Hongkongers face higher capital-gains tax on Australian property

Hong Kong investors in Australian properties will need to pay a higher capital-gains tax from May of this year in the wake of new rules that exclude non-residents from a tax break.

Baker & McKenzie's Sydney-based tax partner John Walker said Australia had offered individual taxpayers a 50 per cent reduction on any capital-gains tax applying to long-term investments held for over 12 months. This tax reduction applied to residents and non-residents.

As part of the 2012-13 Australian federal budget announced in May, however, this tax concession is limited to Australian residents. Walker said the government had announced that it would remove the concession in respect to capital gains earned by foreign residents after May 8 of this year, on taxable Australian assets such as real property and mining interests.

"This was on the basis that the tax concession is not considered necessary to attract investment in Australian property and mining assets, which are immobile," Walker said.

Foreign residents would be entitled to a discount on capital gains accrued prior to May 8 of this year, Walker said.

"If foreign residents have held such property up to this date, it is recommended that they obtain a market valuation as of May 8, 2012, in order to qualify for the tax concessions on any gains accrued up to this date," he added.

Serena Chow, a senior associate at Baker & McKenzie in Sydney, said the proposal was expected to have a significant impact on foreign-resident individuals that held Australian property and mining assets. The Australian government anticipated that the proposal would increase revenue by A$55 million (HK$444 million), Chow said.

Ray Chan, the managing director of Henson Properties, an real estate agency in Sydney's Chinatown, said the new law would have some impact on overseas buyers' interest in Australian real estate.

"Mainlanders and other Asian investors have been important buyers of properties in Sydney over the past few years. They represent almost half of all sales in many new property projects," Chan said.

The removal of the 50 per cent capital-gains tax reduction for foreign investors will lower the return on their investments, and erode buying interest. But Chan believes the impact will not be significant.

"Many mainland and Asian property buyers are buying properties in Australia for their children to live in, as they are studying here. They won't stop buying just because of a higher tax," he said.

Chan said those who purchase Australian properties were usually not short-term speculators, as Australian property prices were not rising as quickly as those in Hong Kong.

"Investors who buy Australian property usually take a longer-term view, and expect modest but stable long-term gains," he said.

"They will not be scared away just because of the removal of the tax reduction."

The challenge for overseas buyers of Australian property in the past two years was instead related to the strong Australian dollar, which had risen over 15 per cent against the US dollar and at present traded at parity or above with the greenback, Chan said.

"The strong currency is worse than the change to the capital-gains tax rule, in terms of discouraging investment in the Australian property market," he said.