Bills Digest No. 49, 2017–18
PDF version [350KB]
Paula Pyburne
Law and Bills Digest Section
10
November 2017
Contents
Purpose of the Bills
Background
Problems with housing affordability
Rising prices
Investor participation
About negative gearing
Arguments for negative gearing
Arguments against negative gearing
High vacancy rates
Government response
Committee consideration
Selection of Bills Committee
Senate Standing Committee for the
Scrutiny of Bills
Policy position of non-government
parties/independents
Australian Labor Party
Australian Greens
Other crossbench
senators
Position of major interest groups
Statement of Compatibility with Human
Rights
Parliamentary Joint Committee on
Human Rights
Measure 1—non-deductible travel
expenses
Commencement
Financial impact
Table 1: financial impact of
measure 1
Key provisions
Income tax deductions
Recognition for CGT
Measure 2—limiting depreciation
deductions
Commencement
Financial impact
Table 2: financial impact of measure
2
Key provisions
Reduction for second hand assets
Calculating the reduction
Measure 3—imposition of vacancy fees
Commencement
Financial impact
Key provisions—Housing Tax Integrity
Bill
Who is captured by the new
provisions?
Liability for vacancy fees
Need to lodge a return
Notice of liability
Vacancy fee recovery
Vesting of interest in Commonwealth
Service of notices
Key provisions—Vacancy Fees Bill
Key issues and provisions
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]
[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.
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