20 Dec Residential Property – Annual Vacancy Fee for Foreign Owners

The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 amends the Foreign Acquisitions and Takeovers Act 1975 (FATA) to establish an annual vacancy fee levied on foreign persons if they hold an interest in a residential dwelling that is not occupied or genuinely available on the rental market for at least six months in a 12 month period.

Further to our recent alerts regarding the Victorian Vacant Residential Land Tax (VRT), taxpayers should also have regard to the separate federal 'annual vacancy fee' that was passed by Parliament late last month.The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 amends the Foreign Acquisitions and Takeovers Act 1975 (FATA) to establish an annual vacancy fee levied on foreign persons if they hold an interest in a residential dwelling that is not occupied or genuinely available on the rental market for at least six months in a 12 month period.

The annual vacancy fee seeks to provide a financial incentive for the foreign owner to make their property available on the rental market – increasing the number of houses available for Australians to live in. Further, reporting and notification requirements are expected to provide greater visibility of vacancy rates for foreign-owned residential properties.

Broadly, when the annual vacancy fee applies, the fee will be equal to the fee that was payable at the time a notice was submitted to the Foreign Investment Review Board to acquire the land (this fee currently starts at $5,500 for properties valued at less than $1m, and increases based on property value).

The measure will apply to properties acquired by foreign investors pursuant to contracts entered into after 7.30pm (AEST) on 9 May 2017 (being the time of the 2017-18 Federal Budget, when the measure was first announced).

When the annual vacancy will apply

The fee will apply to foreign owners for each dwelling on residential land where the dwelling is 'residentially occupied' for fewer than 183 days during a 'vacancy year'. Potentially posing difficulties from an administrative perspective, a 'vacancy year' is not a calendar or financial year. Rather a vacancy year means each successive period of 12 months since the 'occupation day' for the dwelling.

The 'occupation day' will usually align with the first day the foreign owner has the right to occupy the dwelling. This will typically be the date of settlement, but could also be the day on which a fitness for occupancy certificate is provided in respect of the property.

To establish whether a dwelling is occupied, a new definition – ‘residentially occupied’ – has been inserted into the FATA.

A dwelling is deemed to be 'residentially occupied' for the purposes of the Act if:

• the foreign owner, or a relative of the foreign owner, genuinely occupies the dwelling as a residence (whether or not with other persons);
• the dwelling is genuinely occupied as a residence under a lease or licence with a term of 30 or more days; or
• the dwelling is genuinely available for occupation (i.e. made available on the rental market and publicly advertised at market rent) as a residence under a lease or licence with a term of 30 or more days.

A property will also be deemed not to be 'vacant' during redevelopment of existing dwellings, or construction periods for the building of new dwellings (where the construction period is taken to be from the settlement of the property until a new dwelling has been completed).

Onerous reporting obligations

Within 30 days after the end of a vacancy year, foreign owners must submit a 'vacancy fee return' to the Commissioner of Taxation (Commissioner). This return is required to report the use of the dwelling in the previous 12 months. Failure to lodge a return carries the risk of a significant penalty on top of any liability to pay the annual vacancy fee. Importantly, it appears that an annual return must be lodged even where the dwelling has been fully occupied in the vacancy year. This will create an onerous reporting burden on foreign investors, particularly for those with more than one dwelling in Australia.

In addition to the vacancy fee return, a foreign owner may be required to provide the Commissioner with evidence to establish that the minimum level of occupancy has been reached. Such evidence might include leases, tenancy agreements or details on letting arrangements. Accordingly, affected owners must keep all relevant records for at least five years after the end of each vacancy year.

The new legislation provides that a vacancy fee may be waived or remitted if the Treasurer is satisfied that it is 'not contrary to the national interest' to do so. The circumstances in which the Treasurer will exercise this discretion are unclear. Foreign owners should seek advice on their ability to obtain an exemption from the annual vacancy fee.

Recovery of Unpaid Fees

Unpaid vacancy fees for a dwelling may be recovered as a debt, or by the creation of a charge over Australian land in which an interest is held by the foreign owner. The charge also secures any unpaid penalties for failure to lodge a vacancy fee return or keep adequate records.

Importantly, the Treasurer and the Commissioner of Taxation have the power to apply for a court order to effectively take ownership of relevant land if necessary to recover unpaid vacancy fees or penalties.

Suggested Actions

In order to mitigate the effects of the annual vacancy fee, affected owners should:

• consider the fees that could be payable in respect of their investments from 2018 onward;
• consider whether it is possible to ensure that their dwelling is occupied (or genuinely made available on the rental market);
• ensure that record keeping processes are in place to ensure that vacancy fee returns can be made and supported in a timely manner.

We expect that the Australian Taxation Office will release further guidance on the administration of the annual vacancy fee shortly. In the interim, please contact us if you have any questions regarding how these changes might impact you or your investments.