Housing affordability package – foreign residents and main residence exemption

The Government has released draft legislation for its housing affordability package, announced in the 2017-18 Federal Budget, which seeks to make capital gains tax (CGT) changes for foreign residents. Specifically, the proposed law includes the measure to remove the main residence exemption for foreign residents when they sell property in Australia from 9 May 2017. Transitional relief will apply to allow foreign tax residents who hold property at 7:30 pm (by legal time in the Australian Capital Territory) on 9 May 2017 to continue to claim the exemption until 30 June 2019.

Importantly, the law does not affect individuals, including temporary residents who are Australian residents for taxation purposes at the time a CGT event occurs to a dwelling. Note that the original Federal Budget announcement had proposed that both foreign residents and temporary residents would be denied access to the exemption.

This same draft legislation also seeks to modify the CGT principal asset that applies when determining whether an entity’s underlying value is principally derived from taxable Australian real property (TARP) (See Global Tax Update for details).

Comments on the draft law are due by 15 August 2017.

For further information, refer to the joint media release from the Treasurer and the Assistant Minister to the Treasurer.

Housing tax integrity – disallowing travel deductions and limiting depreciation deductions

The Government has released exposure draft materials to give effect to the 2017-18 Federal Budget announcement to disallow travel expense deductions and limit depreciation deductions for plant and equipment in relation to ‘residential’ investment properties of certain taxpayers. Companies, super funds (other than a self-managed super fund) and certain large trusts can continue to claim these deductions, as can taxpayers who incur the costs in the course of carrying on a business such as property investment or a business of providing retirement living, aged care, student accommodation or property management services.

For affected taxpayers, the proposed amendments mean that from 1 July 2017:

·       All travel expenditure relating to residential investment properties will no longer be deductible. This includes travel undertaken to inspect and maintain the property, attend an owner’s corporation meeting or to visit a real estate agent to discuss the property. However, investors can continue to claim deductions for costs of engaging third parties such as real estate agents to provide property management services for their investment properties. Any disallowed travel expenditure will also be prevented from forming part of the cost base of the property for CGT purposes.

  • Depreciation deductions for items of plant and equipment (e.g. dishwashers, ceiling fans, hot water systems) in residential investment properties will be limited to those assets not previously used. The amendments do not affect the entitlement to depreciation on an asset installed in new residential premises (including substantially renovated premises) if no entity has previously been entitled to any deduction for the decline in value of the asset and no one has resided in the premises in which the asset has been used. Transitional relief is provided for depreciable items used or installed in residential investment properties as of 9 May 2017 (or acquired under contracts already entered into at 7:30PM (AEST) on 9 May 2017) which will continue to be eligible for depreciation deductions. Depreciation amounts that cannot be deducted will be able to be recognised as a capital loss (or in certain circumstances a capital gain) when the asset ceases to be used.

Comments on the exposure draft law are due by 10 August 2017. For further information, refer to the media release from the Minister for Revenue and Financial Services.

ATO guidance on payments for use and exploitation of professional sportsperson’s ‘public fame’ or ‘image’

On 19 July 2017, the Australian Taxation Office (ATO) released Draft Practical Compliance Guideline PCG 2017/D11, which sets out a ‘safe harbour’ for apportioning lump sum payments for the provision of a professional sportsperson’s services and the use and exploitation of their ‘public fame’ or ‘image’ under licence.

A professional sportsperson may receive payments pursuant to their playing contract and/or collective bargaining agreement where those agreements mandate their participation in appearances for the development and promotion of their sport or the use and exploitation of their ‘public fame’ or ‘image’ for the development and promotion of their sport. Payments may also be made pursuant to an agreement to provide additional services where those services are provided in conjunction with the use and exploitation of their ‘public fame’ or ‘image’.

Under the proposed safe harbour, the ATO will accept that up to 10 per cent of such payments can be treated as referable to the use and exploitation of the professional sportsperson’s ‘public fame’ or ‘image’ and treated as the income of an associated tax resident third-party. This will apply where the professional sportsperson has granted the associated resident third-party a non-exclusive licence to use and exploit their ‘public fame’ or ‘image’ and under which the resident third-party is contractually entitled to receive the resulting income. It is a further condition that the payment is not referable to the use or exploitation of rights which are recognised and specifically protected under Australian law, such as copyright, trademarks or registered design rights.

Comments are due on the Draft Guideline by 1 September 2017.

Liability of a legal personal representative of tax debts of a deceased person

The ATO’s Draft Practical Compliance Guideline PCG 2017/D12, issued on 5 July 2017, is intended to provide the legal personal representative (LPR) of a deceased person with certainty about the extent of the deceased’s outstanding tax liabilities for the period up to the time of their death.

This Draft Guideline is intended for smaller and less complex estates to enable the LPR to wind up such an estate without concern that they may have to fund any of the deceased’s liabilities from their own assets. It outlines when an LPR will be treated as having notice of a claim or potential claim by the ATO.

Comments are due by 2 August 2017.