BILLS DIGEST NO. 49, 2017–18              10 November 2017

Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 [and] Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017

Paula Pyburne
Law and Bills Digest Section 

Date introduced:  7 September 2017

House: House of Representatives

Portfolio:  Treasury

Commencement: Various dates as set out in the body of this Bills Digest

Links:  The links to the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page.

The links to the Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page.

Both Bills can be accessed through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at November 2017.

Purpose of the Bills

This Bills Digest relates to two Bills.

The purpose of the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 (the Housing Tax Integrity Bill) is to amend the Income Tax Assessment Act 1997 (ITAA 1997) to:

•       ensure that travel expenditure incurred in gaining or producing assessable income from residential premises is not deductible and not recognised in the cost base of the property for capital gains tax purposes

•       deny income tax deductions for the declining value of ‘previously used’ depreciating assets used in producing assessable income from the use of residential premises as residential accommodation.

In addition, the Housing Tax Integrity Bill amends the Foreign Acquisitions and Takeovers Act 1975 (FATA) to provide that an annual vacancy fee is payable by foreign owners of residential real estate where property is not occupied or genuinely available on the rental market for at least six months in a 12 month period.

The purpose of the Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017 (the Vacancy Fees Bill) is to amend the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (Fees Imposition Act) to impose the vacancy fee as a tax.

Background

Problems with housing affordability

Housing affordability encompasses a persistent and complex set of issues before the Parliament.[1] During the 44th Parliament, the Senate Economics References Committee (Economics Committee) considered the difficulties faced by many Australians in accessing affordable housing. The Economics Committee report, entitled Out of Reach? The Australian Housing Affordability Challenge[2] sets out the troublesome nature of the problems stating:

… no single measure can capture the diversity of Australian experiences of housing affordability … [but] most indicators point toward a deterioration of affordability in recent decades. This decline is keenly felt by a broad array of people, including people wanting to become homeowners, renters and people living in community and public housing. Homelessness, meanwhile, is a tremendously complex problem, and it would be reductive to suggest it is simply a corollary of housing affordability and nothing more besides. Nonetheless … poor housing affordability creates pressures throughout the housing system …[3]

Rising prices

In 2014 a sharp rise in housing prices in Sydney and Melbourne, along with suggestions that perhaps 40 percent of new homes were being purchased by overseas buyers, was reported.[4] In addition to the apprehension about the rise in residential real estate prices were two other concerns. First, there were claims that ‘… tough visa restrictions, which limit temporary residents to owning just their family home, were being flouted’.[5] Second, was the suggestion that wealthy Chinese investors were ‘sidestepping Foreign Investment Review Board (FIRB) regulations to buy established property …’.[6]

While it has recently been reported that prices have fallen in Sydney and auction clearance rates are falling, this has not necessarily translated into better access for first home buyers.[7] In April 2017, it was reported that ‘housing affordability worsened in Sydney, Melbourne and Adelaide over the year to March and will deteriorate further as record low interest rates keep pushing prices up by more than wages’.[8]

Investor participation

About negative gearing

In Australian tax law, investors have a right to offset non-capital losses from an income producing asset against their personal income, and can thereby reduce the overall amount of personal income tax payable. Negative gearing is commonly taken to refer to the ability of landlords to deduct losses from mortgage-financed rental property, including interest paid on borrowings to acquire the property, from their overall assessable income.[9]

Australian Taxation Office data confirms:

•        2,047,000 Australians own an investment property

•        1,277,000 Australians negative gear their investment property

•        The average deduction for negative gearing is $8,702

•        807,521 Australians with taxable incomes below $80,000 a year negatively gear

•        Over 103,000 Australians aged under 30 negatively gear property.[10]

In the light of the housing affordability problems faced by many Australians, there have been calls for changes to negative gearing such as by limiting it to investment in new housing.[11]

Arguments for negative gearing

In December 2016, Treasury invited submissions for the 2017–18 Budget.[12] Amongst those in favour of negative gearing was the Real Estate Institute of Australia (REIA) which argued that the abolition of negative gearing would not serve as a panacea for Australia's housing problems.[13] REIA disputed the contention that the current tax treatment of negative gearing was ‘exacerbating housing affordability issues’. It argued:

The current taxation arrangements provide many Australians with the opportunity to invest in property and augment their savings in particular their retirement savings and at the same time improve rental affordability through an increased supply of rental housing … Negative gearing contributes to the provision of new housing …[14]

Similarly, the Property Council of Australia (PCA) advocated for the retention of the current negative gearing arrangements opining that property investors are ‘crucial in supporting new developments, with up to 40 per cent of all new developments financed by investors’.[15]

Arguments against negative gearing

The argument against negative gearing, according to the Australian Institute of Company Directors, is that ‘negative gearing and the capital gains tax discount had created distortions in the housing market and had boosted after-tax returns from investment in existing residential property and made housing less affordable’.[16] According to one commentator:

In 2015, 93 per cent of investor loans were used to purchase established dwellings. These figures undermine the original policy intention of negative gearing, which was to create a mechanism for reducing rents by encouraging investors to build new property to increase housing supply. Instead, negative gearing has placed upward pressure on the housing market, mismatched the supply and demand of housing, and made it difficult for owner-occupiers to afford a home.[17]

In his submission to the Economics Committee inquiry into affordable housing, economist Saul Eslake opined in relation to negative gearing:

…it's hard to think of any worthwhile public policy purpose which is served by it. It certainly does nothing to increase the supply of housing, since the vast majority of landlords buy established properties: 92% of all borrowing by residential property investors over the past decade has been for the purchase of established dwellings, as against about 72% of all borrowing by owner-occupiers.

Precisely for that reason, the availability of “negative gearing” contributes to upward pressure on the prices of established dwellings, and thus diminishes housing affordability for would-be home buyers.[18]

High vacancy rates

Another dimension to the housing affordability problem became apparent following the 2016 Census—the number of houses that were, apparently, empty. It was reported that ‘Australia has 200,000 more homes sitting empty than it had a decade ago, new figures show, despite the country grappling with a housing supply shortage that is pushing the cost of a first home beyond many of its residents’.[19]

On the night of the 2016 Census, 1,089,165 dwellings were empty—11.2% of all Australian dwellings.[20] Some commentators assumed that ‘these empty dwellings, by not contributing to housing supply, increase house prices’.[21] However, Richard Tomlinson, Professor of Urban Planning at the University of Melbourne, commented:

[E]mpty house data should be seen in context: over the previous 35 years, between 9.2% and 11.2% of houses were empty. Vacancy rates have changed little over this time. Almost two-thirds of empty dwellings on census night are holiday houses or dwellings where owners were absent. Among the capital cities, only in metropolitan Perth did the empty dwelling rate exceed 10%.[22]

Government response

The measures contained in the Bills represent part of the Government’s response to these issues. In a joint media release, the Treasurer, Scott Morrison and Assistant Minister to the Treasurer, Michael Sukkar outlined:

An annual charge of at least $5,000 on foreign owners of residential real estate will be applied where Australian residential property is not occupied or genuinely available on the rental market for at least six months of the year. The measure is designed to free up more dwellings for Australian renters and applies to applications to acquire property from 7:30pm Budget night. The new charge builds on the Government's existing foreign investment regime, which seeks to increase the number of houses available for Australians to live in, by creating a financial incentive for foreign owners to make their property available on the rental market. Foreign ownership in new developments will be limited through the introduction of a 50 per cent cap on the number of properties that can be sold to foreign investors through developer pre-approvals. The cap will be included as a condition on all New Dwelling Exemption Certificates for new property developments where the application is made from 7.30pm on Budget night. This measure will mean Australian buyers will have access to more dwellings in these developments …

From 1 July 2017, the Government will disallow deductions for travel expenses related to owning a residential investment property. This is an integrity measure to address concerns that such deductions are being abused. This will rein in a high growth deduction item and improve taxpayer confidence in the negative gearing system. [23]

Committee consideration

Selection of Bills Committee

The Selection of Bills Committee determined that the Bills would not be referred to committee for inquiry and report.[24]

Senate Standing Committee for the Scrutiny of Bills

The Standing Committee for the Scrutiny of Bills (Scrutiny of Bills Committee) noted that each of the measures in the Bills apply retrospectively:

•       the amendments in Schedule 1 (relating to travel costs deductions) of the Housing Tax Integrity Bill are proposed to apply to losses or outgoings incurred on or after 1 July 2017

•       the amendments in Schedule 2 (relating to depreciation deductions) are proposed to apply to income years starting on or after 1 July 2017 to assets acquired at or after the time the measure was announced (7.30pm on 9 May 2017), unless the asset was acquired under a contract entered into force before this time

•       the amendments in Schedule 3 and the Vacancy Fees Bill are proposed to apply to foreign persons who submit a notice or an application to acquire residential land from the time the measure was announced (7.30pm on 9 May 2017).

The Scrutiny of Bills Committee stated:

The committee has a long-standing scrutiny concern about provisions that apply retrospectively, including provisions that back-date commencement to the date of the announcement of the Bill … as such an approach challenges a basic value of the rule of law that, in general, laws should only operate prospectively (after they have been passed by the Parliament).[25]

Whilst the Scrutiny of Bills Committee accepted the explanation for the retrospective application of the measures in Schedule 2 to the Housing Tax Integrity Bill, it noted that there was no explanation for the retrospective application of the measures in Schedules 1 and 3 of the Housing Tax Integrity Bill or of the Vacancy Fees Bill. That being the case, the Committee requested the Treasurer's advice ‘as to why it is intended to apply the measures relating to travel costs deductions and the proposed vacancy fees regime retrospectively’.[26]

The Treasurer’s response indicated that the retrospective application of the measures relating to travel cost deductions in Schedule 1 were ‘necessary to ensure taxpayers could not avoid the operation of the amendments by incurring deductible travel costs prior to the Bill being passed’. Further, it would ensure that ‘affected taxpayers who incur travel costs throughout the income tax year, beginning 1 July 2017, are treated equally’.[27]

Similarly, in relation to the retrospective application of the proposed vacancy fees regime for foreign persons, the Treasurer indicated that this was to ‘ensure that foreign persons could not circumvent the operation of the amendments by lodging applications to acquire residential property between the time of the announcement and the commencement of the amendments to avoid the vacancy fee and the requirement to make properties available for occupation’.[28] The Treasurer’s response added:

Importantly, foreign persons who made a foreign investment application before 7:30pm on 9 May 2017, but have not yet purchased a property or had not yet been notified of the outcome of their application will not be affected. Consequently the vacancy fee only applies to new applications and applicants were on notice of the new fee from the time it commenced. In particular, the Foreign Investment Review Board website provided clear alerts and guidance material highlighting the new rule.

The retrospective application of the vacancy fee can also be managed by affected foreign persons as they have a full 12 month period to ensure that the property is occupied or made genuinely available for at least six of the 12 months. Foreign owners of residential real estate will be required to report annually about the use of their property in the previous 12 months - the first possible date that reporting may be required is 9 May 2018.

Furthermore, foreign owners of residential property will have the full 12 month period to gather any relevant documentation (for example, proof of occupation) required for the purpose of the vacancy fee. Noting the above timeframes, the earliest that a liability for the vacancy fee could arise is 9 May 2018.[29]

In relation to the Treasurer’s response, the Scrutiny of Bills Committee noted that ‘a full 12 month period would be available only if affected persons have acted on the assumption that the policy announced on 9 May 2017 will become law’. It observed that ‘[r]etrospective commencement, when too widely used or insufficiently justified, can work to diminish respect for law and the underlying values of the rule of law’. The Scrutiny of Bills Committee requested that the key information in the Treasurer’s response be included in the Explanatory Memorandum, noting the importance of this document as a point of access to understanding and interpreting the law.[30]

Policy position of non-government parties/independents

Australian Labor Party

Whilst the Australian Labor Party (Labor) has stated that it supports the measures in the Bills, it is also concerned that they do not go far enough towards tackling the problems of housing affordability.[31]

Australian Greens

The Australian Greens (the Greens) have not specifically commented on the contents of these Bills.

However the Greens have stated in relation to negative gearing that they would:

… limit existing negative gearers to one property. Only 583,000 out of Australia’s 1.5 million property investors invest in two or more investment properties. The deductions available for second or more properties would shrink by one-fifth each year until reaching zero after the fifth year. The limit would bring in an extra $100 million in tax revenue in the first four years and $1.3 billion over 10 years.[32]

It is likely that the Greens will consider that the Bills do not sufficiently address the issue of negative gearing and its impact on housing affordability.

Other crossbench senators

Whilst there has been no specific comment about the Bills from the Senate, it is clear that there is a range of views in relation to reform of negative gearing held by the crossbench senators.

On 11 October 2016, Greens Senator Lee Rhiannon (also on behalf of Labor Senator, Doug Cameron) introduced a motion which included a call for the Federal Government to ‘significantly reform negative gearing and the capital gains tax discount to ensure housing is more affordable for first home buyers’. Senator Jacqui Lambie supported the motion, while senators from Pauline Hanson’s One Nation party, Senator Derryn Hinch and Senator David Leyonhjelm opposed the motion (NXT senators and then Family First Senator Bob Day were absent).[33]

Speaking after the 2017–18 Budget was delivered, Senator Hinch was critical that the changes to negative gearing did not go far enough:

One embarrassing thing for the government was the scant mention of two controversial words: negative gearing. It is true: people with negatively geared property will no longer be allowed to claim an annual trip to inspect the property as a tax deduction, and depreciation on the washing machine I think has also been disallowed. I support negative gearing. I have declared in my pecuniary interest register that I have one heavily mortgaged negatively geared apartment, but I am open to legislation to limit the number of properties, residential or commercial, that a person can negatively gear. I am increasingly being convinced of a limit of two or three such properties. It could help first-time buyers who are being swamped by investors, local and foreign, at every weekend auction.[34]

Given these strongly held views there may be moves in the Senate to broaden the scope of the measures in the Bills.

Position of major interest groups

There are a range of views concerning reform to negative gearing and the appropriate taxation of investment properties. As stated above, those in favour of negative gearing, in particular the REIA and the Property Council of Australia, argue that negative gearing contributes to the provision of new housing. In contrast, the Australian Council of Social Services has advocated for broad reform to negative gearing to improve housing affordability.[35] Research commissioned by GetUp! and conducted by the Australia Institute has also argued that current tax arrangements contribute to lower housing affordability.[36]

However, analysis conducted by David Montani, Tax Director at Nexia Perth, concluded that ‘many claims made by both defenders and detractors of negative gearing are revealed as unsupported, or simply myths’. In relation to house prices, he stated:

A rather fervent claim made is that restricting the deductibility of negative gearing losses would cause a reduction in the demand for housing, with a resulting significant reduction in house prices. The possible impact from different models of restricting negative gearing has been studied by various bodies, and the conclusion is a modest, one-off, fall of 1-2%.[37]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bills are compatible.[38]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights (PJCHR) made comments in relation to two matters.[39] The PJCHR noted that the Housing Tax Integrity Bill amends the FATA to implement an annual vacancy fee payable by 'foreign persons'. It stated:

The measure would appear to have a disproportionate negative effect on non-nationals, raising questions about whether this disproportionate negative effect (which indicates prima facie indirect discrimination) amounts to unlawful discrimination.

The committee therefore seeks the advice of the Treasurer as to whether the measure is reasonable and proportionate for the achievement of the stated objectives (including how it is based on reasonable and objective criteria; any evidence regarding the number of foreign persons who leave properties vacant in contrast with Australian residents; or any other information to explain the rationale for the differential treatment between nationals and non-nationals; and whether there are other less rights restrictive ways to achieve the stated objective).[40]

The PJCHR also noted the Housing Tax Integrity Bill provides that a civil penalty may apply where a foreign person fails to submit a ‘vacancy fee return’ or keep a required record. Its analysis questioned the compatibility of the civil penalty with criminal process rights and sought advice from the Treasurer as to whether:

•       the civil penalty in the Bill is 'criminal' in nature for the purposes of international human rights law and if so

•       whether the measures could be amended to accord with criminal process rights.[41]

Measure 1—non-deductible travel expenses

Commencement

The amendments in Schedule 1 of the Housing Tax Integrity Bill commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent.

However, the amendments apply to a loss or outgoing incurred on or after 1 July 2017.[42]

Financial impact

According to the Explanatory Memorandum, measure 1 is expected to result in a gain to revenue of $540 million over the forward estimates period as set out in the table below.

Table 1:              financial impact of measure 1

2016–17

2017–18

2018–19

2019–20

2020–21

Nil

Not zero but rounded to zero

$160 million

$180 million

$200 million

Explanatory Memorandum, Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 [and] Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017, p. 3.

Key provisions

The provisions of Schedule 1 to the Housing Tax Integrity Bill are intended to achieve two things:

•       first, to ensure that travel expenditure incurred in gaining or producing assessable income from residential premises is not deductible and

•       second, to ensure that such amounts are not recognised in the cost base of the property for the purposes of calculating capital gains tax (CGT).

Income tax deductions

Income tax is paid by a person based on the amount of their taxable income. Part 2-5 of Chapter 2 of the ITAA 1997 provides that particular types of gross income are deductible. Within Part 2-5, Division 26 provides for some amounts that cannot be deducted, or cannot be deducted in full, from gross income in the calculation of taxable income.

Currently, travel expenditure for, but not limited to, the inspection or maintenance of rental property owned by a taxpayer, or travel expenditure to collect rent is deductible as it is considered to be incurred in gaining or producing assessable income.[43]

Item 2 of Schedule 1 to the Housing Tax Integrity Bill inserts proposed section 26-31 into Division 26. The amendment operates so that, in calculating a person’s taxable income for a year, the person cannot deduct a loss or outgoing that has been incurred in relation to travel, if:

•       it is incurred in gaining or producing assessable income from the use of residential premises[44] as residential accommodation and

•       it is not necessarily incurred in carrying on a business for the purpose of gaining or producing the person’s assessable income.[45]

However, there is an exception to this general rule. A person may deduct a loss or outgoing if, at any time during the income year in which the loss or outgoing is incurred, the person is:

•       a corporate tax entity

•       a superannuation plan that is not a self-managed superannuation fund

•       a managed investment trust

•       a public unit trust (within the meaning of section 102P of the Income Tax Assessment Act 1936) or

•       a unit trust or partnership, if each member of the trust or partnership is covered by one of the above dot points at that time during the income year.[46]

Recognition for CGT

If a person sells a capital asset, such as real estate or shares, they generally make a capital gain or capital loss. This is the difference between what it cost to acquire the asset (called the cost base) and what the person receives when they dispose of it.[47] Currently the cost base is made up of the following elements:

•       money paid or property given for the CGT asset[48]

•       incidental costs of acquiring the CGT asset or that relate to the CGT event[49]

•       costs of owning the CGT asset[50]

•       capital costs to increase or preserve the value of the asset or to install or move it[51]

•       capital costs of preserving or defending title or rights to the CGT asset.[52]

When a CGT event happens to a CGT asset and the taxpayer has not made a capital gain, the person needs the asset’s reduced cost base to work out whether there has been a capital loss.[53] Like the cost base, the reduced cost base has five elements.[54]

Currently, travel expenditure does not form part of the cost base or the reduced cost base of a residential investment property to the extent that a taxpayer has deducted or can deduct it. Items 3 and 4 of Schedule 1 to the Bill insert proposed subsections 110-38(4A) and 110-55(9J) into the ITAA 1997 to ensure that such losses and outgoings that will not be deductible due to the amendments in item 2 ‘do not form part of any element of the cost base and reduced cost base of a residential investment property’.[55]

Measure 2—limiting depreciation deductions

Commencement

The amendments in Schedule 2 to the Housing Tax Integrity Bill commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent.

However, the amendments apply to an entity for income years commencing on or after 1 July 2017 for assets that were acquired under contracts that were entered into or assets that were otherwise acquired at, or after, 7.30 pm (according to the time in the Australian Capital Territory) on 9 May 2017.[56] 

Financial impact

According to the Explanatory Memorandum, measure 2 is expected to result in a gain to revenue of $260 million over the forward estimates period as set out in the table below.

Table 2:              financial impact of measure 2

2016–17

2017–18

2018–19

2019–20

2020–21

Nil

Nil

$40 million

$100 million

$120 million

Explanatory Memorandum, Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 and Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017, p. 5.

Key provisions

The amendments in Schedule 2 to the Housing Tax Integrity Bill are intended to deny income tax deductions for the decline in the value of a ‘previously used’ depreciating asset that an entity uses in gaining or producing assessable income from the use of residential premises for the purposes of residential accommodation.[57]

Currently, Part 2-10 of Chapter 2 of the ITAA 1997 sets out the general rules for deductibility of capital expenditure. Broadly speaking, a taxpayer can deduct an amount equal to the decline in value for an income year of a depreciating asset that the taxpayer has held for any time during the year.[58] However, a taxpayer must reduce their deduction by the part of the asset’s decline in value that is attributable to their use of the asset for a purpose other than a taxable purpose.[59]

Reduction for second hand assets

Item 4 in Schedule 2 to the Housing Tax Integrity Bill inserts proposed section 40-27 into the ITAA 1997 so that the amount of the deduction that would generally be applicable may be reduced to nil where:

•       the taxpayer did not hold the asset when it was first used, or first installed ready for use[60] or

•       the taxpayer used the asset during that income year or an earlier income year, in their own residential premises or for a purpose that was not a taxable purpose.[61]

Essentially then, the deduction will only apply where the depreciating asset was acquired new for that purpose.

Example

Fred buys a house that he intends to rent out to increase his income. Immediately before renting out the house, Fred buys a new washing machine and a second hand clothes dryer for installation.

The amendments do not alter Fred’s entitlement to deduct an amount under Division 40 of the ITAA 1997 for the washing machine.

However, Fred is not able to deduct an amount for the clothes dryer because it has been previously used.

The rule, above, does not apply to:

•       a corporate tax entity

•       a superannuation plan that is not a self-managed superannuation fund

•       a managed investment trust

•       a public unit trust (within the meaning of section 102P of the Income Tax Assessment Act 1936) or

•       a unit trust or partnership, if each member of the trust or partnership is covered by one of the above dot points at that time during the income year.[62]

Similarly, the rule does not apply if the residential premises are supplied to the taxpayer as new residential premises and the depreciating asset is supplied as part of that supply and no entity was residing in the residential premises in which the asset was used, or installed ready for use, at any earlier time.[63]

Calculating the reduction

Item 5 of Schedule 2 to the Housing Tax Integrity Bill inserts proposed section 40-291 into the ITAA 1997. The section provides the formula for calculating the amount of the reduction for depreciating assets which are captured by proposed section 40-27.

Measure 3—imposition of vacancy fees

Commencement

The provisions of Schedule 3 to the Housing Tax Integrity Bill commence on the earlier of a single day to be fixed by Proclamation or six months after Royal Assent.

The provisions of the Vacancy Fees Bill commence at the same time as Schedule 3 to the Treasury Laws Amendment (Housing Tax Integrity) Act 2017 commences. However, the provisions do not commence at all if that Schedule does not commence.

Financial impact

According to the Explanatory Memorandum ‘the vacancy charge is estimated to have a gain to budget of $16.3 million over the forward estimates period’.[64] Funding of $3.7 million over four years from 2017–18 will be provided to the Australian Taxation Office to implement the vacancy charge.

The Explanatory Memorandum assesses the measure will have a low compliance cost impact:

There will be minor regulatory cost for foreign persons who buy residential real estate from 9 May 2017 onwards, to report their usage of the property. Furthermore, the requirement to use the property may mean that investors also have to take steps to ensure that the property is occupied for at least 6 months of a given 12 month period.[65]

Key provisions—Housing Tax Integrity Bill

Items 1–9 in Schedule 3 to the Housing Tax Integrity Bill amend the FATA. In particular, item 7 inserts proposed Part 6A—Vacancy fees for foreign acquisitions of residential land into the FATA.

Who is captured by the new provisions?

The provisions in new Part 6A apply to a foreign person who has acquired an interest in residential land on which one or more dwellings are (or are to be) situated and either the acquisition is a notifiable action or the acquisition would be, but an exemption certificate has been given.[66]

For the purposes of the FATA, a foreign person is:

•       an individual not ordinarily resident in Australia

•       a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest

•       a corporation in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest

•       the trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest

•       the trustee of a trust in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest

•       a foreign government

•       any other person, or any other person that meets the conditions, prescribed by the regulations.[67]

A foreign person is obliged to inform the Treasurer that they are proposing to take a significant action if the action is also a notifiable action.[68] In broad terms, a notifiable action is a proposed action to acquire a direct interest in an Australian entity or Australian business that is an agribusiness, to acquire a substantial interest in an Australian entity or to acquire an interest in Australian land. Relevant to the measures in the Bill, Australian land may be described as residential land, as a new dwelling or as an established dwelling.[69]

Under the foreign investment framework, foreign persons may receive individual approval for a specific property prior to making the purchase. Alternatively, broad pre-approval through ‘exemption certificates’ can be granted for eligible foreign persons seeking to acquire an established dwelling or for developers seeking to sell new dwellings to foreign persons.[70]

Liability for vacancy fees

The Housing Tax Integrity Bill provides that a person must pay a vacancy fee in relation to each dwelling on the land that is residentially occupied for fewer than 183 days during each vacancy year for the dwelling.[71] For the purposes of that requirement, the Bill contains a number of relevant definitions.

First, a vacancy year is the first, and each successive, period of 12 months since the occupation day for the dwelling during which the person has continuously held the interest in land.[72]

Second, the occupation day for a dwelling on the land is:

•       for an established dwelling—the first day the person acquires the right to occupy the dwelling

•       for a new dwelling, or a near-new dwelling interest[73]—the later of, the day on which a certificate of fitness for occupancy or use is issued in relation to the dwelling for the purposes of the law of a State or Territory relating to approvals of new dwellings and, the first day the person acquires the right to occupy the dwelling or

•       a day prescribed by regulations.[74]

Third, a dwelling is residentially occupied on a day if:

•       the person, or a relative of the person, genuinely occupies the dwelling as a residence on that day

•       the dwelling is genuinely occupied on that day as a residence under a lease or licence with a term of 30 or more days or

•       the dwelling is genuinely available on that day for occupation as a residence under a lease or licence with a term of 30 or more days.[75]

Need to lodge a return

The Housing Tax Integrity Bill requires a person to provide the Commissioner of Taxation (the Commissioner) with a vacancy fee return in the approved manner and form within 30 days after the end of the vacancy year for a dwelling on the land.[76]

Where a person fails to provide the vacancy return within the relevant time, two consequences arise:

•       the failure gives rise to a civil penalty of a maximum of 250 penalty units[77] and

•       the person is deemed to be liable to pay a vacancy fee—regardless of the number of days during the vacancy year on which the dwelling is residentially occupied.[78]

Notice of liability

The Treasurer[79] or the Commissioner must give written notice to a person who is liable to pay a vacancy fee setting out the amount of the fee, and the reasons why the person is to pay the fee.[80]

The vacancy fee becomes due for payment on a day specified in the notice—being at least 21 days after the notice is given to the person.[81]

The Treasurer may waive or remit the whole or a part of a vacancy fee if he, or she, is satisfied that it is not contrary to the national interest to do so.[82]

Vacancy fee recovery

A vacancy fee may be recovered as a debt due to the Commonwealth in a court of competent jurisdiction.[83]

In the alternative, if the interest in Australian land can be registered on a land register, a charge[84] may be created (following a declaration by the Treasurer) on the land to secure the payment of the following amounts:

•       amounts of unpaid vacancy fees that are due for payment but have not been paid in relation to that land

•       any amounts of unpaid vacancy penalties payable for contravention by the person of the requirement to lodge a vacancy fee return or the requirement to keep records.

The Treasurer’s declaration is a notifiable instrument.[85] The declaration must specify the time at which it comes into force and the Australian land to which it applies.[86]

The effect of the charge created on land is that it has priority over any other interests in the land and is not affected by any change in ownership of the land. It remains in force until all unpaid vacancy fees, unpaid vacancy penalties and any costs incurred by the Commonwealth in the recovery of those amounts have been paid.[87]

In practical terms, the charge will be registered on the title deed for the relevant property. This means that the property cannot be sold or transferred to another person unless, and until, the charge is satisfied.

Vesting of interest in Commonwealth

The Housing Tax Integrity Bill empowers the Treasurer or the Commissioner to apply to a court of competent jurisdiction for an order authorising the vesting of an interest in Australian land in the Commonwealth.[88]

Where the Court makes the relevant order, the interest in the land vests in the Commonwealth at law once the applicable registration requirements have been complied with.[89] At that time, the Commonwealth is entitled to be registered on a land register as the owner of that property.[90] In addition, the Treasurer has power, on behalf of the Commonwealth, to do, or authorise the doing of, anything necessary or convenient to obtain the registration of the Commonwealth as the owner.[91]

The Treasurer, and persons acting on the Commonwealth’s behalf, can dispose of, or otherwise deal with, a person’s interest in Australian land that vests by a court order after the later of:

•       if the period provided for lodging an appeal against the order has ended without such an appeal having been lodged—the end of that period;

•       if an appeal against the order has been lodged—the appeal lapses or is finally determined.[92]

The Treasurer must, on behalf of the Commonwealth, dispose of an interest in a person’s land that vests in the Commonwealth as soon as practicable thereafter.[93] The proceeds of the sale must be applied against the following:

•       any unpaid vacancy fees and unpaid vacancy penalties that the person remains liable to pay

•       any costs incurred by the Commonwealth in relation to recovering the unpaid vacancy fees and unpaid vacancy penalties and

•       any costs incurred by the Commonwealth in relation to the disposal.[94]

The remainder of the proceeds, if any, must be paid in the following order:

•       a person holding a mortgage, charge or other interest over the land if the mortgage, charge or interest relates to a debt due by the owner and               has been registered on a land register[95]

•       the Commonwealth in relation to any other penalty or debt that is due and payable to the Commonwealth by the owner

•       the owner.[96]

Service of notices

Item 8 of Schedule 3 to the Housing Tax Integrity Bill inserts proposed section 135A into the FATA which deals with the service of notices and other documents, including documents in respect of a proceeding to recover an amount of a fee or penalty, where the Secretary, the Treasurer or the Commissioner is unable to find the person, or is satisfied that the person is not in Australia. In that case, a document may be served by posting it (or a sealed copy of it) in a letter addressed to the person at any address of the person in Australia or in a foreign country, or any electronic address of the person that is last known to the Secretary, Treasurer or Commissioner.[97]

Key provisions—Vacancy Fees Bill

Key issues and provisions

Under the FATA a person who applies for an exemption certificate, gives notice of a notifiable action, or gives a notice in relation to a proposal to take a significant action that is not a notifiable action, must pay a fee when the notice is given or an application is made.[98]  Applications are not considered made and notices are not considered given until the correct fee has been paid or otherwise waived.[99] The Treasurer may waive fees if he, or she, is satisfied that it is not contrary to the national interest to do so.[100]

The Fees Imposition Act sets out the rates of the fees that apply and provides a power for Regulations to prescribe the rate of the fee, subject to a maximum amount set out in the Fee Imposition Act.

The Vacancy Fees Bill amends the Fees Imposition Act to impose the vacancy fee which is created by proposed Part 6A—Vacancy fees for foreign acquisitions of residential land of the FATA as a tax.[101]

Item 11 of the Vacancy Fees Bill inserts proposed section 12A into the Fees Imposition Act to set out in table form the amount of the vacancy fee in a number of specified circumstances. In each case, the fee is calculated by reference to existing amounts payable in accordance with sections 6–8 of the Fees Imposition Act or a lower fee that is specified in regulations.[102]

© Commonwealth of Australia

Creative Commons

With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.

In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.

To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.

Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.

Disclaimer: Bills Digests are prepared to support the work of the Australian Parliament. They are produced under time and resource constraints and aim to be available in time for debate in the Chambers. The views expressed in Bills Digests do not reflect an official position of the Australian Parliamentary Library, nor do they constitute professional legal opinion. Bills Digests reflect the relevant legislation as introduced and do not canvass subsequent amendments or developments. Other sources should be consulted to determine the official status of the Bill.

Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library’s Central Enquiry Point for referral.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

[1].              M Thomas and A Hall, ‘Housing affordability in Australia’, Briefing book: key issues for the 45th Parliament, Parliamentary Library, Canberra, 2016, pp. 86–89; see also T Dale, ‘Housing affordability and home ownership: previous inquiries and reports’, FlagPost, Parliamentary Library blog, 29 March 2017.

[2].              Senate Economics References Committee, Out of reach? The Australian housing affordability challenge, The Senate, Canberra, May 2015, pp. 174–176, 194–198.

[3].              Ibid., p. 11.

[4].              C Joye, ‘Sharp rise in foreign investors and June prices’, The Australian Financial Review, 1 July 2014, p. 37; S Cauchi, ‘Foreigners grab housing’, The Age, 1 July 2014, p. 23; R Wallace, ‘$5.5bn spree sparks call on foreigners’ property grab’, The Australian, 1 July 2014, p. 6; N Mauby, ‘Foreign buyer surge: property investment up’, Herald Sun, 11 July 2014, p. 24.

[5].              L Van Den Broeke, ‘Foreign buyer probe: investors flout rules’, Herald Sun, 18 July 2014, p. 21; L Macken, ‘Cashed-up Chinese find the sweet spot’, The Sydney Morning Herald, 23 August 2014, p. 16.

[6].              R Wallace and A Hepworth, ‘1pc of foreign home sales examined’, The Weekend Australian, 26 July 2014, p. 6; R Wallace and S Danckert, ‘Chinese buyers “safeguarding wealth”’, The Australian, 14 August 2014, p. 6.

[7].              J Duke, ‘Why it’s too early to call this a property crash’, The Sydney Morning Herald, 12 October 2017, p. 4.

[8].              M Bleby, ‘Housing affordability to worsen as price pressure persists’, The Australian Financial Review, 27 April 2017, p. 8.

[9].              Senate Economics References Committee, Out of reach? The Australian housing affordability challenge, op. cit., p. 123.

[10].              Property Council of Australia, ‘New ATO data confirms that almost two in three negative gearers have taxable incomes less than $80,000 a year’, Property Council of Australia website, 12 April 2017.

[11].              M Cranston, ‘Negative gearing change top solution for affordability’, The Australian Financial Review, 16 August 2017, p. 34.

[12].              M McCormack (Minister for Small Business), 2017–18 Budget: submissions now open, media release, 9 December 2016.

[13].              Real Estate Institute of Australia, 2017–18 Pre-budget Submission to Treasury, January 2017, pp 6–7.

[14].              Ibid.

[15].              Property Council of Australia, 2017–18 Pre-budget Submission to Treasury, n.d., p. 10.

[16].              N Khadem, ‘Time to stop negative gearing "distortions", says business lobby’, The Age, 4 April 2017, p. 20.

[17].              C Gribbin, ‘Negative gearing: an update ahead of the 2017–18 Federal budget’, Taxation in Australia, 51(1), May 2017, p. 556.

[18].              S Eslake, Submission to the Senate Economics References Committee, Inquiry into affordable housing, 21 December 2013, p. 10.

[19].              E Bagshaw, ‘A million homes left empty across the country’, The Sydney Morning Herald, 18 July 2017, p. 3.

[20].              R Tomlinson, ‘Airbnb and empty houses: who’s responsible for managing the impacts on our cities?’ The Conversation, 19 September 2017.

[21].              Ibid; E Bagshaw, ‘”Cruel and immoral”: 1m homes left empty’, The Age, 18 July 2017, p. 1; J Duke, ‘Situation vacant: what the census data really means’, The Age, 27 July 2017, p. 12.

[22].              Tomlinson, ‘Airbnb and empty houses: who’s responsible for managing the impacts on our cities?’, op. cit.

[23].              S Morrison (Treasurer) and M Sukkar (Assistant Minister to the Treasurer), Reducing pressure on housing affordability, joint media release, 9 May 2017.

[24].              Selection of Bills Committee, Report 11, 2017, Senate, Canberra, 14 September 2017.

[25].              Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 11, 2017, The Senate, Canberra, 13 September 2017, pp. 21–22.

[26].              Ibid.

[27].              Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 12, 2017, The Senate, Canberra, 18 October 2017, p. 150.

[28].              Ibid.

[29].              Ibid., pp. 150–1.

[30].              Ibid., p. 152.

[31].              M Thistlethwaite, ‘Second reading speech: Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 [and] Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017’, House of Representatives, Debates, (proof), 18 October 2017, p. 81; C Bowen, ‘Second reading speech: Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 [and] Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017’, House of Representatives, Debates, (proof), 18 October 2017, p. 78.

[32].              P Martin, ‘Greens claim overhaul of negative gearing will save $51 billion’, The Canberra Times, 29 July 2017, p. 2.

[33].              Australia, Senate, Journals, 9, 2016, 11 October 2016, pp. 293–4.

[34].              D Hinch, Budget: statement and documents, Senate, Hansard, 11 May 2017, p. 3496.

[35].              Australian Council of Social Service (ACOSS), Fuel on the Fire: negative gearing, capital gains tax and housing affordability, ACOSS, Sydney, 2015, p. 6.

[36].              M Grudnoff, Top Gears: How negative gearing and the capital gains tax discount benefit the top 10 per cent and drive up house prices, The Australia Institute, Canberra, April 2015.

[37].              D Montani, ‘Negative gearing: separating fact from fiction’, Taxation in Australia, 51(8), March 2017, pp. 432, 435.

[38].              The Statement of Compatibility with Human Rights can be found at pages 17, 39 and 60–62 of the Explanatory Memorandum to the Bills.

[39].              Parliamentary Joint Committee on Human Rights, Scrutiny report, 11, 2017, 17 October 2017, p. 35.

[40].              Ibid, p. 38.

[41].              Ibid, pp 40–1.

[42].              Item 5 in Schedule 1 to the Housing Tax Integrity Bill.

[43].              Australian Taxation Office (ATO), Rental properties 2017, ATO, June 2017, p. 8.

[44].              Section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 defines the term residential premises as land or a building that is occupied as a residence or for residential accommodation; or is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation—(regardless of the term of the occupation or intended occupation)—and includes a floating home. Section 995-1 of the ITAA 1997 applies that definition for the purposes of the ITAA 1997.

[45].              ITAA 1997, section 995-1 defines business as including any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

[46].              ITAA 1997, proposed subsection 26-31(2).

[47].              ATO, ‘Capital gains tax’, ATO website, last modified 24 October 2017.

[48].              ITAA 1997, subsection 110-25(2).

[49].              ITAA 1997, subsection 110-25(3).

[50].              ITAA 1997, subsection 110-25(4). These costs include: interest on money borrowed to acquire the asset; costs of maintaining, repairing or insuring it; rates or land tax, if the asset is land; interest on money borrowed to refinance the money that was borrowed to acquire the asset; and interest on money borrowed to finance the capital expenditure that was incurred to increase the asset’s value.

[51].              ITAA 1997, subsection 110-25(5).

[52].              ITAA 1997, subsection 110-25(6).

[53].              ATO, ‘Elements of the cost base and reduced cost base’, ATO website, last modified 17 July 2017.

[54].              ITAA 1997, subsection 110-55(2).

[55].              Explanatory Memorandum, Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 [and] Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017, p. 15.

[56].              Subitem 13(1) in Schedule 2 to the Housing Tax Integrity Bill.

[57].              Explanatory Memorandum, Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 [and] Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017, p. 19.

[58].              ITAA 1997, section 40-30 defines a depreciating asset as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except land, an item of trading stock, or an intangible asset.

[59].              ITAA 1997, subsection 40-25(2).

[60].              ITAA 1997, proposed paragraph 40-27(2)(c).

[61].              ITAA 1997, proposed paragraph 40-27(2)(d).

[62].              ITAA 1997, proposed subsection 40-27(3).

[63].              ITAA 1997, proposed subsection 40-27(4).

[64].              Explanatory Memorandum, Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 and Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017, p. 5.

[65].              Ibid.

[66].              FATA, proposed subsection 115B(1).

[67].              FATA, section 4.

[68].              FATA, section 46.

[69].              FATA, section 12, note 2.

[70].              Foreign Investment Review Board (FIRB), ‘Significant actions and notifiable actions’, guidance Note 35, last updated 1 July 2017.

[71].              FATA, proposed subsection 115C(1). Proposed section 115G of the FATA requires a person to keep records for at least five years that explain all the acts that the person engages in that are relevant to their liability for vacancy fees for each dwelling.

[72].              FATA, proposed subsection 115C(2).

[73].              Section 5 of the Foreign Acquisitions and Takeovers Regulation 2015 defines a near-new dwelling interest as an interest in a dwelling, if all of the following apply: (a) the dwelling is contained in a development; (b) an agreement to sell the interest in the dwelling had become binding; (c) that agreement did not result in the transfer of title to the interest, and is no longer in force; (d) the interest is to be sold under another agreement; (e) the interest would be an interest in a new dwelling, to be acquired under the other agreement, if there were no agreements to which paragraphs (b) and (c) applied.

[74].              FATA, proposed subsection 115C(3).

[75].              FATA, proposed subsection 115C(4).

[76].              FATA, proposed subsection 115D(1).

[77].              At the time of writing, a penalty unit is equivalent to $210. This means that the maximum penalty is $52,500.

[78].              FATA, proposed subsection 115D(3).

[79].              Note that the Treasurer may delegate his or her powers under the FATA to the Secretary, the Commissioner, or a person engaged under the Public Service Act 1999 who is employed in the Department or the Australian Taxation Office. FATA, subsection 137(1).

[80].              FATA, proposed subsection 115E(1).

[81].              FATA, proposed section 115F.

[82].              FATA, proposed section 115H.

[83].              FATA, proposed section 115J.

[84].              A charge is security for a debt or obligation attaching to property of a debtor. A charge may be fixed on specific property, or it may float over all property, or property of a certain type, crystallising on the exercise of the chargee’s rights under the charge. A charge over land or company property gives the chargee certain rights to take possession of, or receive payment out of the proceeds of sale of, the charged property. Source: Butterworths Concise Australian Legal Dictionary, 3rd edn, LexisNexis Butterworths, Australia, 2004, p. 67.

[85].              Legislation Act 2003, section 7, provides that unlike legislative instruments, notifiable instruments are not subject to Parliamentary scrutiny. Nor are they subject to automatic repeal 10 years after registration.

[86].              FATA, proposed section 115L.

[87].              FATA, proposed subsection 115M(2).

[88].              FATA, proposed subsection 115N(1).

[89].              FATA, proposed paragraph 115P(2)(a).

[90].              FATA, proposed paragraph 115P(2)(c).

[91].              FATA, proposed paragraph 115P(2)(d).

[92].              FATA, proposed subsection 115Q(1).

[93].              FATA, proposed subsection 115R(1).

[94].              FATA, proposed subsection 115R(3).

[95].              If the proceeds are insufficient to pay all of the persons in this category, then they are to be paid proportionally. FATA, proposed paragraph 115R(5).

[96].              FATA, proposed paragraph 115R(6).

[97].              FATA, proposed subsection 135A(2).

[98].              FATA, section 113.

[99].              FATA, section 114.

[100].              FATA, section 115.

[101].              Item 3 of the Vacancy Fees Bill amends section 5 of the Fees Imposition Act to this effect.

[102].              Fees Imposition Act, section 11.