Schedule 2, item 2, subsection 115-125(5)]
2.61 The Subdivision 115-B discount percentage is used as the basis
for determining the affordable housing discount percentage as:
• the affordable housing discount percentage (before
adjustment) of 10 per cent is one-fifth of the discount capital
gain percentage of 50 per cent that applies to individuals
(noting that only individuals are entitled to an affordable
housing capital gains discount); and
• it reduces the amount of the discount to take into account the
time the individual was either a foreign resident or temporary
resident for taxation purposes -- this ensures consistency
with the discount capital gain, removes the need to apportion
separately and also takes into account the transitional
arrangements that applied to this apportionment (that is not
reducing the discount for foreign or temporary residence days
occurring before 9 May 2012).
[Schedule 2, item 1, paragraph 115-100(e)]
2.62 The affordable housing discount percentage must also be
adjusted to ensure that a capital gains discount is only available to the
extent that the property was used for affordable housing use on and after
1 January 2018. This is achieved by applying an adjustment factor
calculated by dividing the affordable housing days by total days in the
ownership period. However, both the denominator and numerator in this
calculation exclude the number of days the individual was a foreign or
temporary resident after 8 May 2012. This exclusion to the number of
days applies as the period that an individual was a foreign or temporary
resident is already accounted for through the use of the Subdivision 115-B
discount percentage.
2.63 As with the existing discount capital gain, the additional
10 per cent capital gains discount for affordable housing will not be
available if they have a net capital loss for the income year that is the sum
of their capital losses for the income year exceeds the sum of their capital
gains.
50
Additional capital gains discount for affordable housing
Example 2.5 --Affordable housing capital gain
Erica signed a contract to purchase a dwelling that was residential
premises (but not commercial residential premises) on 15 May 2018
for $600,000.
On 15 September 2024 Erica signs a contract to sell the property. She
makes a gross capital gain (before any capital gains discount applies)
of $140,000.
Erica was an Australian resident for taxation purposes for the whole of
the ownership period for the dwelling.
Erica also realises a capital loss of $30,000 in the 2024-25 income year
and has a $10,000 carry forward capital loss from a prior income year.
Erica used the dwelling as follows during the period of time for which
she owned it:
• left it vacant and undertook repairs from when she acquired it on
15 May 2018 (the acquisition date for CGT purposes) until
9 September 2018 (118 days);
• rented it out by providing affordable housing to eligible tenants
through an eligible community housing provider from
10 September 2018 until 17 May 2022 (1346 days);
• rented it for rent at market value (that is not providing affordable
housing) from 18 May 2022 until 1 February 2023 (260 days);
• rented it out by providing affordable housing to eligible tenants
through an eligible community housing provider from
2 February 2023 until 1 August 2024 (547 days);
• vacated the property and prepared it for sale on and after
2 August 2024 through until 15 September 2024 (45 days).
Therefore Erica owned the dwelling for a total of 2,316 days of which
she used it to provide affordable housing for 1,893 days.
Erica's net capital gain for the 2024-25 income year is calculated as
follows:
Step 1 -- reduce the capital gains made during the income year by the
capital losses (if any) made during the income year
Erica's capital gain from Step 1 is $110,000, being the $140,000
capital gain less the capital loss of $30,000 she realised during the
current income year.
Step 2 -- reduce the capital gains remaining at the end of Step 1 by
any previously unapplied net capital losses from earlier income years
Erica's capital gain from Step 2 is $100,000, being the $110,000
capital gain at the end of Step 1 less the prior year capital loss of
$10,000.
51
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
Step 3 -- reduce by the discount percentage each amount of a discount
capital gain remaining after Step 2
For the purpose of Step 3 the discount percentage is equal to the sum
of the Subdivision 115-B discount capital gain percentage plus the
affordable housing capital gains discount percentage.
Erica's Subdivision 115-B discount capital gains discount percentage
is equal to 50 per cent (Erica was an individual and she was a resident
of Australia for the whole of the ownership period).
The affordable housing discount capital gain percentage is equal to:
= Subdiv 115-B discount percentage x Affordable housing days
5 Total ownership days
= 50% x 1,893
5 2,316
= 8.17%
The discount percentage is equal to the sum of the Subdivision 115-B
discount capital gain percentage and the affordable housing capital
gains discount percentage that is 58.17 per cent (50 per cent plus
8.17 per cent).
The capital gain from Step 3 is the capital gain following step 2
reduced by the discount percentage, that is:
= Step 2 capital gain x (1 - discount percentage)
= $100,000 x ( 1 - 58.17%)
= $41,830
Step 4 -- apply the small business concession to any capital gain to
which they apply (if applicable)
The small business concessions do not apply to Erica's capital gain
from the sale of the investment property. Therefore Erica's capital gain
continues to be $41,830.
Step 5 -- add up the amounts of any capital gains (if any) remaining
after step 4 -- the sum is the net capital gain for the income year
Erica's capital gain from the sale of the investment property at the end
of Step 4 is $41,830. This is also her total capital gain for the
2024-25 income year as she has not realised any other capital gains
during that year.
Example 2.6 --Affordable housing capital gain -- individual is a
resident for only some of the ownership period
William purchased a dwelling that was residential premises on
1 January 2015 which he used to earn rent for the whole time he owned
52
Additional capital gains discount for affordable housing
it. William used the property to provide affordable housing from
1 January 2018 until 30 June 2023.
On 30 June 2023 William signs a contract to sell the dwelling. He
makes a capital gain (before any capital gains discount) of $200,000.
William moved to the United States of America on 1 July 2022,
becoming a foreign resident for taxation purposes on and from that
day. Therefore William was an Australian resident for taxation
purposes for 2,738 days and a foreign resident for 365 days of the
3,103 day ownership period of the dwelling.
William does not realise any other capital gains or losses in the
2022-23 income year and does not have any prior year capital losses.
William's net capital gain for the 2022-23 income year is calculated as
follows:
Step 1 -- reduce the capital gains made during the income year by the
capital losses (if any) made during the income year
William's capital gain from Step 1 is $200,000 as he has not realised
any capital losses during the 2022-23 income year.
Step 2 -- reduce the capital gains remaining at the end of Step 1 by
any previously unapplied net capital losses from earlier income years
William's capital gain from Step 2 is $200,000 as he does not have any
capital losses from prior income years.
Step 3 -- reduce by the discount percentage each amount of a discount
capital gain remaining after Step 2
For the purpose of Step 3 the discount percentage is equal to the sum
of the Subdivision 115-B discount capital gain percentage plus the
affordable housing capital gains discount percentage.
The Subdivision 115-B discount capital gain percentage is equal to:
Number of days during discount testing period that you were
= an Australian resident (but not a temporary resident)
2 x No days in discount period
2,738
=
2 x 3,103
= 44.11%
The affordable housing discount capital gain percentage is equal to:
= Subdiv 115-B discount percentage x Affordable housing days
5 Total ownership days
= 44.11% x 1,642
5 2,738
= 5.29%
Affordable housing days and total ownership days both exclude the
53
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
number of days when the individual was a foreign or temporary
resident.
The discount percentage is equal to the sum of the Subdivision 115-B
discount capital gain percentage and the affordable housing capital
gains discount percentage that is 49.4 per cent (44.11 per cent plus
5.29 per cent).
The capital gain from Step 3 is the capital gain following step 2
reduced by the discount percentage, that is:
= Step 2 capital gain x (1 - discount percentage)
= $200,000 x ( 1 - 49.4%)
= $101,200
Step 4 -- apply the small business concession to any capital gain to
which they apply (if applicable)
The small business concessions do not apply to William's capital gain
from the sale of the investment property. Therefore William's capital
gain continues to be $101,200.
Step 5 -- Add up the amounts of any capital gains (if any) remaining
after step 4 -- the sum is the net capital gain for the income year.
William's capital gain from the sale of the investment property at the
end of Step 4 is $101,200. This is also his total capital gain for the
2022-23 income year as he has not realised any other capital gains
during that year.
Reporting requirements for community housing providers
2.64 Under section 396-55 in Schedule 1 to the TAA 1953,
community housing providers that issue affordable housing certificates
must provide an annual report notifying the Commissioner in the
approved form of the details of all certifications that they provide during
an income year, including in relation to this measure (unless the
Commissioner notifies that it is not required). Notification for an income
year must be provided to the Commissioner on or before 31 days
following the end of the relevant income year or within such further time
that the Commissioner allows.
Disclosure of information to state registrars about community housing
providers
2.65 The confidentiality of taxpayer information provisions in section
355-25 of Schedule 1 to the TAA 1953 make it an offence for a taxation
officer to disclose tax information that identifies any entity, or is
reasonably capable of being used to identify any entity, except in specified
circumstances.
54
Additional capital gains discount for affordable housing
2.66 Community housing providers are regulated at the state and
territory government level. The Commissioner is permitted under table
items 9 and 10 of the subsection 355-65(8) of Schedule 1 to the
TAA 1953 to disclose to the state and territory community housing
registrars information about community housing providers for the purpose
of the registrars determining whether they should be, or should continue to
be, registered. The Commissioner can inform the relevant state or territory
registrar about information concerning a community housing provider
registered with it if the Commissioner has information suggesting that
community housing provider should no longer be registered.
Application and transitional provisions
2.67 These amendments to provide an additional CGT discount
applies to CGT events occurring on and after 1 January 2018 for
affordable housing provided on and after that day. Although this change is
retrospective in application, the additional CGT discount provides a
benefit to taxpayers and does not disadvantage any taxpayers. [Schedule 2,
item 3]
2.68 Schedule 2 to the Primary Bill commences on the first day of the
next quarter following the day of Royal Assent. [Clause 2]
55
Chapter 3
Near-new dwelling interests
Outline of chapter
3.1 On 24 June 2017 amendments were made to the Foreign
Acquisitions and Takeovers Regulation 2015. As part of these
amendments a near-new dwelling exemption certificate was introduced.
3.2 The introduction of the near-new dwelling exemption certificate
creates flexibility for property developers and enables them to sell
near-new dwellings (dwellings that have previously been subject to a
failed settlement) to foreign persons under the Foreign Acquisitions and
Takeovers Act 1975.
3.3 These exemption certificates broadly mirror the new dwelling
exemption certificates that are available to developers under section 57 of
the Foreign Acquisitions and Takeovers Act 1975.
3.4 Schedule 3 to the Treasury Laws Amendment (Reducing
Pressure on Housing Affordability Measures) Bill 2019 and the Foreign
Acquisitions and Takeovers Fees Imposition Amendment (Near-new
Dwelling Interests) Bill 2019 create a reconciliation mechanism to ensure
that where a near-new dwelling is sold by a developer to a foreign person,
the developer provides a reconciliation payment in respect of that sale.
Context of amendments
3.5 Consistent with the process for payment under a new dwelling
exemption certificate, these amendments introduce a reconciliation
payment for the near-new dwelling exemption certificate by which
developers pay additional fees for each near-new dwelling that was sold to
a foreign person by the developer under the exemption certificate.
3.6 This ensures equivalent treatment as that given under the new
dwelling exemption certificate, which allows property developers to sell
new dwellings to foreign persons, paying a reconciliation fee for each sale
under the exemption certificate.
3.7 Property developers are unable to sell a near-new dwelling to a
foreign person under their new dwelling exemption certificate.
3.8 Prior to the introduction of a near-new dwelling exemption
certificate, a foreign person had to submit an individual application for
approval to purchase the near-new dwelling.
57
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
3.9 Practically, issues arose when a developer managed to exchange
contracts with a person in respect of a new dwelling, but then the sale of
the new dwelling did not reach settlement. Such dwellings were
considered to have been sold, and therefore unable to be sold under a new
dwelling exemption certificate, even though they had not changed
ownership and were still able to be seen as new.
3.10 On 24 June 2017, near-new dwelling exemption certificates
were introduced for developers to allow them to sell a near-new dwelling
(a dwelling that had not reached settlement under a previous contract of
sale) in the same way as they sell new dwellings.
Summary of new law
3.11 These amendments create a reconciliation mechanism to require
developers to make six monthly payments to the Treasurer (or his or her
delegate, currently the Commissioner of Taxation) under the Foreign
Acquisitions and Takeovers Fees Imposition Act 2015.
Comparison of key features of new law and current law
New law Current law
The new law will replicate existing Six monthly fees are payable by
requirements for developers to make developers who sell a new dwelling
reconciliation payments for new to a foreign person under a new
dwellings they sell to foreign persons dwelling exemption certificate
under a new dwelling exemption obtained under section 57 of the
certificate. Developers who sell a Foreign Acquisitions and Takeovers
near-new dwelling to a foreign person Act 1975.
under a near-new dwelling exemption The current provision doesn't extend
certificate will be required to make a to cover developer sales of near-new
reconciliation payment for each sale dwellings to foreign persons under
of a near-new dwelling to a foreign near-new dwelling exemption
person. certificates.
Detailed explanation of new law
3.12 Reconciliation payments are a necessary mechanism to ensure
that developers pay the same fee as would be payable if a foreign person
directly applied to the Foreign Investment Review Board for the
58
Near-new dwelling interests
acquisition. Without reconciliation payments, foreign persons would be
able to acquire dwellings without the Commissioner of Taxation receiving
any additional fees with respect to those individual applications. Fees
would only be incurred with respect to the application for the exemption
certificate.
3.13 To create a reconciliation payment applying to sales of
dwellings made under a near-new dwelling exemption certificate, new
definitions have been added to the Foreign Acquisitions and Takeovers
Act 1975 including a definition of near-new dwelling acquisition,
near-new dwelling interest and residential land (near-new dwelling
interests) certificate. [Schedule 3 to the Treasury Laws Amendment (Reducing
Pressure on Housing Affordability Measures) Bill 2019, items 1 and 10, section 4 and
paragraph 115C(3)(b) of the Foreign Acquisitions and Takeovers Act 1975]
3.14 Schedule 3 to the Treasury Laws Amendment (Reducing
Pressure on Housing Affordability Measures) Bill 2019 also inserts a new
definition at subsection 113(4A) of the Foreign Acquisitions and
Takeovers Act 1975 to define near-new dwelling acquisition. A near-new
dwelling acquisition is, for the purposes of the foreign investment regime,
any acquisition covered by a residential land (near-new dwelling interests)
certificate provided to a developer. [Schedule 3 to the Treasury Laws Amendment
(Reducing Pressure on Housing Affordability Measures) Bill 2019, item 9, subsection
113(4A) of the Foreign Acquisitions and Takeovers Act 1975]
3.15 The Foreign Acquisitions and Takeovers Act 1975 is amended to
establish the near-new dwelling exemption certificate reconciliation
payment for developers. As a result of these changes, a developer will
remit their near-new dwelling fees every six months. [Schedule 3 to the
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures)
Bill 2019, items 2 to 8, section 113 of the Foreign Acquisitions and Takeovers Act 1975]
3.16 If a developer receives the near-new dwelling exemption
certificate after this legislation is enacted then the first reconciliation fee is
payable at the end of the six month period after they received the
near-new exemption certificate. The first reconciliation fee will include
any fees payable from sales made by a developer under a near-new
dwelling exemption certificate within that six month period.
3.17 If a developer received the near-new dwelling exemption
certificate before this legislation was enacted then the developer will pay
the first reconciliation fee at their first reporting date after 30 days of the
commencement of this legislation. The first reconciliation fee will include
any fees payable from sales made by the developer under a near-new
dwelling exemption certificate since the certificate was obtained. [Schedule
3 to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability
Measures) Bill 2019, items 11 and 12]
3.18 For subsequent reconciliation payments, developers are required
to pay the reconciliation fee for sales of residential land under near-new
dwelling exemption certificates on a six monthly basis. [Schedule 3 to the
59
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures)
Bill 2019, item 5, subsection 113(2A) of the Foreign Acquisitions and Takeovers Act
1975]
Example 3.1
Pablo is a property developer who has just completed an apartment
complex on the Gold Coast. Pablo understands that his apartments may
attract the interest of foreign investors so he obtains a new dwelling
exemption certificate and a near-new dwelling exemption certificate on
1 August 2017.
Pablo makes a number of successful sales to foreign persons under the
new dwelling exemption certificate. However, one of the sales fails to
reach settlement and the dwelling is not sold.
Pablo finds another purchaser for the apartment, Wendy who is a
foreign person under the Foreign Acquisitions and Takeovers Act
1975. Pablo is able to sell the dwelling to Wendy under a near-new
dwelling exemption certificate.
Pablo and Wendy settle the sale of the apartment on
31 December 2017. Pablo is required to pay the Commissioner of
Taxation (as the Treasurer's delegate) the reconciliation fee related to
this sale on the first six monthly reporting period that falls at least
30 days after this legislation is enacted.
Consequential amendments
3.19 Consequential amendments are made by the Foreign
Acquisitions and Takeovers Fees Imposition Amendment (Near-new
Dwelling Interests) Bill 2019 to the Foreign Acquisitions and Takeovers
Fees Imposition Act 2015 in order to impose the amount of the fee
payable by developers. [Schedule 1 to the Foreign Acquisitions and Takeovers Fees
Imposition Amendment (Near-new Dwelling Interests) Bill 2019, item 4, subsections
6(5) and 6(6) of the Foreign Acquisitions and Takeovers Fees Imposition Act 2015]
3.20 Editorial amendments are made to the Foreign Acquisitions and
Takeovers Fees Imposition Act 2015 as a result of these changes. [Schedule
1 to the Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new
Dwelling Interests) Bill 2019, items 1, 2, and 3, section 6 (heading), subsection 6(1) and
subsection 6(1) after note 2, of the Foreign Acquisitions and Takeovers Fees Imposition
Act 2015]
Application and transitional provisions
3.21 Amendments to the Foreign Acquisitions and Takeovers
Act 1975 apply from 1 July 2017. [Schedule 3 to the Treasury Laws Amendment
(Reducing Pressure on Housing Affordability Measures) Bill 2019, item 11]
60
Near-new dwelling interests
3.22 Schedule 3 to the Treasury Laws Amendment (Reducing
Pressure on Housing Affordability Measures) Bill 2019 establishes a
transitional period to cover acquisitions made under near-new dwelling
exemption certificates that were given to a developer after 1 July 2017 and
before this legislation was enacted. The transitional provisions enable a
developer to make a reconciliation payment at the end of the first
reporting period that falls at least 30 days after the legislation was
enacted. [Schedule 3 to the Treasury Laws Amendment (Reducing Pressure on
Housing Affordability Measures) Bill 2019, item 12]
3.23 For subsequent reconciliation payments, they must be made six
monthly. [Schedule 3 to the Treasury Laws Amendment (Reducing Pressure on
Housing Affordability Measures) Bill 2019, item 5, subsection 113(2A) of the Foreign
Acquisitions and Takeovers Act 1975]
3.24 Amendments to the Foreign Acquisitions and Takeovers Fees
Imposition Act 2015 apply from 1 July 2017 so that any sales of near-new
dwellings made pursuant to a near-new dwelling exemption certificate are
subject to a reconciliation payment by the developer who sold the
near-new dwelling. [Schedule 1 to the Foreign Acquisitions and Takeovers Fees
Imposition Amendment (Near-new Dwelling Interests) Bill 2019, items 5 and 6]
3.25 The amendments to both the Foreign Acquisitions and
Takeovers Act 1975 and the Foreign Acquisitions and Takeovers Fees
Imposition Act 2015 are retrospectively applied from 1 July 2017 to align
with the introduction of the near-new dwelling exemption certificate, as it
was always the intention to apply a reconciliation fee for each sale of a
near-new dwelling to a foreign person.
3.26 The retrospective application of this measure is consistent with
the announcement of the near-new dwelling exemption certificate in the
2017-18 Budget announcement. Any adverse impact is expected to be
minor, given the retrospective application was included in the Explanatory
Statement that accompanied the regulations that introduced the near-new
dwelling exemption certificate.
3.27 Page 5 of the Explanatory Statement of the Foreign Acquisitions
and Takeovers Fees Imposition Amendment (Fee Streamlining)
Regulations 2017 (which introduced the near-new dwelling exemption
certificate) made it clear that a reconciliation payment would apply for
each near-new dwelling sold to a foreign person by the developer.
3.28 Transitional provisions apply for the first reconciliation payment
for near-new dwelling exemption certificates given before this legislation
was enacted. For these near-new dwelling exemption certificates, the
transitional reconciliation fee period is the first reporting date that falls
30 days after the legislation commences. A fee is payable by a developer
for each sale of a dwelling under the near-new dwelling exemption
certificate within that period. [Schedule 1 to the Foreign Acquisitions and
Takeovers Fees Imposition Amendment (Near-new Dwelling Interests) Bill 2019, item 6]
61
Chapter 4
Statement of Compatibility with Human
Rights
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Capital gains tax changes for foreign residents
4.1 Schedule 1 to the Primary Bill 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
4.2 This Schedule amends the ITAA 1997 to:
• remove the entitlement to the CGT main residence exemption
for foreign residents; and
• modify the foreign resident CGT regime to clarify that, for
the purpose of determining whether an entity's underlying
value is principally derived from TARP, the principal asset
test is applied on an associate inclusive basis.
Human rights implications
4.3 This Schedule does not engage any of the applicable rights or
freedoms.
Conclusion
4.4 This Schedule is compatible with human rights as it does not
raise any human rights issues.
Additional capital gains discount for affordable housing
4.5 Schedule 2 to the Primary Bill 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.
63
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
Overview
4.6 Schedule 2 to the Primary Bill amends the ITAA 1997 to
provide an additional affordable housing capital gains discount of up to
10 per cent at the time a CGT event occurs to an ownership interest in
residential premises that has been used to provide affordable housing.
Human rights implications
4.7 This Schedule is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in the
definition of human rights in section 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011.
4.8 Of the human rights and freedoms recognised or declared in the
international instruments listed in the definition of human rights at
section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011, this
Schedule engages the right to an adequate standard of living, including
housing, as referred to in Article 11.1 of the International Covenant on
Economic, Social and Cultural Rights.
4.9 Article 11.1 of the International Covenant on Economic, Social
and Cultural Rights states that everyone has the right to 'an adequate
standard of living for himself and his family, including adequate food,
clothing and housing, and to the continuous improvement of living
conditions' and that 'appropriate steps' be taken to 'ensure the realization
of this right'.
4.10 Under the additional capital gains discount for affordable
housing measure, an additional incentive is introduced for taxpayers who
hold and maintain affordable rental housing assets in Australia which are
managed by registered Community Housing Providers. This will
incentivise these investors by allowing them to retain an increased amount
of the capital gains they realise from their investments that are leased to
members of the community earning low to moderate incomes, at rental
rates set according to state and territory housing policies. As such, this
Schedule is designed to increase the volume of affordable housing that is
available in the market, reducing the likelihood that community members
on lower incomes will experience homelessness and housing hardship.
4.11 This Schedule introduce a framework for empowering individual
and institutional investors to increase their level of private investment in
affordable rental accommodation by adjusting the existing concessional
taxation treatment of capital gains. These measures are therefore
compatible with and enhance the right to an adequate standard of living
including housing.
64
Statement of Compatability with Human Rights
4.12 Article 27 of the Convention on the Rights of the Child also
recognises 'the right of every child to a standard of living adequate for the
child's physical, mental, spiritual, moral and social development'. The
Article also states that 'States Parties, in accordance with national
conditions and within their means, shall take appropriate measures to
assist parents and others responsible for the child to implement this right
and shall in case of need provide material assistance and support
programmes, particularly with regard to nutrition, clothing and housing'.
4.13 By incentivising greater investment in affordable housing for
prospective tenants on low to moderate incomes, the Primary Bill is
compatible with children's rights to an adequate standard of living. The
Primary Bill will help ensure children within households at risk of
homelessness are at lower risk of being without a home.
4.14 Tax concessions of this kind are in line with the guidance issued
by the UN Committee on Economic Social and Cultural Rights regarding
the right to an adequate standard of living, with respect to housing.
Conclusion
4.15 This Schedule is compatible with human rights as it does not
raise any human rights issues.
Near-new dwelling exemption certificates
4.16 Schedule 3 to the Treasury Laws Amendment (Reducing
Pressure on Housing Affordability Measures) Bill 2019 and the Foreign
Acquisitions and Takeovers Fees Imposition Amendment (Near-new
Dwelling Interests) Bill 2019 are 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
4.17 Schedule 3 to the Treasury Laws Amendment (Reducing
Pressure on Housing Affordability Measures) Bill 2019 and the Foreign
Acquisitions and Takeovers Fees Imposition Amendment (Near-new
Dwelling Interests) Bill 2019 establish a reconciliation payment
mechanism for developers who sell residential property to foreign persons
under the Foreign Acquisitions and Takeovers Act 1975.
4.18 A sale of a near-new dwelling under a near-new dwelling
exemption certificate will give rise to an obligation on a developer to
make a payment to the Treasurer (or his or her delegate) of the amount of
the fee that would have been payable by the foreign person under the
Foreign Acquisitions and Takeovers Act 1975, the Foreign Acquisitions
and Takeovers Fees Imposition Act 2015 and the Foreign Acquisitions and
65
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling
Interests) Bill 2019
Takeovers Fees Imposition Amendment (Fee Streamlining)
Regulations 2017 had the foreign person obtained a foreign investment
approval themselves.
4.19 The Schedule does not impose any additional fees on foreign
persons and creates greater flexibility for a foreign person to purchase a
near-new dwelling from a developer.
Human rights implications
4.20 Schedule 3 to the Treasury Laws Amendment (Reducing
Pressure on Housing Affordability Measures) Bill 2019 and the Foreign
Acquisitions and Takeovers Fees Imposition Amendment (Near-new
Dwelling Interests) Bill 2019 engage the right to freedom from
discrimination.
4.21 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.
4.22 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'.2
4.23 The Schedule 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'.
4.24 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
2
General Comment No 18: Non-discrimination at [13].
66
Statement of Compatability with Human Rights
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'.
4.25 Schedule 3 to the Treasury Laws Amendment (Reducing
Pressure on Housing Affordability Measures) Bill 2019 and the Foreign
Acquisitions and Takeovers Fees Imposition Amendment (Near-new
Dwelling Interests) Bill 2019 engage these human rights as they apply
based on the citizenship of the investor. The Schedule interacts with
provisions in the Foreign Acquisitions and Takeovers Act 1975 to
determine whether or not an investor is subject to Australia's foreign
investment framework.
4.26 The underlying principle of Australia's foreign investment
framework is that foreign investment in Australia is welcome where it is
in the national interest. The objective of the framework is to provide a
predictable and welcoming environment for foreign investors while giving
the Treasurer the power to review certain investments to ensure that
investment is not contrary to the national interest.
4.27 While Schedule 3 to the Treasury Laws Amendment
(Reducing Pressure on Housing Affordability Measures) Bill 2019 and the
Foreign Acquisitions and Takeovers Fees Imposition Amendment
(Near-new Dwelling Interests) Bill 2019 only affect individuals who are
citizens of countries other than Australia, in the context of Australia's
foreign investment framework there is no less restrictive way of achieving
the framework's objectives. Accordingly those limitations are reasonable,
necessary and proportionate.
Conclusion
4.28 Schedule 3 to the Treasury Laws Amendment (Reducing
Pressure on Housing Affordability Measures) Bill 2019 and the Foreign
Acquisitions and Takeovers Fees Imposition Amendment (Near-new
Dwelling Interests) Bill 2019 are compatible with human rights because to
the extent that they may limit human rights, those limitations are
reasonable, necessary and proportionate.
67