Your Complete List of New Tax Changes for Residential Property Investors

Residential property investments are a significant part of every business family’s portfolio in Perth. The recent tax changes in this sector have profoundly impacted how tax accountants structure the taxes for these families and manage their investment portfolios. Understanding these changes is crucial for every residential property investor in Perth.

Of course, many business families own and operate commercial properties in addition to their residential ones, including commercial property held in an SMSF, and some of these changes also apply to them. 

Tax changes from July 2016

Foreign Resident Capital Gains Withholding (FRCGW)

The FRCGW regime, initially introduced in the 2013–14 federal budget, is detailed in Subdivision 14-D of Schedule 1 to the Taxation Administration Act 1953 (TAA). It covers transactions for Australian real property under a contract executed from 1 July 2016 onwards.

Initially, the FRCGW required buyers to withhold 10% of the property’s purchase price and pay it to the Australian Tax Office (ATO) if the property was purchased from a foreign resident seller and the purchase price exceeded $2 million for residential properties.

Under the FRCGW framework, all sellers are presumed to be foreign residents. However, Australian resident sellers can exempt themselves from this withholding by acquiring a clearance certificate from the ATO and presenting it to the buyer before settlement. These certificates are relatively easy to obtain; if you are unsure, your Perth tax accountant can apply for one.  The withheld amount might also be decreased if a variation is requested from the ATO. Several exclusions are additionally applicable.

Subsequent amendments effective from 1 July 2017 increased the withholding rate to 12.5% and lowered the property value threshold for this withholding from $2 million to $750,000.

Further adjustments were announced during the Mid-Year Economic and Fiscal Outlook for 2023–24, which will require Perth tax accountants to help their clients further. The withholding rate was set to rise from 12.5% to 15%, and the property value threshold was reduced from $750,000 to $0, effective for property sales under contracts initiated from 1 January 2025.

Tax changes from July 2017

Travel Expenses and Depreciation on Certain Rental Property Assets

Since 1 July 2017, the ATO has enforced stricter rules to prevent incorrect claims of travel expenses related to residential rental properties (RRP). Section 26-31(1) of the Income Tax Assessment Act 1997 (ITAA 1997) excludes deductions for travel expenses incurred in managing, maintaining, or collecting rent for residential properties. This includes vehicle costs, taxi or hire car fees, airfares, public transport fares, and associated meals or accommodation. This provision also prevents these costs from being included in the property’s capital gains tax (CGT) cost base.

Sections 26-31 of the ITAA 1997 detail exceptions to this rule. The ATO’s Rental property schedule still includes a category for claiming travel expenses applicable to non-residential properties or those owned by certain excluded entities.

Additionally, from 1 July 2017, changes were implemented to curb the practice of property investors, with the help of their Perth tax accountant, ‘refreshing’ the value of depreciating assets, such as plant and equipment, acquired with a property. Now, taxpayers generally cannot claim depreciation on second-hand depreciating assets within a residential rental property purchased after 7:30 p.m. on 9 May 2017. Exceptions are made for properties used in business operations, owned by excluded entities, or if the property was partly or wholly rented out in the 2016–17 financial year.

Where depreciation cannot be claimed due to subsection 40-27(2) of the ITAA 1997, taxpayers may realise a capital loss under CGT event K7. This loss is calculated based on the unclaimed depreciation—the difference between the asset’s termination value and cost.

To ensure compliance, taxpayers must maintain detailed records of the purchase and sale price allocations between the property’s components (land and dwelling) and its depreciating assets. This documentation is crucial for accurately calculating permissible depreciation claims and any capital losses under CGT event K7 upon the property’s sale, distinct from the capital gains or losses from CGT event A1.

This tax change significantly impacted the tax strategy of rentvesting when the investment property was in a suburb close to the landlord’s family.

Tax changes from July 2018

GST Payable on Settlement

The significant rise in ‘phoenix activity’—where property developers avoid paying GST by cyclically liquidating companies and starting anew—prompted a legislative response in a 2018 explanatory memorandum for an amending bill. Anecdotally, a Perth tax accountant (not Westcourt) helped an infamous Perth property investor create this Phoenix scheme.  By November 2017, the Australian Tax Office (ATO) had identified 3,731 individuals in this scheme over the past five years. These individuals were linked to over 12,000 now-insolvent entities, which collectively accrued $1.8 billion in written-off debts and claimed $1.2 billion in input tax credits from 2013 to 2017.

Effective 1 July 2018, a new measure under Subdivision 14-E of Schedule 1 to the Taxation Administration Act (TAA) was introduced to combat this issue. Like the Foreign Resident Capital Gains Withholding (FRCGW) regime, this measure requires buyers of ‘new residential premises’ or new subdivisions of ‘potential residential land’ to pay a portion of the GST directly to the ATO at settlement.

Specifically, the obligation requires purchasers to remit one-eleventh of the transaction price directly, or 7%, if the GST margin scheme is applicable. Sellers must inform buyers if a GST withholding payment is necessary through prescribed notifications included in most standard land contracts, which are crucial for the timely processing of transactions. Property developers will always ask their Perth tax accountant to obtain this exemption.  Sellers only receive a credit for the GST amount after the Commissioner has received it.

Frequent errors found on forms submitted by property purchasers and their representatives, often due to incorrect seller information, can delay the processing of credits. It is recommended that the ATO’s prescribed forms are utilised correctly for both payment and reporting to ensure accuracy and prevent delays.

Tax changes from July 2019

Vacant land denial

Since 1 July 2019, section 26-102 of the Income Tax Assessment Act 1997 (ITAA 1997) has prohibited deductions for expenses related to holding vacant land. Exceptions are made for cases where the land is used in a business, owned by primary producers, or held by certain exempt entities. For these purposes, land is classified as ‘vacant’ if it lacks any substantial and permanent structure that is in use or ready for use.

Distinct from residential rental properties (RRP), section 26-102(4) specifies how to assess if land with residential structures is considered vacant under the GST Act. In this context, residential structures are ignored in determining vacancy status until they are:

1. Legally habitable according to relevant laws.
2. Actively leased, hired, or available for such arrangements.

This provision ensures taxpayers cannot claim deductions for holding costs on land with residential premises until they are legally rentable and efforts are being made to generate income. This emphasises that mere intentions of renting do not qualify for tax deductions.

Furthermore, expenses that are non-deductible due to section 26-102 in a given tax year can be added to the property’s capital gains tax (CGT) cost base. It is always important for the Perth tax accountant to update the CGT asset register for these costs during the tax return preparation process.

From July 2020

Loss of the main residence exemption for tax non-residents

Since 1 July 2020, section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) has eliminated the main residence exemption (MRE) for foreign residents, applicable from 9 May 2017 for properties not owned before that date.

Under these regulations, a taxpayer who is a foreign resident during a capital gains tax (CGT) event and previously used a dwelling as their main residence before renting it out faces specific restrictions. They are unable to:

1. They can continue claiming the dwelling as their main residence under the six-year absence rule, which would otherwise permit them to do so for up to six years while rented.
2. Reset or uplift the cost base of the dwelling to its market value when it was first rented.

These benefits are only accessible under the MRE, which foreign residents are now generally excluded from, barring certain life events.

Common tax mistakes for residential property investors

Here is a revised list of tips to help avoid common errors when filing tax returns and claiming rental property deductions:

1. Gross Up Net Rental Income: When using figures provided by property agents, adjust the net rental income to a gross figure before reporting. Avoid claiming expenses again if they’ve already been deducted from the net income reported.
2. Apportion for ‘Mates’ Rates’: If rental income is reduced due to offering ‘mates’ rates’, ensure expense deductions are proportionally adjusted.
3. Classify Improvements Correctly: Distinguish capital improvements from repairs. A repair involving replacing an entire asset should be treated as a capital expense.
4. Distinguish Between Depreciating Assets and Capital Works: Accurately differentiate between the cost of depreciating assets and more substantial capital works.
5. Holiday Rental Deductions: To claim deductions on a holiday rental, ensure the property is available for rent.  You cannot enjoy a tax deduction when you use it.
6. No Deductions for Own Labour: You cannot claim deductions for your labour when doing cleaning, repairs, or construction on your rental property.
7. Prepaid Interest Deductions: Prepaid interest can be deducted immediately if the prepayment covers no more than 12 months and ends by the close of the next income year after the payment was made.
8. Negative Gearing: Negative gearing deductions are still permissible for rental properties.
9. Immediate Deductions for Small Assets: Assets costing less than $300 can be immediately deducted unless they are part of a set or substantially identical to other assets purchased in the same income year that exceed $300.
10. Third Element Holding Costs: For properties held since post-28 August 1991, third element costs are part of the cost base unless the property is used for a taxable purpose, such as being genuinely available for rent between holiday periods.
11. Non-Resettable Cost Base: A property’s cost base is reset to market value only when it switches from being a primary residence to earning rental income, not each time it is rented thereafter.
12. Using the Six-Year Absence Rule: This rule applies only if you stop treating the property as your main residence, not just by temporarily vacating. A partial main residence exemption applies if the property is sold.
13. Deductibility of Land and Other Taxes: Land taxes and similar state-based holding taxes, including vacancy and short-stay levies, are fully deductible.  However, simply receiving a land tax assessment does not mean you must accept it; you can object to a RevenueWA Land Tax Assessment.
14. Data Matching and Compliance: With advanced data matching systems, such as the Rental bond and the Residential investment property data matching programs, evading scrutiny from the ATO is increasingly challenging.

While many Perth families in business appreciate how real estate is a tax-effective investment, it is also fair to say that the rate of the tax change on residential property investors across Perth and Australia is unprecedented.  With property – the dollars invested in purchasing, holding, improving, and maintaining are always significant – so getting clear, documented tax structuring and strategy advice is essential.  Westcourt is a clear choice for property tax structuring – with our proven record of tax excellence, a deep global network of tax advisors, and forever independent and conflict-free advice coupled with our single focus on business families. Why not call us today?