Housing affordability measures
21 October, 2019 | Steve Burnham
Housing affordability measures
Steve Burnham: Hello listeners, welcome to the Tax Wrap podcast, episode 202. I’m your host, Steve Burnham, and we have in the studio a special guest who keeps coming back and helping us out, Simon Dorevich.
Simon Dorevich: Hi Steve. It’s always great to be on, thanks for having me.
Steve Burnham: It’s always good to have you. Now Simon, as people may remember, is from A&A Tax Legal Consulting and is manager of corporate and international tax at A&A. Simon, now you’re here to speak about some measures that have been put in place to help with housing affordability and homelessness.
Simon Dorevich: Yeah, that’s right. Anybody who’s been following the news in the last few years knows that it’s a very important issue that many people feel strongly about. And so both the federal government and many of the state governments have imposed measures to try to address housing affordability.
Steve Burnham: Right…
Simon Dorevich: …and essentially these measures penalise people who, or corporations or trusts…
Steve Burnham: …any entity…
Simon Dorevich: …any entity that holds property but leaves it vacant for more than half of the year.
Steve Burnham: Right. That’s the annual vacancy fee that we’re talking about, isn’t it?
Simon Dorevich: Well the annual vacancy fee is the federal government.
Steve Burnham: That’s the one.
Simon Dorevich: And yeah, perhaps we’ll talk about that first.
Steve Burnham: Sure.
Simon Dorevich: There’s also a regime in Victoria and New South Wales, Queensland and the ACT called the absentee owner surcharge.
Steve Burnham: Oh, okay.
Simon Dorevich: That’s a surcharge to land tax. And finally Victoria has gone it alone in also introducing what they term a vacant residential land tax.
Steve Burnham: Right, okay.
Simon Dorevich: And that applies to property in certain parts of Melbourne.
Steve Burnham: All right. So let’s, as you suggested, go through the three starting with the federal measure. So the annual vacancy fee, what’s involved with that?
Simon Dorevich: So the annual vacancy fee, it was first announced or rather the act was first amended on the 30th of November, 2017. And it’s payable broadly where… well, first you must be a foreign person.
Steve Burnham: Okay. The owner…
Simon Dorevich: Yes the owner must be a foreign person. That’s right. So in the case of an individual, that’s someone who’s not ordinarily resident in Australia.
Steve Burnham: Right, okay.
Simon Dorevich: By ordinarily a resident, I mean that in the preceding 12 months they were not in Australia for 200 or more days and there was no legal time limit on their continued presence in Australia.
Steve Burnham: Okay.
Simon Dorevich: So that’s in the case of an individual…
Steve Burnham: …sorry, I just wanted to quickly ask because I’m not clear on that. Is that the same as every other definition of a resident and non-resident?
Simon Dorevich: No. So it’s not the same as a “resident for tax purposes”.
Steve Burnham: Okay.
Simon Dorevich: Which goes by… well there’s four different tests. There’s the ordinary concepts…
Steve Burnham: Yeah…
Simon Dorevich: …the 183 day test.
Steve Burnham: That’s the one.
Simon Dorevich: The domicile permanent place of abode test, and the superannuation test. And so someone could be a non-resident under that test and also not “ordinarily resident” for the purposes of this test.
Steve Burnham: Okay.
Simon Dorevich: But it is also possible that they may qualify for one and not the other.
Steve Burnham: But it’s something to check out perhaps if you have that bit of doubt about if the person is resident, non-resident for tax purposes or for annual vacancy fee, just with a quick check, do you think?
Simon Dorevich: Yeah, absolutely. For these purposes it’s a simpler test because it looks, as I said, it’s this 200 day test and therefore it’s simpler to apply.
Steve Burnham: It is simpler, yeah.
Simon Dorevich: …than the income tax residency rules.
Steve Burnham: Okay. And so what are they look at? How did they tell if a dwelling is occupied or not?
Simon Dorevich: It will be occupied on a particular day if one of three things apply.
Steve Burnham: Right.
Simon Dorevich: The first is if the person or a relative of that person genuinely occupies the dwelling as their residence on that particular day. Or if it’s genuinely occupied as a residence under a lease or license with a term of 30 days or more. So now those 30 days, that requirement makes me think of a property that might be rented out for shorter period through Airbnb.
Steve Burnham: Yeah that’s true.
Simon Dorevich: Or one of those sorts of websites.
Steve Burnham: Yeah, yeah.
Simon Dorevich: That period would be as if it weren’t rented out at all. It needs to be for a longer term, a longer term lease.
Steve Burnham: Right.
Simon Dorevich: And then even if the property is vacant, it will be considered to be residentially occupied if on that day it was genuinely available for rent. And by that I mean, is it advertised publicly at realistic rates, at commercial market rates.
Steve Burnham: Okay. Yeah. Well that makes sense. That goes along genuinely being available, they can check on that by various ways.
Simon Dorevich: Yeah, that’s right. Well, prima facie, if you don’t meet those criteria, if it was vacant for more than half of the year then it will be applied, but there are some exemptions that are potentially available.
Steve Burnham: Oh.
Simon Dorevich: And the main one to keep in mind is when the property was incapable of being occupied. Now it could be that the property was incapable of being occupied because it was damaged or renovated or repaired.
Steve Burnham: Right.
Simon Dorevich: On those days it was not fit for a person to live in.
Steve Burnham: No, no.
Simon Dorevich: Or there could be that the owner or the person, whoever that may be, that would otherwise live in the property was prevented from doing so, for example, for medical reasons or legal reasons, an order of the court.
Steve Burnham: Right.
Simon Dorevich: So if those were the reasons why the property wasn’t occupied, then the government says that’s a valid reason.
Steve Burnham: That’s okay. Yeah. So what about the admin side of things? How is an annual vacancy fee return… there was a return you were saying?
Simon Dorevich: Ah, yeah. So it’s lodged online and it needs to be lodged within 30 days of the end of the vacancy year. Now…
Steve Burnham: …vacancy year?
Simon Dorevich: Vacancy year. So it’s not the calendar year, so it’s not the year ended 31st of December, nor is the income tax year. So it’s not the..
Steve Burnham: …June 30.
Simon Dorevich: The June 30 year. Instead it’s the year that starts when the property was first available to be occupied. So in the case of an existing dwelling that would typically be settlement date. In the case of a dwelling that was built, it could be the date that the certificate of occupancy is issued.
Steve Burnham: Oh, okay. Yep. That makes sense.
Simon Dorevich: Now, just going back briefly, I’ve realised that there’s something important that I failed to mention.
Steve Burnham: Sure. Yep.
Simon Dorevich: And that is that it applies where the foreign person, which as I mentioned can be an individual or a corporation or trust that a foreign entity has a significant and substantial interest in…
Steve Burnham: Yep.
Simon Dorevich: It applies where they submitted a notice of application to acquire the property on or after 9th of May, 2017. So that date was when the measure was announced by the Treasurer on budget night.
Steve Burnham: So being a foreign resident, you mean they have to submit to the Foreign Investment Review Board.
Simon Dorevich: Exactly right. That’s what I mean by a notice of application. So being, as you say, being a foreign resident, acquiring a residential Australian property, there requires to, that’s what they call a notifiable action. So they’re required to notify the treasurer.
Steve Burnham: Yep.
Simon Dorevich: So if they had done that and acquired the property before this measure was announced by the Treasurer on the 9th of May, 2017, then it doesn’t apply to them. But if they submitted that notification application after 7:30 on that night after the treasurer began speaking, then it’s potentially payable.
Steve Burnham: They’re going to have to start lodging those returns, etcetera.
Simon Dorevich: Yeah, that’s right.
Steve Burnham: All right. And does it cost anything? There could be a fee, well there is a fee, what I’m talking about of course are costs. Is there a scale of these fees, I should say?
Simon Dorevich: Yeah, much like the application fee for the Foreign Investment Review Board approval, it depends on the value of the property. So for properties with a value of $1 million or less then the fee payable each year is $5,700 and it can go up from there. It just depends, 1 million to 2 million has its own price and then two to three, all the way up…
Steve Burnham: So it costs money to have a vacant thing sitting there. So of course this is the aim of, I assume, the legislation to get owners using property, other than just sitting vacant, sitting fallow.
Simon Dorevich: Yeah. It’s a pretty big disincentive. So if you’re a foreign person and you don’t want to pay this fee…
Steve Burnham: …to pay at least this $5,000 nearly $6,000.
Simon Dorevich: Yeah, that’s right…
Steve Burnham: …every year.
Simon Dorevich: Every year. Then the smart thing to do would be to live in it or to rent it out.
Steve Burnham: Yeah. You were saying there are also other state based imposts due to vacant land. It’s actually just, I don’t know whether this is relevant or not, but it sort of reminds me of payroll tax. Each state seems to have a different thing on payroll. You’d think there’d be some sort of harmonisation as well with these actions, but perhaps that’s to come in the future? Who knows?
Simon Dorevich: Yeah, that’s right. Some states don’t impose what they call an absentee owner surcharge at all, whereas Victoria does. So we were the first to impose one and New South Wales, Queensland and the ACT to date have all followed. But as you say, there are important differences to be aware of, it’s not entirely harmonised. And those differences relate to what kind of property is subject to the surcharge. So in Victoria it’s all types of land, but in New South Wales, for example, it’s only residential land.
Also the types of taxpayers that are covered. In Victoria it’s much like the, we discussed with the annual vacancy fee, can be an individual or a company or a trustee, but in Queensland they’ve decided to only impose it on individual owners. And the threshold itself is dependent on where the property is located. Anywhere from $150,000 in the ACT, and I wouldn’t imagine there’s many properties…
Steve Burnham: That’s the value? No, no, you wouldn’t find many…
Simon Dorevich: …less than that. Whereas in New South Wales, they’ve taken a much high figure and it’s $692,000. And of course, the rate of tax varies. In Victoria, in the last budget they increased the rate and so for the 2020 year it’s now 2%.
Steve Burnham: Okay. Yeah. 2% of the value of the property is it?
Simon Dorevich: It’s a surcharge on land tax.
Steve Burnham: I see.
Simon Dorevich: So whatever the land tax rate that would be payable, which you know, trusts have their own rates and other entities a rate. Add 2% to that if you’re an absentee person is the terminology used in the act.
Steve Burnham: So sorry, just before we go on, you wanted to speak about the absentee owner surcharge in the different states. But can I just ask, could you have a case where the annual vacancy fee also applies as well as an absentee owner surcharge or absentee…
Steve Burnham: Yes, you could.
Steve Burnham: You can?
Simon Dorevich: Yeah, you can. And in fact there’s a third one that, as I said there are three different regimes. It’s possible for all three to apply.
Steve Burnham: Oh gosh.
Simon Dorevich: Which can get quite expensive.
Steve Burnham: For sure. Which would depend where you live, because weren’t you saying the third one is Victoria only?
Simon Dorevich: Yes, that’s right. But more so not just Victoria only, but in only certain parts of Melbourne. So if your property is in Geelong, for example, then you don’t need to worry about that one.
Steve Burnham: You were talking about the absentee surcharge. Let’s have a run down of that.
Simon Dorevich: As the name suggests, it’s applicable to absentee persons. Now again, that can be a natural person, a corporation or a trustee. In the case of a natural person, they’ll be an absentee person if they are not an Australian citizen or permanent resident.
And that could actually include a New Zealand citizen that’s a holder of a special category visa. And they do not ordinarily reside in Australia. And we covered that in the last topic. And finally in the year immediately preceding the tax year, so IE the year ended 31 December and then if payable will be payable in January, they were either they were absent from Australia on the 31st of December or they were absent for a period in that year of at least six months. And it doesn’t have to be a six continuous months. But if in aggregate for the year in total they were absent for at least six months. So if all those three conditions are satisfied, then they’ll be an absentee person. And an absentee cooperation or trust is one where the absentee persons hold a majority interest or they’re able to control the composition of the board.
Steve Burnham: Now I’m assuming all these are run by the State Revenue Office and depending on which state we were talking about?
Simon Dorevich: Yes, that’s exactly right. And in some circumstances an exemption may be available and so it’s the state commissioner of revenue that is the one that has the discretion to grant this exemption.
Steve Burnham: Okay, what are the exemptions?
Simon Dorevich: So there’s one that is limited to absentee corporations and absentee trusts and it’s more likely to be granted where that corporation or trust makes a strong and positive contribution to the Victorian economy or community.
Steve Burnham: Toward the state we’re talking about?
Simon Dorevich: Yeah. Towards the state. Yeah, that’s right. This is more likely to be granted in the case of an active business that employs people and buys from Victorian suppliers and contributes to the economy in that sense. And is less likely to be granted in the case of a more passive investor that simply owns a property and then leases it out to somebody else.
Steve Burnham: Are we talking about the Guide Dogs Association or something like that, or is it up to…
Simon Dorevich: No, it doesn’t have to be for a charitable purpose. It can be for an ordinary profit seeking business that contributes to the economy by being an employer or spending money in Victoria, whereas someone that’s merely a passive landlord is not really, I mean, aside from making that initial investment, doesn’t really exhibit an ongoing or at least not a significant ongoing contribution to the economy.
Steve Burnham: I’m just reading, I mean thinking about it. So you could basically have a New Zealand national who perhaps has inherited property in New South Wales or whatever. Theoretically, I’m just thinking, it’s just a passive investor, it’s just they’ve had it handed to them from great granddad, they may be facing fees for having that land sitting there…
Simon Dorevich: Ah, yeah, yes
Steve Burnham: I don’t know why I’m going off on that tangent, but I’m just thinking people might find that they have a liability that they just didn’t have before.
Simon Dorevich: That’s right. And the obligation is on the owner to lodge the form and failure to do so, if they weren’t aware of it, could give rise to penalties.
Steve Burnham: So proving that you’re a significant contributor to an economy, a state based economy, is up to the owner…
Simon Dorevich: If they believe that an exemption could be available on those grounds, then they should write to the commissioner to seek that exemption.
And the commission has published some guidelines online to help people assess whether or not, how likely it is that the exemption would be granted and the factors that they take into account. Another one that I didn’t mention before was the extent to which they are Australian based. And by that I mean that they are necessarily absentee to first need to worry about this and apply for an exemption. But some are more absent than others. I suppose the stronger their connection to Australia, the more likely it is that the exemption will, the discretion, will be exercised.
Steve Burnham: Fair enough. I wouldn’t have expected less. Well Simon, there is a third prong to this?
Simon Dorevich: Yeah. The last one is the newest of the three. It has applied since the 1st of January, 2018 and this is a Victorian government only measure. It’s known as the vacant residential land tax. And it applies to homes in inner and middle Melbourne that were vacant for more than six months in the preceding calendar year. So when I say inner and middle Melbourne, I’m talking about the Monash, Port Philip, Glen Iris, Stonnington, Bayside, Boroondara, Yarra, Moreland, Maribyrnong – the councils in inner Melbourne and middle, but the outer suburbs of Melbourne and any areas outside of Melbourne itself will not be subject to it.
Steve Burnham: I wonder why they did that?
Simon Dorevich: It’s a good question. I’m sure they enjoy the revenue – yeah, it’s an extra 1% and on the capital improved value of these properties and being in inner and middle Melbourne, the values of these properties can be quite substantial.
Steve Burnham: As the government would like to see them occupied by people, it kind of makes sense.
Simon Dorevich: Yeah. I think, going back, to take a less cynical view, going back to the rationale behind these regimes of reducing, making more properties available and thereby reducing or increasing housing affordability and reducing homelessness, the state government argued that’s an issue that is particularly severe in these areas of Melbourne and therefore that justified an additional charge or tax that applies only in those areas. If the owner of the property has made the property, has rented it out, or generally sought to do so for more than half of the year, then they won’t be subject to it.
Simon Dorevich: And it’s important to note that, in the previous two topics we talked about foreign persons and absentee persons…
Steve Burnham: This is not?
Simon Dorevich: This can apply to anybody. So it is not just foreigners and their advisers that need to worry about it. Anyone who owns land in these areas, Australian or not, it’s potentially anyone. It could be anyone.
Steve Burnham: You mentioned 1% of, is it the value of the land or was it the property…
Simon Dorevich: The capital improved value of the land. So to see what that is, you go to the council rates notice where it should be displayed. And it’s 1% on the entire value without any threshold. So in the previous topic, I talked about how each state has their own threshold and if it’s below that, then the absentee owner surcharge won’t be payable. Well in this particular case, vacant residential land tax, it doesn’t matter what the value of the property is. It starts from $1. It’d probably be hard placed to find a property in that area for $1. But if you did then 1 cent tax would be payable.
Steve Burnham: And so you mentioned the local council areas, and is it residential property or is it anything?
Simon Dorevich: It’s only residential property.
Steve Burnham: Not land that’s destined to become an apartment block or…
Simon Dorevich: So it does apply where there’s a residence being constructed or renovated. And there’s a two year time limit which the commissioner does have a power to extend, but it doesn’t include vacant land and it doesn’t include commercial premises or commercial residential premises. So by that I mean, a hotel or a bed and breakfast or a…
Steve Burnham: …display home?
Simon Dorevich: Yeah display home, that sort of thing.
Steve Burnham: All right. So is it considered unoccupied, the same as the annual vacancy fee that we mentioned earlier, is there any difference?
Simon Dorevich: There is a bit of a difference. It needs to be occupied by the owner or the owners permitted occupier as their principal place of residence or a person under a bona fide lease or short term letting arrangement.
Simon Dorevich: And there are of course exemptions.
Steve Burnham: Ah, the exemptions.
Simon Dorevich: So one of them is where the ownership of the property change during the year. So if a property was, if I sold you a property and on the 1st of December say. Then 31 December comes around and that’s when land tax is, it’s assessed, I won’t need to pay it and you won’t need to pay it either because during the year ownership changed.
Steve Burnham: Ah, okay. So they start again from the next-
Simon Dorevich: They start again for the next year. And there’s another one for holiday homes. So, and for that exemption to apply, it needed to be occupied by the owner for at least four weeks during the relevant year. And doesn’t need to be a continuous four weeks. It just needs to be four weeks in total. And the owner must also have had a different principal place of residence in Australia during that year.
Steve Burnham: Oh, all right. That’s a sensible one. So it’s a genuine holiday home.
Simon Dorevich: Exactly.
Steve Burnham: It’s just another property they have down the coast or whatever.
Simon Dorevich: Yep.
Steve Burnham: That’s very sensible.
Simon Dorevich: And one more exemption is that it’s a property that was used for at least 140 days in a year for the purposes of attending the owner’s workplace. So let’s say a person, their main residence is in, they work somewhere in one of the 16 council areas. So in inner or middle Melbourne. But their home is far away and so they’ve decided to buy a property closer to work in one of these 16 council areas so that their commute to work is less. They live there Monday to Friday and then go home, live with their family on the weekends.
Steve Burnham: Greenacres, whatever they call it.
Simon Dorevich: Yeah.
Steve Burnham: Okay.
Simon Dorevich: So if they do that for at least 140 days in the year, then the property, even though it might be less than half of the year, the property will be not subject to this tax.
Steve Burnham: Well that would just negate the positives or the benefits of having that arrangement. I mean, if you’re lucky enough to be able to do that it would be good if you could keep going. And how is this tax? Tax could I call it?
Simon Dorevich: Yeah, yeah.
Steve Burnham: How is it paid and collected. Is there a return that needs to be filled in?
Simon Dorevich: Yeah, so by the 15th of January, as I mentioned, land tax is assessed on the owner as at 31 December. Then on the 15th of January of that following year, the owner needs to advise the SRO that the property was vacant. And then the SRO will issue an assessment notice and then they’ll then have 60 days to pay.
Steve Burnham: Okay. All right. Well it’s a lot more to be aware of. I mean, for property owners just don’t leave it empty or you could be facing-
Simon Dorevich: Yeah potentially quite substantial judges. When you think of the three different regimes that they can apply, depending on who the owner is and where the properties is located.
Steve Burnham: Potentially you could be hit by all three. Now just on, you probably don’t, I don’t know if you know this or not Simon, but is it your feeling that with the last Victorian scheme, is it likely that that will expand to other states or we just don’t know, I suppose.
Simon Dorevich: Well that’s been the experience with the absentee owner surcharge. It started off in Victoria-
Steve Burnham: Again, we did it again.
Simon Dorevich: Yeah. We’ve led the way in-
Steve Burnham: What is it with Victoria in these things?
Simon Dorevich: In these things and it started off at a lower rate. In time the rate’s gone up and it’s expanded to other states, so I wouldn’t be surprised if the rates continue to go up and it expands to this vacant residential land tax, it’s taken up by other states as well.
Steve Burnham: Yeah. Yeah. Well that’s the way it seems to go, doesn’t it? Taxes don’t ever go down, it seems.
Simon Dorevich: Though it could depend on the state of the property market that, if it’s falling and governments don’t want to scare away foreign investors, then they may hold off. But if they feel that they can introduce it without having too much of a chilling effect on the market-
Steve Burnham: Lose votes or whatever. Yeah.
Simon Dorevich: Yeah, then my guess is that they’d be more likely to do so.
Steve Burnham: Yeah. Yep. Okay. Now Simon, you’ve written about this more extensively, I think in our outlook magazine.
Simon Dorevich: Yes. That’s right.
Steve Burnham: The one coming up. So listen to the show, keep an eye out on that, for that I should say. Simon, thanks for much for coming in.
Simon Dorevich: Yeah, my pleasure. Thanks for having me on.
Steve Burnham: Enlightening as always. Listeners, thanks for listening. Please tune in again next time.
Tax Wrap 202: Tax Wrap chats with Simon Dorevich of A&A Tax Legal Consulting about three measures that seek to address housing affordability; the annual vacancy fee for foreign owners, the absentee owner surcharge that applies in certain states, and Victoria’s vacant residential land tax.