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  • Foreign Investment Reforms working group minutes 12 May 2017

    Meeting details

    Venue: Teleconference

    Date: 12 May 2017

    Start: 11:00am Finish: 12:00pm

    Chair: Ann Middleby

    Secretariat: Abbey Wright

    Contact phone: (03) 8632 4882

    Attendees

    Ashurst

    Vivian Chang

    Australian Financial Market Association

    Dr Stephen Kirchner

    CPA Australia

    Gavan Ord

    Deloitte Lawyers Pty Ltd

    James Fabijancic
    Luke Imbriano

    Institute of Conveyancers

    Rosemary Cotton

    Law Council of Australia

    John Farrell

    Holding Redlich

    Elly Ashley

    Property Council of Australia

    Rebecca Douthwaite

    Real Estate Institute of Australia

    Jock Kreitals

    Stevens Partners

    Jeff Stevens

    Treasury

    Anna Schneider-Rumble
    Michele Arcaro

    Trinity Law

    Michael James

    Australian Taxation Office

    Ann Middleby
    Deborah Robinson
    Heidi Clarke
    Laurence Scarborough
    Kelly Canavan
    Abbey Wright
    Col Davis

    Apologies

    Australian Bankers Association

    Tony Pearson

    Australian Financial Markets Association

    Robert Coquhoun

    BDO

    Lance Cunningham

    Chartered Accountants Australia & NZ

    Michael Croker

    Greenwoods & Herbert Smith Freehills

    Manuel Makas

    Deloitte Lawyers Pty Ltd

    Craig Saunders

    Agenda item 1: Welcome and introductions

    Ann Middleby welcomed members and noted for newcomers that the working group was made up of representatives from professional groups, Treasury and the ATO.

    Agenda item 2: Update from Treasury

    Annual charge on foreign owners of underutilised residential property

    • The Government will introduce a charge on foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months per year.
    • This measure will apply to foreign persons who make a foreign investment application for residential property from 7:30PM (AEST) on 9 May 2017.

    Restrict foreign ownership in new developments to no more than 50 per cent

    The Government will introduce a 50 per cent cap on foreign ownership in new developments through a condition on New Dwelling Exemption Certificates. This will occur on applications made from 7:30PM (AEST) on 9 May 2017.

    Streamlining and enhancing the foreign investment framework

    • Refining the type of developed commercial property subject to the lower $55 million threshold by removing low sensitivity applications from the meaning of sensitive land
    • Allowing failed off-the-plan purchases to be considered as ‘new’
    • Simplifying foreign investment business application fees, including legislating existing fee waiver arrangements
    • Introducing a new exemption certificate that applies to low risk foreign investors
    • Clarifying the treatment of developed solar and wind farms
    • Restoring the previous arrangement whereby companies with significant foreign custodian holdings (that is, legal rather than equitable interest holders) are not subject to notification requirements

    From 1 July 2017 an exemption certificate will also be available for new dwellings without specifying an actual address.

    10 per cent fee increase

    The Government will establish a Critical Infrastructure Centre within the Attorney-General’s Department which will also work with and assist in strengthening review processes for foreign investment within the Department of the Treasury. This measure will be offset by a 10 per cent increase in the application fees for foreign purchases of residential properties valued at less than $10.0 million, to take effect from 1 July 2017.

    Questions/Comments

    Q. Regarding the vacant property tax, the measure doesn’t apply to people who have applied for FIRB approval prior to Budget Night, is that right?

    A. That’s correct.

    Q: Will it simply be a 50% on the amount of dwellings available? With respect to any other non-residents, they won’t be able to go through the certificates?

    A: The 50% is a flat 50% - 50% of the development irrespective of the value of a development. The cap only applies to the certificate. That certificate only allows the developer to sell properties valued at under $3 million. All of the guidance notes on the FIRB website have been updated.

    Agenda item 3: Project overviews

    Foreign investment reforms – Ann Middleby

    • FIRB annual report was released on Tuesday. The volume of applications for residential property in 2015/2016 is around 40,000 but we are expecting quite a reduction for a number of reasons in 2016/2017 including the interaction of fees since December 2015.
    • Since 1 April 2017 assessment of non-sensitive commercial applications to the FIRB is now undertaken by the ATO. Of the 1,200 commercial applications per year the ATO will now assess about 600 non-sensitive applications per year. The sensitive applications will still be assessed by Treasury. The ATO unit assessing applications is completely separate to the ATO team that looks at whether or not tax conditions should apply. Those applications have been processed by ATO staff since April.
    • There have been over 750 breaches detected since we began this body of work. Around $2.9 million in penalties issued to date for breaches.
    • Residential screening is going along smoothly. We were caught up with some of the system processes that occurred at the ATO in December but the work continued manually.
    • As Anna mentioned, the water register will be ready in July 2017.
    • The residential land register is there to register property once settled.
    • The next annual report for Agricultural land will be issued in early 17-18 financial year.

    Questions/Comments

    Q: Vanya: Before the changes, there was a lot of noise with supposed non-compliance with foreign people buying dwellings. In the auditing process taking place, are you seeing any substantiation of that concern? Are there people who’ve deliberately bought established dwellings?

    A: When you look at screening, only 20% of applications are for established dwellings. The government tries to steer applications towards new dwellings. When we look at our compliance body of work, we do find many of our breaches are in relation to established dwellings more so than the new dwellings because the new dwellings are fairly straight forward and in line with the policy. There is mischief in the established dwelling market but we’re uncovering it and working towards not just continuing along with the compliance work but educating people about the fact that people need to be in the system.

    Q: When you’ve mentioned this in the last few meetings, you said most of the cases are from self-reports or dob-ins. Are you now focusing more on data matching?

    A: When we track where the information is coming from in 2015/2016, it primarily came from the amnesty period and dob-ins. We now have a broader program of data matching where we’re not just looking at the quick and simple we’re also looking at unpicking company structures that may have been put into place to avoid the FIRB regime. We’ve worked through self-reports and dob-ins, and now data matching is one of our main priorities.


    Foreign Resident Capital Gains Withholding (FRCGW) – Laurence Scarborough

    On 9 May 2017, the Government announced proposed changes to the foreign resident capital gains withholding (FRCGW) rate and threshold. The changes will apply to contracts entered into on or after 1 July 2017:

    • to real property disposals where the contract price is $750,000 and above (currently $2 million)
    • the FRCGW withholding tax rate will be 12.5% (currently 10%).

    The existing threshold and rate will apply for any contracts that are entered into before 1 July 2017, even if they are not due to settle until after 1 July 2017. More information is available on the ATO website.

    Changes to the main residence CGT exemption: New rules for foreign tax residents were proposed in the 2017–18 Budget to take effect from 9 May 2017. Foreign tax residents will no longer be able to claim the main residence CGT exemption when they sell property in Australia.  Foreign tax residents who already hold property on 9 May 2017 will be able to claim the main residence CGT exemption until 30 June 2019.

    Laurence Scarborough stated he would send further information to members of the working group after the meeting. This information is below:

    Foreign Resident Capital Gains (FRCGW) Withholding BAU:

    Statistics as at 30 April:

    • 29,666 clearance certificates issued
    • 447 variation applications received – 415 finalised
    • The webpage ato.gov.au/FRCGW has had heading changed to “Capital gains withholding: Impacts on foreign and Australian residents” to avoid confusion for Australian tax residents.
    • Webinar presentation to those in the Tax and other professionals that deal with Mergers & Acquisitions – is available on
     
    • Additionally, produced an article on indirect interests for the Tax Professional Newsletter.
    • The ATO is working with PEXA on an electronic channel to report Purchaser Payment Notification directly to the ATO. The ATO will consider with PEXA whether this may be extended to Clearance certificates in the future.
    • Legislative instrument released for income tax exempt entities

    Commissioner’s Remedial Power:

    • Consultation period has finished. Its purpose is to allow vendors to claim a FRCGW credit in the same year in which they have to declare the capital gain.

    FRCGW compliance:

    • Letters will start to issue to vendors and purchasers where they have been identified as breaching the provisions seeking an explanation
    • A general awareness letter will start to issue to vendors who have had withholding applied, and to new purchasers about the measure.

    Communications for Budget changes:

    • Communications have commenced – includes social media, articles in Business Bulletin, Tax professionals newsletter
    • Updated FRCGW webpage and New Legislation webpage to bring proposed changes to attention
    • Advised all Law Societies of proposed changes as they will need to consider / update their standard contracts
    • Already in contact with AIC – organising presentations so those who are not aware of FRCGW may have an opportunity to learn. Will be in contact with each State registrar of Conveyancers.
    • Chinese language webpage, real estate factsheet & website messaging will be updated with the changes on Royal Assent
    • How can we work together to assist getting the message out? eg. We would welcome you publishing information in your newsletter

    Questions/Comments

    Q: Are your systems able to handle the increase in applications because of the changes to the threshold?
    A: As long as the taxpayer has lodged their income tax returns, it should go through in a couple of hours.

    Comment: [Redacted]

    Q from Michael James: Could you take me through the arrangements for transactions that are already on foot and they’re over the $750k threshold?

    A from Treasury: It applies to transactions entered into after 1 July 2017. If it’s a case that there’s a contract that has already exchanged but will settle after 1 July 2017, existing conditions will apply.

    Q: [Redacted]

    Agenda item 4: Update on communications

    Revised web pages for ato.gov.au will be published in June.

    Two webinars have been booked or June to discuss the new water register. More webinars will be staggered throughout the stocktake period. Information on the dates and times of webinars to follow.

    Agenda item 5: General Q&A

    Nil.

    Agenda item 6: Close

    The next meeting will be held on Thursday 8 June at 11:30am.

    Note: June meeting was later cancelled due to a number of key stakeholders not being able to attend. The next meeting will now take place on 27 July 2017.

      Last modified: 02 Aug 2017QC 53020