The 2017-18 Victorian and Federal Budgets were released in May. Now the dust has settled, let’s look at the real implications of the respective budgets for residential property developers.
For contracts entered into on or after 1 July 2017 for the sale of relevant taxable Australian property (e.g. real property) valued at $750,000 or above, purchasers must withhold 12.5% of the purchase price unless the vendor provides a Clearance Certificate (which verifies that the vendor is not a foreign resident) by settlement.
Significantly more vendors will be affected than when the regime was first introduced on 1 July 2016 for a higher value threshold of $2m +. Affected vendors are “guilty until proven innocent”. I recommend you not wait to obtain a Clearance Certificate - it costs nothing and can be used for all projects settling within 12 months.
To clear up confusion regarding adjustments, on 4 July 2017, the ATO’s website was updated to confirm that “[w]here the purchase price is used as a proxy for market value, the market value is the purchase price before adjustment for any disbursements at settlement …Therefore, the $750,000 threshold test for taxable Australian real property is applied to the purchase price before adjustment for disbursements.”
Purchaser to remit GST
From 1 July 2018, purchasers of new residential premises or subdivisions must remit GST directly to the ATO by settlement.
You will need to put in place procedures to make sure GST is calculated correctly (if the margin scheme is used) and remittance made by the purchaser. These procedures can be set out in the Contract of Sale or via co-operation between each party’s lawyers. Frustratingly, no guidance has been released about how the regime will work, leaving many unanswered questions including liability for information given to purchasers and level of disclosure required where the margin scheme is used.
Cap on foreign ownership
A 50% cap on foreign ownership of dwellings has been imposed.
This affects new multi-storey buildings that have at least 50 dwellings. A Project Director for a prominent local and international apartment developer is expecting the change to adversely affect project activity in Victoria, saying “…it is a fact of life that developers at the moment cannot sell stock…and in some cases may end up going into receivership.”
However, there is little change for small-to-medium sized developers, whose financiers presently require a majority of pre-sales to local buyers.
Interestingly, there doesn’t seem to be any cap on local buyers on-selling to foreign residents.
OTP concession changes
From 1 July 2017, investors will lose the OTP concession and owner-occupiers who are not first home buyers will only be eligible for the OTP concession where the dutiable value is $550,000 or less.
Interest from some investors may drop. Developers will need to critically review their sale prices, target market and their finance requirements.
Stamp Duty abolished
From 1 July 2017, stamp duty is abolished for first home buyers of property valued at $600,000 or less, and will be levied on a sliding scale for property between $600,000 and $750,000.
Based on a value range of $600,000 to $750,000, one can expect more affordable outer-city suburbs (e.g. Kurunjang, Wyndham Vale or Frankston North) will experience short-term growth. A present example is Diggers Rest (approx. 30km from the CBD) which is currently experiencing the start of a property value rise.
Given the 50% foreign cap, apartment developers might consider maintaining prices in the above range to attract first home buyers. Overall, the attitude of many real estate agents is that buyers in that price range now have more to spend. Focusing on housing within this price range will provide more opportunity for sales and boost housing supply for a desperate generation of first home buyers.
About the Writer – Stephanie McGrath
Stephanie McGrath is a Senior Associate at Melbourne law firm Robert James Lawyers and presents at Business Concepts Group’s annual Property Development Masterclass.