Specialising in the very top end of luxury off-the-plan sales, Marshall White Projects experiences firsthand, the widespread and often unintended consequences that state and federal legislative and tax changes can have on Melbourne’s property market.
Since the start of this financial year alone, we have witnessed an 80 percent rise in the popularity of prestige apartments in the $2m+ price bracket, with families and professional couples becoming more accepting of apartment living as a lifestyle choice.
However, a new withholding tax and compliance regime set to be introduced from July 1st 2016 could significantly dampen this growth, with potentially dire consequences for the market.
Applying to properties in excess of $2 million, the new legislation requires purchasers to withhold 10 per cent of the purchase price and remit it to the Australian Taxation Office (ATO) if a vendor is a foreign resident for tax purposes.
Moreover, any vendor selling a property for more than $2 million, Australian or otherwise, is required to obtain a clearance certificate from the Tax Office to prove they are an Australian resident for tax purposes.
Though this initiative was designed to deter foreign resident taxpayers from diverting proceeds overseas before they encountered compliance action, what we are now noticing is the potentially dramatic impact it may have on anyone looking to assign their contract of sale, under the nominee provision, during the construction period.
FIRB (foreign investment review board) or migration clients who have previously committed to a $2 million plus contract of sale, may now face a scenario in which the purchaser who takes over their contract of sale under a nominee provision, could be forced to deduct 10% from the purchase price and pay this amount to the ATO. That is, unless the original purchaser can organise a tax clearance.
Trouble arises when a nominated buyer isn’t allowed to settle with the original vendor or developer unless the vendor receives the full contract price at settlement.
This gives greater propensity for the first purchaser to simply walk away from the initial deposit and leave the responsibility of again selling the property to the developer, at what may be a significantly reduced price.
We also foresee this affecting the growing number of neighbours, who are taking advantage of new zoning provisions by packaging up their properties for bulk sale.
The cause for concern here is that the exemption to capital gains taxes usually afforded to a purchaser’s principal place of residence may not apply to the increased value generated by neighbours selling collectively.
Somewhat painful is the reality that the burden of tax compliance and the settlement process will be dragged out as a by-product of these new conditions.
For us this means further complications towards the already onerous task of on selling. For sellers this means potentially remaining on the hook past a previously proposed settlement date. For purchasers this means frustrating delays which may well culminate in them not securing the property. For the lawyers and conveyances involved in settlements this means additional costs that will need to be passed on to an unaware client.
Leaonard Teplin is a director of Marshall White Projects.