Taxation office bombshell a fresh blow to Asian buyers & property market (The Australian, 19-May-2016)

SydneyMeanwhile, in Australia… this is what is happening. Perhaps there are some lessons and observations for Canada. Intervention in a bubble market can have many consequences — some predictable, some unpredictable. (See “Unstoppable? Too late to intervene in Vancouver’s housing price escalation?”) In Australia, Chinese purchases of property have plummeted due to new rules and taxes. Meanwhile, buying by locals has increased. So has uncertainty and unpredictability. Robert Gottliebsen writes “… fasten your seats belts for a horror commentary.”

Below are excerpts of two articles in The Australian. Please go directly to the source articles for full story.

ATO bombshell is a fresh blow to Asian buyers and the property market
by Robert Gottliebsen, The Australian, May 19, 2016

    • Thousands of real estate agents and property owners around Australia are about to get a terrible shock when they deal in property valued at more than $2 million.
    • On the day before the Federal election, Friday July 1 2016, the rules for transacting dwellings and commercial property worth more than $2m will change dramatically.
    • In short, all Australian sellers of $2m-plus properties will be classified as overseas investors unless they get a special tax clearance. That means that all buyers of $2m-plus properties must deduct 10 per cent from the purchase price and pay that amount to the Australian Taxation Office (ATO) unless the seller has a tax clearance.
    • Chinese and Asian buying of Sydney apartments has already fallen 50 per cent in recent weeks and the trend is spreading to other markets, particularly Melbourne. This new measure, as well as creating chaos for locals, may accelerate the decline in the Chinese buying of apartments (Dramatic shifts herald a new era in residential property, May 12 [excerpts below).
    • The current mess was created when former treasurer Joe Hockey caved into pressures to curb Chinese investment in Australian residential property in 2015. In the process, the treasurer was convinced by the Australian Taxation Office to widen the net to cover local residents.
    • Parliament was being bombarded with tax legislation at the time and the Canberra politicians did not pick up what the ATO had done.
    • So, fasten your seats belts for a horror commentary.

  • I was alerted to the position by one of Australia’s top commercial/tax barristers, John Fickling of WA. I am using many of Fickling’s words in describing what is about to happen.
  • If you purchase a property worth $2m or more on or after July 1 2016, you will be required to withhold 10 per cent of the purchase price and remit it to the ATO UNLESS the vendor is able to provide a special purpose tax resident’s “clearance certificate” from the ATO. It does not matter if the vendors were born in Australia and have lived all their lives in Australia — unless they have that clearance certificate, they are classed as a foreigner and the buyer must send 10 per cent of the purchase price to the tax office.
  • [Article goes into detail about the tax rules/legislation]… 
  • … At this point, it is worth noting that we are giving the Australian Taxation Office another weapon to recover tax legitimately owed and that is a good thing for society.
  • The great danger is the complexity created and that currently the tax office is badly run and is operating outside the law in key small business areas. It knows it can’t be challenged because of the cost of court cases.
  • Meanwhile, the legislation is yet another blow being aimed at Chinese and other Asian investors in property. These blows have come separately and each one has had reasonable motivations. But, in combination, they could inflict severe damage to the apartment and other parts of the residential property market.
  • Chinese and other Asian investors face a Hobson’s choice. They will not enjoy getting a tax clearance but nor will they appreciate the buyer of their property taking 10 per cent off the purchase price.
  • And if the tax office treats locals illegally, what might they do to foreigners?
  • Australia desperately needs greater independent supervision of the tax office.
  • Chinese investment in property has saved us from the worst effects of the big fall in the mining investment boom. But look at what is now happening….

See also:

Dramatic shifts herald a new era in residential property
by Robert Gottliebsen, The Australian, May 12, 2016

Excerpts only.

There have been two sudden and dramatic shifts in the Sydney apartment market, which are set to spread to Melbourne, Brisbane and other markets.

It may herald a new era in Australian residential property.

The first shift is that the level of Chinese buying of Sydney apartments has fallen dramatically. The largest Sydney developer, Meriton’s Harry Triguboff, estimates that in the last month or so Chinese buying has halved.

The Chinese and other Asian buyers have been buying over 80 per cent of Sydney apartments in recent years so this is a huge and dangerous development.

But just as everyone began to prepare for the resulting calamity, a second dramatic shift has taken place in the last few weeks: There has been a surge in Australian buying of both existing and ‘off the plan’ apartments.

The increased buying has been so sudden that there has not been time to fully analyse the trend, but it seems that two forces are driving it. 

First, the Coalition’s retrospective (see footnote) decimation of superannuation as a savings mechanism for up-and-coming executives and salary earners has turned Australians towards negative gearing as a savings mode.

And, secondly, this trend was accelerated by the fall in interest rates as well as the signal by the Reserve Bank that if inflation remains at current levels or moves lower, further interest rate cuts would be in the pipeline.

…The sudden fall in Chinese buying in Sydney is of great long-term significance to the nation. The Chinese buyers not only underpin the market values but have also enabled the nation to adjust to the fall in mining investment. They have been a key element in our prosperity. If it continues to be difficult for the Chinese to buy apartments it may also affect our tourism and education, which have been key export markets for Australia.

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