Malaysian investors with properties in Australia may face significant tax challenges and potential penalties 

MALAYSIAN property investors with assets in Australia may be in for a rude awakening as a result of some recent regulatory changes. 

A slew of changes in land tax rates and withholding tax regulations may result in those property owners facing some financial consequences. Some of the potential penalties and reassessments could run into tens of thousands of dollars. 

One of the key changes were surcharges of land tax up to 4% in Victoria and New South Wales (NSW), potentially adding tens to a few hundred thousand dollars to tax bills. 

Then there is the withholding tax increase to 15% starting Jan 1, 2025, and a potential reassessment of absentee rate for up to five years of back taxes. 

Sounds complicated? Well, definitely is if you are not familiar with the system and regulations. 

A Real Case Scenario 

Here is a real scenario. Wong, a Malaysian investor who owned a Melbourne property since 2014, sold it in the early 2023 for A$800,000 (RM2.35 million). 

“Wong was shocked when his conveyancer informed him that A$100,000 (12.5%) was withheld for tax purposes. He had no idea about this requirement and had never filed an Australian tax return,” TJD Accounting Australia principal accountant Dominic Murphy told The Malaysian Reserve (TMR). 

The Aussie-based international tax specialist said what followed was a complex, six-month process to recover the withheld funds. 

The process began with obtaining a tax file number (TFN), a non-negotiable for foreign investors. It’s the unique identifier that the Australian Tax office (ATO) uses to maintain all the person’s tax records. 

“Without it, you cannot engage with the Australian tax system. It’s required for filing tax returns, claiming refunds and even opening Australian bank accounts. 

“But as a non-Australian resident, the best way is to apply for it in person at your country’s Australian consulate or embassy with the required documents. The ATO said this process takes 28 days, but from our experience, it can take up to three months or longer,” he said. 

Next, gathering historical data. On this, Wong is said to have spent several weeks collecting a decade’s worth of financial records related to the property. 

This led to preparing multiple tax returns. Murphy’s team prepared Wong’s tax returns for every year since 2014, accounting for rental income, expenses and depreciation. 

Then it came to maximising deductions. For this, a depreciation report was obtained to claim wear and tear, helping to offset some of the capital gain from the sale. 

“After six months, we managed to recover about half of the with-held amount for Wong. If he had his tax file number and done his tax returns from the year he bought the property, he would have retrieved the withheld tax sooner, not after six months,” he said. 

What to Do 

Investors need to do some planning. Well, at least, that is what the tax specialists are advocating. 

“If you own property in Australia, you must get your TFN, file your returns annually. You must lodge these returns, regardless of whether the property is generating income or not,” he said. 

There are some strategies for tax optimisation. Investors can make avail of legal structures that can help mitigate some of these tax burdens. For instance, they can set up discretionary trusts with Australian beneficiaries or use corporate trust structures for potential tax advantages. 

“But bear in mind the ATO scrutinises trust arrangements involving foreign investors. I’d advise that any structure the investor sets up is compliant with current regulations and aligns with your specific circumstances,” he said. 

The tax experts reminded investors that the state revenue offices assess taxes annually, using ownership data as of specific dates, such as Dec 31 or June 30. 

Payment deadlines vary by state, and failure to comply can lead to penalties and fines, adding to the already high tax charges. In some instances, this has resulted in distress sales due to excessive tax liabilities. 

Murphy said: “We’ve had clients come to us with reassessment tax bills ranging from A$60,000 to over A$100,000. They are simply shocked as they’ve been unaware of their tax status for years.” 

Adding to these challenges is the ATO’s decision to increase withholding tax to 15% on all property sales starting Jan 1, 2025. This would eliminate the previous A$750,000 threshold, affecting all investors who choose to sell, including those who attempt to quickly offload their properties due to unbearable land tax and surcharges. The new withholding tax rate will likely create additional financial burden. 

“For instance, if you sell your property for A$600,000 after 2024, A$90,000 of tax will be withheld from you by the ATO,” he said. 

“Many investors are caught off guard, and we’d advise them to file tax returns from the property’s purchase date to reclaim these withheld taxes. 

“Usually, this involves applying for an Australian TFN and backtracking to file returns for each year of ownership — a tedious process, especially for those who do not understand these requirements at the time of purchase,” he said. 

On its website, ATO states that one can apply for a TFN if the person: Receives income from an Australian source, other than inter- est, dividends or royalty payments, such as rental income; receives income from Australian business interests; has a spouse who is an Australian resident and is applying for family tax benefit or child care subsidy; is a member of an Austra- lian superannuation fund or needs to lodge an Australian tax return or applies for an Australian business number. 

Still Attractive 

ATO data shows foreign investors have purchased 5,360 properties worth A$4.9 billion in 2022-2023, up from 4,228 purchases valued at A$3.9 billion in 2021-2022. 

The top three states for foreign property transactions in 2022-2023 were Victoria (recording sales of 2,240 units) Queensland (1,121) and NSW (656), according to the Austral- ian Treasury 2023 report. 

Foreign investors are attracted to Australian property for their steady growth with their annual yields generally ranging from 3% to 8%, depending on location and property type. 

But many investors are not clear about the changes taking place. Research by property consultant Stephen Bailey of Blue Crest Property Solutions showed that 94% of his clients, including those from Malaysia, were unaware of their tax obligations in Australia. 

For Malaysians who want to buy Australian property, Bailey said they must first be informed by understanding the type of property they want to invest in and what their long-term goals are. 

“While there are high tax surcharges for foreigners overall, some states offer lower rates or have different requirements,” he said. 

It is understood that the demographics of Malaysian investors were aged between 30s to late 60s and people who make purchases for the future generations, especially for children’s tertiary education. 

Bailey noted that while the tax changes were significant, they were a part of a broader strategy to ensure fair contribution from all property owners. 

“The Australian property market still offers attractive opportunities for Malaysian investors who are well-informed and prepared. 

“While the tax landscape can seem daunting, it’s important to remember that proper planning can mitigate some challenges. Investors should view these regulations as an opportunity to professionalise their approach to property investment in Australia,” he said. 

As regulations continue to evolve for foreign investors, both Murphy and Bailey stressed the importance of staying informed and prepared.

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Tax combinations that matter 

HERE are some of the tax combinations that may be relevant to foreigners who own property in Australia. 

Land Tax and Foreign Investor Surcharges

An annual tax imposed by state governments, with rates varying significantly between states and property values. 

Some states have introduced additional surcharges for foreign investors. Victoria, the most popular state for foreign investors, including Malaysians, has a foreign investor surcharge of 4% on top of regular land tax rates. New South Wales currently has a 4% surcharge, which is set to increase to 5% in 2025. 

“For a property valued at A$800,000 (RM2.35 million), a 4% surcharge means an additional A$32,000 in ongoing annual land tax. This will increase to A$40,000 when New South Wales raises its surcharge to 5%,” said TJD Accounting Australia principal accountant Dominic Murphy. 

Absentee Owner Surcharges

Additional taxes for non-resident property owners, which can be applied retroactively for up to five years. It can result in unexpected bills of tens of thousands of dollars. 

Withholding Tax Changes by the ATO

The withholding tax rate for the capital gains tax regime for non-residents is proposed to increase from 12.5% to 15% and the A$750,000 property value threshold is proposed to be removed ie reduced to nil. 

The proposed change was announced as part of the federal government’s 2023-2024 Mid-year 

Economic Forecast in relation to changes to the capital gains tax regime for foreign residents. Treas- ury had released an exposure draft legislation in relation to changes to the rates and thresholds in relation to Foreign Resident Capital Gains Withholding (FRCGW) and was asking for any comments by Aug 5, according to information shared at the BDO Australia website. 

The FRCGW regime first came into effect on July 1, 2016, with a view to improving collection of capital gains tax liabilities owed by foreign residents and improving compliance of non-residents with their Australian tax obligations. 

The explanatory statement to the proposed changes notes that the government’s reasoning in increasing the FRCGW rate to 15% is that the current rate is not sufficient to recover capital gains owed by foreign residents on capital gains in many instances, especially given increases in property prices in recent years. 

Removal of the A$750,000 threshold will require a purchaser to withhold 15% in relation to all transactions involving the disposal of Taxable Australian Real Property (TARP) or indirect Australian real property interest (IARPI) unless the vendors provide an ATO clearance certificate or make a declaration confirming that they are not a foreign resident or, for indirect interests in TARP, a declaration that the indirect interests are not IARPI in respect of the transaction. 

Capital Gains Tax 

Applicable on property sales, with complex calculations involving the entire period of ownership. 

Annual Tax Returns 

Required to be done for the entire period of property ownership, even if the property isn’t generating income, according to tax specialists. “Many investors don’t realise they need to file annual tax returns in Australia as it is a legal obligation, even if they’re not planning to sell,” Murphy told The Malaysian Reserve (TMR). 

High Land Tax Rates with Reassessments

If land tax is applicable, investors will be taxed as Australian residents, but the local state governments may reassess an investor’s status if information sharing reveals they are not an Australian resident. 

“If the state government discovers that an investor is actually a resident overseas, they will reassess them at a higher rate. 

“For those who’ve owned the property for some time, they will likely reassess them for the last five years, usually at the absentee rate. That’s when significant penalties can kick in,” said Murphy. — TMR

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• This article first appeared in The Malaysian Reserve weekly print edition