As we approach the Federal Budget, the Australian Government has recently detailed several significant changes affecting Capital Gains Withholding, Foreign Investment Fees, State Property Taxes, and the Deductibility of Interest Charges. These changes may have far reaching, and possibly unintended, consequences.
The first legislated change related to the International Tax Agreements Act 1953, which ensured that certain surcharge and foreign ownership taxes will prevail when there are inconsistencies with Australia’s double taxation agreements. The Federal Government has also proposed changes in respect of capital gains withholding tax (to increase the withholding rate and reduce the threshold) and change the deductibility of the general interest charge and shortfall interest charges.
The proposed changes will be hot ticket items to watch in the Budget next week, where these small changes can carry big impacts.
Foreign investment fees and State property taxes
On 8 April 2024, the Treasury Laws Amendment (Foreign Investment) Bill 2024 received royal assent. This Act amended the International Tax Agreements Act 1953 to ensure that various State taxes and Foreign Investment Review Board (FIRB) fees may be collected and are not impeded by Australia’s double taxation agreements.
Specifically, the amended legislation is intended to give precedence to foreign investment fees and certain taxes such as State and Territory taxes (i.e. surcharge duty and foreign ownership surcharge land tax) in the event of any inconsistency with a double taxation agreement. These changes take effect on and from, 8 April 2024, with retrospective application from 1 January 2018.
Prior to the amended legislation,the New South Wales Government provided refunds to certain individuals and entities from New Zealand, Finland, Germany, India, Japan, Norway, South Africa and Switzerland that had paid surcharge purchaser duty or surcharge land tax on or after 1 January 2021.
The New South Wales Government has yet to provide further information on whether refunds will be reversed. Despite the Bill’s retrospective effect, the Revenue NSW’s commentary suggests it may not seek to recover refunds of surcharge duty given to individuals or entities whose purchase contracts were entered into prior to 8 April 2024. However, foreign buyers from those countries will need to pay surcharge purchaser duty if they enter into an agreement to acquire residential property in NSW on or after 8 April 2024. It appears surcharge land tax will be imposed again on foreign owners from those countries in the ordinary course from 31 December 2024.
Capital Gains Withholding
The foreign resident capital gains withholding regime currently provides for a purchaser to withhold and remit a non-final withholding of 12.5% of the purchase price of any property over $750,000, unless the vendor provides a Clearance Certificate (Subdivision 14-D of Schedule 1 to the Taxation Administration Act 1953).
The proposed amendments will reduce the $750,000 threshold of the regime to nil (i.e. every contract in of the relevant asset type will be captured) and increase the withholding rate from 12.5% to 15%. Once enacted, the proposed changes are intended to take effect for any contracts entered into from 1 January 2025.
The Government cited housing affordability and the pursuit of greater compliance with Australian tax obligations for foreign residents as the basis for these changes.
Although the changes may appear minor, they will impose additional administrative requirements on the sale of all taxable Australian real property (amongst other assets), including simple property transfers.
Deductibility of interest charges
The general interest charge (GIC) and the shortfall interest charge (SIC) are imposed on outstanding federal tax liabilities. Simply put, GIC accrues on an outstanding tax liability, and SIC accrues when a tax liability has been incorrectly assessed and resulted in a shortfall of tax paid – SIC accrues from the original assessment up to the payment due date of the amended assessment. Both charges are calculated on one of the Reserve Bank of Australia rates, with additional 7% for GIC and 3% for SIC, and compounded daily. At present, the payment of both GIC and SIC are deductible for a taxpayer.
As part of the 2023-2024 Mid-Year Economic and Fiscal Outlook, the Government announced that the interest charged would no longer be deductible if incurred on or after 1 July 2025.
This change follows the accrual of the general interest charge and shortfall interest charge at the highest rate since the latter stages of the global financial crisis in 2012, at over 11% (GIC) and 7% (SIC). The Federal Government claims the change will promote fairness and compliance, and is estimated to raise $500 million per year.
The SIC and GIC often quickly accrue to be a substantial liability of itself, and in compliance activity with the Australian Taxation Office (which often takes several years) may eclipse the primary liability. In these circumstances, the change of the deductibility of the charge may have significant and severe consequences for taxpayers, particularly given the current regimes to remit the charges – for SIC, a taxpayer can only object to the application of SIC (and decision not to remit the charge) if it equates to at least 20% of the outstanding primary liability, and for GIC, a taxpayer cannot object to a decision not to remit the charge and must instead commence what are typically cost-prohibitive proceedings in the Federal Court of Australia.
If there is any move on the deductibility in the upcoming Budget, it will be particularly interesting to see whether there is any change to address the difficulties associated with challenging the charge.