Bills Digest no. 93, 2017–18
PDF version [343KB]
Helen Portillo-Castro
Economics Section
23 March 2018
Contents
Purpose of the Bills
Background
Capital gains tax features: the main
residence exemption and the discount
Capital gains tax changes for foreign
residents
Change to the capital gains discount
Near-new dwelling interests
certificates
Committee consideration
Senate Standing Committee for
Selection of Bills
Senate Standing Committee for the
Scrutiny of Bills
Policy position of non-government
parties/independents
The Labor Party
The Australian Greens
Other cross-bench senators
Position of major interest groups
Financial implications
Statement of Compatibility with Human
Rights
Parliamentary Joint Committee on
Human Rights
Capital gains tax measures
Changes for foreign residents
Commencement
Financial impact
Key provisions and issues
Absence rule adjustment
Principal asset test application
Additional capital gains discount for
affordable housing
Commencement
Financial impact
Key provisions and issues
Near-New Dwelling Interests
Reconciliation payment for near-new
dwelling exemption certificates
Commencement
Financial impact
Key provisions
Date introduced: 8
February 2018
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 (Reducing Pressure on Housing Affordability No. 2) Bill 2018,
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 (Near-new Dwelling
Interests) Bill 2018. Links to both can also be found 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
March 2018.
Purpose of
the Bills
This Bills Digest relates to two Bills.
The Treasury Laws Amendment (Reducing Pressure on Housing
Affordability No. 2) Bill 2018 (the Principal Bill) will amend the Income Tax Assessment
Act 1997 (ITAA 1997), the Income Tax
(Transitional Provisions) Act 1997, the Foreign
Acquisitions and Takeovers Act 1975 (FATA) and the Taxation
Administration Act 1953 (TAA 1953). The provisions of the Principal
Bill are designed to:
- restrict
access to the capital gains tax (CGT) discount through the main residence
exemption by precluding foreign residents from claiming the exemption (Schedule
1, Part 1)
- clarify
the CGT regime (as it applies to foreign residents) by stipulating the basis
for applying the principal asset test to enable a determination on whether an
entity’s underlying value is principally derived from taxable Australian real
property (TARP) (Schedule 1, Part 2)
- create
a mechanism for developers to make a reconciliation payment when dwellings are
sold to foreign persons under a near-new dwelling certificate (Schedule 2) and
- increase
the CGT discount for investors when disposing of TARP that has been used to
provide affordable housing (Schedule 3).
The purpose of the Foreign Acquisitions and Takeovers Fees
Imposition Amendment (Near-New Dwelling Interests) Bill 2018 (Near-New Dwelling
Interests Bill) is to modify the Foreign
Acquisitions and Takeovers Fees Imposition Act 2015 (Fees Imposition
Act) to impose the amount payable by developers, and frequency of fee
payment, in respect of obligations under Schedule 2 of the Principal Bill.
Background
Capital
gains tax features: the main residence exemption and the discount
Prior to 1985, Australia had no general tax on capital
gains. Tax applied to some capital gains on property held for less than a year.[1]
The introduction of a CGT was first recommended by the Asprey Committee report
released in 1974, and later by the 1985 draft white paper on tax reform, on the
basis that taxation at that time discriminated in favour of people who
primarily earned income from capital gains.[2]
The draft white paper stated that the decision to exempt
owner-occupied homes from the CGT was made by the Prime Minister and was
consistent with overseas practices at the time.[3]
The CGT initially applied to realised gains or losses on assets acquired on or
after 19 September 1985, adjusted for inflation so that taxation only applied
to real (not nominal) capital gains.[4]
The main residence exemption has been a feature of CGT
since the tax was introduced. While there have been a number of changes and
clarifications to the specifics of the exemption since its introduction, the
high-level principle has largely remained the same—namely that a dwelling used
as a principal place of residence is ignored for CGT purposes.[5]
The CGT discount, legislated in 1999, was a significant
change to the capital gains tax regime: it replaced the previous indexation
method for assets acquired after 21 September 1999.[6]
Under the discount method, capital gains tax is paid on half of the capital
gain on assets held for more than 12 months (or one-third for superannuation
funds).[7]
Capital
gains tax changes for foreign residents
The pair of measures that affect foreign residents under
the Principal Bill were announced in the 2017–18 Budget,[8]
along with related measures that have since been legislated to reform the CGT
regime as it applies to ‘foreign investors’.[9]
The Government’s stated intent behind this pair of measures is to:
... stop foreign tax residents from claiming the main residence
capital gains tax (CGT) exemption when they sell property in Australia from
Budget night 2017. Foreign tax residents who hold property on Budget night can
continue to claim the exemption until 30 June 2019. The legislation will also
modify the CGT principal asset test to apply on an associate inclusive basis.
This will ensure that foreign tax residents cannot avoid a CGT liability by
disaggregating indirect interests in Australian real property.[10]
However, some stakeholders have warned that the changes
would apply to persons who were Australian residents for tax purposes
(including Australian citizens and permanent residents) who have occupied their
home for a period of time and happen to sell it while residing overseas (and
hence whilst considered ‘foreign tax residents’).[11]
The Treasury released draft legislation for consultation
on this measure on 21 July 2017, with submissions closing on 15 August
2017.[12]
Stakeholder views are discussed under the ‘Capital gains tax measures’ section below.
Change to
the capital gains discount
The proposed increase of the CGT discount under the Principal
Bill was announced in the 2017–18 Budget: it too relates to other aspects of
the Government’s housing affordability package—in particular the measure that
aims to encourage investment in affordable housing supply through managed
investment trusts (MITs).[13]
Taken together, these measures aim to create greater
incentives for private investment in affordable housing supply that targets the
rental market, whether through individual or institutional investment.[14]
Investors will realise a greater gain upon disposing of property that has been
used to provide affordable housing for a minimum period of three years, by
virtue of the CGT reduction at the time the property is sold.
Industry participants attribute decline in housing
investment over the past year to prudential measures restricting investor
lending since April 2017.[15]
The Australian Prudential Regulation Authority’s intervention stems from the
2014 Financial System Inquiry finding that ‘tax treatment of investor
housing ... tends to encourage leveraged and speculative investment in housing’.[16]
Yet investors play a critical role in the provision of housing to a significant
percentage of housing market participants.
Research examining Australian Bureau of Statistics Survey
of Income and Housing data for 2013–14 suggests that, at that time,
9.5 per cent of housing market participants were in an investor class
that benefitted from renting TARP attracting the CGT discount.
Ninety-point-five per cent of housing market participants did not own
rental investment properties—and nearly half of this majority were renting.[17]
When exposure draft legislation for the CGT discount
measure was announced on 14 September 2017, the Treasurer clarified
that eligibility for the discount would differ—in terms of surrounding
conditions and commencement date—by type of investor:
From 1 January 2018, residents investing in eligible
affordable housing will be entitled to a capital gains discount of up to 60 per
cent if they hold the investment for at least three years, rather than the
standard 50 per cent discount.
From 1 July 2017, MITs can hold affordable housing for
the purpose of deriving long-term rent. The same MIT will also be permitted to
derive other eligible investment business income from investments including
shares or commercial property.[18]
[emphasis added]
A controversial announcement accompanied the release of
the exposure draft legislation: that MITs would be prevented from acquiring
ownership interests in dwellings other than residential property held for
long-term rent as affordable housing.[19]
The controversy surrounding this announcement relates to
the so-called ‘build-to-rent’ model that stakeholder groups argue represents an
attractive proposition for investors;[20]
but that is said to be adversely affected if MITs are constrained to investing
in residential real estate managed by an authorised community housing provider.[21]
This issue, at the time of writing, is being considered by the Senate Economics
Legislation Committee.[22]
Near-new
dwelling interests certificates
The 2017–18 Budget included a measure to restrict foreign
ownership in new developments.[23]
Amendments came into effect in 2017 introducing a near-new
dwelling exemption certificate under the Foreign Acquisitions
and Takeovers Regulation 2015 (the Regulation).[24]
Prior to this, foreign buyers were required to go through a FATA application
process in order to purchase dwellings that had never been lived in but that
had been subject to a failed settlement (‘near-new dwellings’). A ‘near-new
dwelling interest’ is defined in the Regulation.[25]
The amendments under Schedule 2 of the Principal Bill,
combined with the Near-New Dwelling Interests Bill, propose that near-new
dwelling interests sold to foreign persons will be subject to the imposition of
a fee on the developer who enables the acquisition.[26]
This replaces the fee that was previously imposed on a foreign buyer through
the FATA approval process, prior to the introduction of the near-new
dwelling certificate last year.
The near-new dwelling exemption certificate creates a fee
imposition mechanism, parallel to the new-dwelling exemption certificate
available to developers under section 57 of the FATA. As for new
dwellings sold to foreign persons under new-dwelling exemption certificates, sales
will be lawful where the developer holds a near-new dwelling exemption
certificate.[27]
Committee
consideration
Senate
Standing Committee for Selection of Bills
The Bills were referred on 15 February 2018 to the Senate
Economics Legislation Committee for inquiry and report by 23 March 2018.[28]
Details of the inquiry are available via the inquiry
homepage.
The Senate Standing Committee for Selection of Bills
referred the Bills on the basis of potential stakeholder interest in the
adjustments to CGT treatment of MITs involved in affordable housing supply.[29]
Senate
Standing Committee for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills (Scrutiny
of Bills Committee) considered the Principal Bill in its Scrutiny Digest,
published on 14 February 2018.[30]
The Scrutiny of Bills Committee highlighted the
retrospective application of the measures contained in the Bill, reiterating
its concern that ‘“legislation by press release” [...] challenges a basic value
of the rule of law that, in general, laws should only operate prospectively’.[31]Amendments
in:
- Schedule
1 are to apply to CGT events occurring at or any time after 7.30pm, by legal
time in the ACT, on 9 May 2017 (items 31 and 34 of Schedule 1)
- Schedule
2 are to apply in relation to acquisitions of near-new dwellings occurring on
or after 1 July 2017 (item 10 of Schedule 2) and
- Schedule
3 are to apply to CGT events happening on or after 1 January 2018 (item
7 of Schedule 3).
In relation to items 31 and 34 of Schedule 1 (the
application provisions for that Schedule), the Scrutiny of Bills Committee
noted:
... in the context of tax law, reliance on ministerial announcements,
and the implicit requirement that persons arrange their affairs in accordance
with such announcements rather than in accordance with the law, tends to
undermine the principle that the law is made by Parliament, not by the
executive.
... in fact, where taxation amendments are not brought before
the Parliament within 6 months of being announced, the bill risks having the
commencement date amended by resolution of the Senate (see Senate Resolution
No. 44).[32]
The Scrutiny of Bills Committee went on to flag sections
of the Explanatory
Memorandum for the Bill that explicated considerations given to the impact
and reasons for retrospective application.[33]
Policy
position of non-government parties/independents
The Labor
Party
The ALP supported the Bills through the House of
Representatives noting, as has been the party position on related legislation, that
the measures associated with the Government’s housing affordability package ‘don't
deal with the core of the problem’.[34]
Despite providing grounds for not opposing the legislation,
the ALP stated in the House that the Senate inquiry into the Principal Bill
would provide clarification about the impact of:
- the
modification to the main residence exemption on New Zealanders residing in
Australia and
- the
increased CGT discount for MITs in particular, in light of Government policy to
restrict investment through MITs to affordable housing developments.[35]
The
Australian Greens
The Greens appear not to have passed comment on the
measures contained in these Bills specifically. However, the party took a
policy to the 2016 election to phase out the CGT discount, reducing the
concession by 10 per cent each year over five years.[36]
Immediately prior to the 2017–18 Budget, Greens spokesperson for housing
Senator Lee Rhiannon said ‘continuing to allow investor tax concessions to
supercharge the housing market is profoundly irresponsible’.[37]
Cross-bench
senators
While no cross-bench senators have made specific comment
about the Bills, some have expressed views on the subject of reducing ‘foreign’
ownership in Australian real estate in relation to addressing housing
affordability—noting that, on the measure pertaining to foreign residents, the
Bill in its current form does not differentiate between foreign investors and Australian
citizens and permanent residents residing overseas who own real estate.
Senator Pauline Hanson has called for restricting foreign
investment activity in the Australian housing market, stating ‘we should be
making policies and building houses so Australians have homes for themselves
and their families, not so foreign investors have a home for their investments’.[38]
It is not clear what position Senator Hanson may take in relation to
Australians living abroad and the impacts the Bill will have on them.
Position of
major interest groups
The positions that major interest groups have taken are
set out in ‘Key provisions and issues’ sections below, under the headings that
relate to measures contained in the Principal Bill and Near-New Dwelling
Interests Bill.
Financial
implications
Each Schedule of the Principal Bill has its own financial
implications. The segmentation of the financial implications relates to the
fact that each measure was announced separately in the 2017–18 Budget, despite
forming part of the Government’s overall housing affordability package.
The parts of this digest examining each measure in detail
contain information on the financial impact of respective measures.
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 Principal Bill’s
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 Bill is compatible.[39]
Parliamentary
Joint Committee on Human Rights
The Parliamentary Joint Committee on Human Rights deferred
consideration of the Principal Bill on 13 February 2018.[40]
The Committee found that the Near-New Dwelling Interests
Bill did not raise any human rights concerns.[41]
Capital gains tax measures
The following outlines key elements of Schedules 1 and 3
of the Principal Bill, which contain the measures that affect CGT features
described in the ‘Background’ section of this Bills Digest.
Changes for
foreign residents
Commencement
The amendments in Schedule 1 of the Principal Bill
commence on the first 1 January, 1 April, 1 July or 1 October to occur after
the Bill receives Royal Assent.[42]
Schedule 1 amendments are intended to apply to relevant CGT
events occurring at or any time after 7.30 pm, by legal time in the ACT, on 9
May 2017.[43]
However, foreign residents holding property at that time may continue to claim
the CGT exemption until 30 June 2019.[44]
Financial
impact
The estimate for the out-year in the forward estimates
(2020–21) has been revised downwards—from $200 million
to $170 million—since figures were published for the measure in the
2017–18 Budget.[45]
The financial implications are, however, identical to the
projections published in the Explanatory
Memorandum for the Treasury Laws
Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017—legislation
that, together with the provisions of this Schedule, implement associated
Budget measures affecting CGT as it applies to foreign residents.[46]
Table 1: Financial impact of CGT changes for foreign
investors
2016–17 |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
* |
$150m |
$100m |
$150m |
$170m |
*Unquantifiable
Source: Explanatory
Memorandum, op. cit., p. 7.
The Explanatory
Memorandum for the Principal Bill explains that the revision to the Budget
figures is due to ‘a minor policy change that will ensure only Australian
residents for tax purposes can access the main residence exemption’.[47]
Treasury’s estimate for the 2017–18 tax expenditure on the
existing main residence exemption was in the order of $33.5 billion.[48]
This figure is relative to the 50 per cent CGT discount that would
apply in the absence of the main residence exemption.
Key provisions and issues
The type of CGT events envisaged by Schedule 1 are those
that occur when a person sells or otherwise disposes of taxable Australian real
property (TARP) in the form of a dwelling, and that person makes a capital gain
or loss.[49]
The amendments in Schedule 1 are designed to affect this
kind of CGT event in two ways:
-
to preclude ‘foreign residents’ (including Australian citizens and
permanent residents residing overseas) from claiming the main residence
exemption in relation to the CGT event (contingent on the time it occurs) and
-
to clarify that the ‘principal asset test’ applies on an associate-inclusive
basis when determining whether an entity’s underlying value is derived from
TARP in relation to a CGT event.
The disposal of a CGT asset in the form of TARP is a CGT
event under the ITAA 1997.[50]
Part 1 of Schedule 1 to the Principal Bill specifically targets dwellings,
including the land on which the dwelling is located, for the purposes of
defining whether the CGT asset may be subject to an exemption from CGT
treatment.[51]
The current law provides an entitlement to claim an
exemption in relation to CGT subject to certain conditions around the owner’s
use of the dwelling as a main residence; the circumstances by which they
acquired their ownership interest; and if the disposal of that asset would
otherwise be treated as a CGT event.[52]
This is the case for:
- Australian
residents for tax purposes
- temporary
residents—such as those on temporary visas—and
- foreign
residents for tax purposes.[53]
Items 3 and 4 of Schedule 1 to the Principal
Bill insert proposed modifications to section 118-110 of the ITAA
1997. The amendments have the effect of excluding any person from claiming
the exemption if, at the time the CGT event occurs, that person fits the
definition of a foreign resident for tax purposes.[54]
(The Government clarified in the 2017–18 MYEFO that temporary tax residents who
count as Australian tax residents will be unaffected by the change.[55])
Item 11 proposes a new subsection
118-185(3) to the ITAA 1997 so that, if at the time the CGT event
occurs the dwelling owner is a foreign resident, a person is not entitled to a partial
exemption where the dwelling has been used as a main residence during part
of the ownership period only. Proposed subsection 118-245(3) at item
28 of Schedule 1 will provide that a partial exemption cannot be claimed if
the person’s ownership interest is affected in part through compulsory
acquisition (for example to land adjacent to the dwelling that was used as a
main residence) and at the time of the compulsory acquisition the person is a
foreign resident.[56]
Absence
rule adjustment
Under the ITAA 1997, an ‘absence rule’ allows
owners to continue to treat a dwelling as their main residence even if they are
absent from their main residence (for example, to travel, work or move into a
retirement village). If the dwelling is used for income producing purposes,
this absence is limited to six years. If not, there is no time limit for
absence.[57]
Item 5 of Schedule 1 adjusts the example of the
operation of the absence rule under subsection 118-145(4) (example) to
provide that a person who vacates their main residence whilst living overseas may
continue to treat it as a main residence, which serves to guide interpretation
of the operative provisions that restrict the application of the absence rule.
The combined effect of the proposed amendments removes
entitlement to the exemption—in part or in full—for all Australian citizens and
permanent residents who are not residents for tax purposes at the time the contract
of sale is signed.[58]
This includes Australians living and working overseas at the time they sell
their property, who are counted as foreign residents for tax purposes. Advisory
firms and the Australian expat community have expressed reservations about this
adjustment to the absence rule.[59]
The table below demonstrates the impact of the proposed
changes on different types of property owners, using the same transaction as an
example.
Table 2: Impact of proposed adjustment to the absence
rule on Australian taxpayers
Type
of property owner |
Material
use of property/transactions |
Current
tax treatment upon disposal |
Position
under the Principal Bill |
Australian resident owner-occupier |
-
Purchased house for $250,000 in
2004.
-
Resides in the house until it is
sold in December 2020 for $500,000
|
The $250,000 capital gain is not included in the
taxpayer’s assessable income. |
Unchanged. |
Australian resident landlord |
-
Purchased house for $250,000 in
2004.
-
Resides in the house until
December 2016.
-
Rents the house from December
2016 until it is sold in December 2020 for $500,000
|
Due to the operation of the ‘absence rule’, the $250,000
capital gain is not included in the taxpayer’s assessable income. |
Unchanged. |
Australian citizen/permanent resident expatriate
landlord |
- Purchased house for $250,000 in
2004.
-
Resides in the house until
December 2016.
- Moves overseas in December 2016
and rents the house from December 2016 until it is sold in December 2020 for
$500,000
|
Due to the operation of the ‘absence rule’, the $250,000
capital gain is not included in the taxpayer’s assessable income. |
The entire capital gain of $250,000 must be included
in the taxpayer’s assessable income, and taxed at their marginal rate (as a
non-resident, they will not have the benefit of the tax-free threshold). |
Source: ITAA 1997; Principal Bill.
The table above illustrates stakeholder concerns that the
Bill will impose CGT on Australian citizens and permanent residents residing
overseas, while taxpayers residing in Australia will continue to enjoy the CGT
exemptions.[60]
It is not clear whether the Government intended Australian expatriates to be
treated in the same way as bona fide foreign investors.
Principal
asset test application
Division 855 of the ITAA 1997 allows foreign
residents to disregard a capital gain or loss against a direct or indirect
asset, unless that asset is TARP. Paragraph 855-5(2)(b) states that this law is
in place to ensure interests in an entity remain subject to Australia’s CGT
laws if the entity’s underlying value is principally derived from Australian
real property.
The amendments in Part 2 of Schedule 1 to the Bill are
relevant where a foreign resident has an indirect interest in TARP, for example
because they have shares in a company that holds TARP or they are a beneficiary
or unitholder of a trust that holds TARP. These types of interests are referred
to as membership interests.
A capital gain or capital loss made by a foreign resident
in respect of a membership interest is disregarded unless both the following
tests are satisfied:
- the
non-portfolio interest test in section 960-195 of the ITAA
1997 and
- the
principal asset test in section 855-30 of the ITAA 1997.
Broadly, the non-portfolio interests test will be
satisfied where the foreign resident has an interest of 10 per cent or more in
the entity in which it holds a membership interest.[61]
The principal asset test will be satisfied where ‘more than 50%
of the market value of the entity's assets is attributable to Australian real
property’.[62]
Section 855–30 provides that where the foreign resident
entity’s interest in the entity that holds the Australian property interest is less
than 10 per cent, the market value of the TARP assets will be treated as zero
and therefore the principal asset test will not be met.
Part 2 of Schedule 1 to the Principal Bill proposes to
amend section 855-30 to ensure that, when determining the foreign entity’s interest
in the entity that holds the Australian property, both the interests held directly
by the foreign entity and the interests held by any of its associates are
counted.
This amendment will mean that the principal asset test is
to be applied on an ‘associate inclusive basis’, and is designed to ensure that
the use of related entities and persons cannot be utilised to evade CGT
liabilities. Some stakeholders have suggested that this anti-avoidance measure
will be ineffective, in that ‘foreign residents can simply swap the membership
interests in associates with direct interests in TARP assets’.[63]
Additional
capital gains discount for affordable housing
Commencement
The amendments in Schedule 3 of the Principal Bill
commence on the first 1 January, 1 April, 1 July or 1 October to occur after
the Bill receives Royal Assent.[64]
Schedule 3 amendments affect TARP leased to provide
affordable housing (as defined in the Bill)[65]
on or after 1 January 2018 for at least three years (1095 days).
Financial
impact
The financial impact of the increase to the CGT discount
is anticipated to have a $15 million cost to revenue, commencing in the
2019–20 year of the forward estimates.
Table 3: Financial impact
of the additional CGT discount
2016–17 |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
- |
- |
* |
-$5m |
-$10m |
*Unquantifiable
- Nil
Source: Explanatory
Memorandum, op. cit., p. 8.
Treasury’s estimate for the 2017–18 tax expenditure on the
existing CGT discount for individuals and trusts was in the order of $10.2 billion.[66]
Key
provisions and issues
Item 2 proposes a new section 115-125 of the
ITAA 1997, inserting the object of the measure and the conditions under
which an increased CGT discount may be calculated for disposal of TARP assets.
These conditions amend existing law to introduce specifications regarding:
- the
entities that may qualify
- the
types and uses of TARP assets that may qualify and
- the
period(s) of time that ownership interests in TARP assets must be held
before the additional CGT discount formula can apply.
Individuals will qualify for an additional discount of up
to 10 per cent more than the standard 50 per cent CGT
discount,[67]
if:
- they
directly own TARP,[68]
or have invested in TARP through a trust[69]
and
- the
TARP is a dwelling that has demonstrably been used to provide affordable
housing on at least 1095 days before the CGT event and during the
person’s ownership period of the dwelling[70]
and
- the
tenancy of the dwelling is exclusively managed by a community housing provider,
who has issued the owner a valid affordable housing certificate
concerning their ownership interest.[71]
The minimum three-year period during which the dwelling
must be used to provide affordable housing may accumulate through multiple,
shorter tenancies that count as affordable housing days;[72]
and the dwelling must be leased through an eligible community housing
provider.[73]
Item 3 inserts a division at the end of ITAA
1997 Part 6-1 that stipulates that entities that manage the tenancy of
dwellings must be providers of community housing services registered under an Australian
law or by an Australian government agency.[74]
Items 5–6 amend the Taxation
Administration Act 1953 to allow the ATO to disclose information to an
agency that regulates community housing service providers and to require
community housing providers to advise the ATO Commissioner of any affordable
housing certificates they issue each financial year.
Industry has welcomed the introduction of the additional
CGT discount formula, but has argued that the implementation of this measure
alone provides insufficient incentive to increase supply to the rental market.[75]
Given the current downturn in the housing construction
cycle and the limitations the conditions in the Bill represent, institutional
investors may not perceive the incentive alluring enough to fund the amount of construction
activity required to develop sufficient additional affordable housing supply.
Some related barriers for institutional investment in the sector include:
-
the need for opportunity at a sufficient scale to generate shareholder returns
-
the profile of residential property as a higher-risk investment class and
-
reputational risk in the event recourse to assets provided as security
is required (however low).[76]
This relates to so-called ‘build-to-rent’ developments, in
that industry believes the viability of that model could rely on attracting
investment in projects that combine both affordable rental housing and
dwellings let at market rates.[77]
If investment in housing developments through MITs is constrained to affordable
housing let through community housing providers, the argument is that the
constraint will have an adverse impact on a model that otherwise holds promise
to attract investment that would increase supply for participants in both the private
and social housing rental markets.[78]
Near-New
Dwelling Interests
The provisions of the Near-New Dwelling Interests Bill
amend the Fees Imposition Act; they are tied closely to provisions
contained in Schedule 2 of the Principal Bill that amend the FATA.
The following outlines key elements of Schedule 2 of
the Principal Bill and the provisions of the Near-New Dwelling Interests Bill.
Taken together, these comprise measures that impose administrative and
financial obligations on developers as described in the ‘Background’ section of
this Bills Digest.
Reconciliation
payment for near-new dwelling exemption certificates
Commencement
The provisions of the Near-New Dwelling Interests Bill are
contingent on, and are to commence simultaneously, with those under Schedule 2
of the Principal Bill—that is, commencement for these interrelated provisions
will occur the day after the Principal Bill receives Royal Assent.
The application of the amendments to the FATA are
proposed to affect acquisitions occurring on or after 1 July 2017.
However, transitional arrangements affecting the timing of reconciliation
payments are proposed to apply to acquisitions that occur on or after 1 July
2017 that are covered by a residential land (near-new dwelling interests)
certificate issued to the developer at least six months before the
provisions become law.[79]
Financial
impact
The financial impact of this measure is aggregated with
others ‘aimed at streamlining the foreign investment regime with a cost of
$20.4 million over the forward estimates’.[80]
Key
provisions
Items 1 and 9 of Schedule 2 to the Principal Bill
propose to insert two definitions into the FATA, namely:
-
a near-new dwelling acquisition[81]
and
-
a residential land (near-new dwelling interests) certificate.[82]
Section 113 of the FATA, which sets out when fees
are payable under that Act, is amended by items 2 to 9 of
Schedule 2 to the Principal Bill. The amendments create a reconciliation
mechanism that requires developers to make payments in relation to sales to
foreigners made under residential land (near-new dwelling interests)
certificates. This will mirror the existing requirements in section 113
that apply to sales to foreigners under new dwelling exemption certificates
issued under section 57 of the FATA.
Schedule 1 of the Near-New Dwelling Interests Bill proposes
to amend the Fees Imposition Act with reference to the FATA
amendments to impose the reconciliation payment. Item 4 of the Near-New
Dwelling Interests Bill amends section 6 of the Fees Imposition Act,
adding proposed sections 6(5) and 6(6) that stipulate how the quantum of
the reconciliation payment for a residential land (near-new dwelling
interests) certificate is to be derived.
The relevant Foreign Investment Review Board (FIRB) guidance
note stipulates that liability for the fee may fall on the foreign purchaser
where this is agreed by the developer and the foreign person.[83]
A foreign purchaser is not normally required to seek FIRB approval to acquire
interests in a property that is already covered by an exemption certificate.[84]
Members, Senators and Parliamentary staff can obtain
further information from the Parliamentary Library on (02) 6277 2500.
[1]. S
Reinhardt and L Steel, ‘A
brief history of Australia’s tax system’, Economic Round-up
(Treasury), Winter 2006, pp. 1–26.
[2]. Australian Government, Reform
of the Australian tax system: draft white paper, June 1985, p. 77.
[3]. Ibid.,
p. 81.
[4]. Reinhardt
and Steel, ‘A
brief history of Australia’s tax system’, op. cit., pp. 11–12.
[5]. For
a statement of the policy rationale, see R Woellner et al., Australian
Taxation Law 2017, 27th edn, Oxford University Press, 2017, p. 382.
[6]. A
Duncan et al., ‘The
income tax treatment of housing assets: an assessment of proposed reform
arrangements’, AHURI Final report, 295, Australian Housing and Urban
Research Institute (AHURI), Melbourne, 7 March 2018, p. 16.
[7]. Reinhardt
and Steel, ‘A
brief history of Australia’s tax system’, op. cit., p. 12.
[8]. Australian
Government, Budget
measures: budget paper no. 2: 2017–18, pp. 27–8.
[9]. Specifically,
measures under the Treasury
Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017
are intended to enhance foreign residents’ compliance with CGT liabilities by
introducing integrity measures that capture more property transactions through:
increasing the CGT withholding rate when a dwelling is purchased from a foreign
resident; and decreasing the market value threshold for such property
transactions. See M Sukkar, ‘Second
reading speech: Treasury Laws Amendment (Foreign Resident Capital Gains
Withholding Payments) Bill 2017’, House of Representatives, Debates,
1 June 2017, p. 6026.
[10]. S
Morrison (Treasurer) and M Sukkar (Assistant Minister to the Treasurer), Helping
Australians realise their dream of home ownership, media release, 21
July 2017.
[11]. J
Mather, ‘CGT:
Expat property fire sale expected’, The Australian Financial Review
Weekend, 24 February 2018, p. 3; PricewaterhouseCoopers, Australia:
Capital Gains Tax changes for foreign residents, Insights, PwC,
28 July 2017.
[12]. The
Treasury, Housing
tax integrity—Capital gains tax changes for foreign residents: exposure draft,
Treasury website, 21 July 2017.
[13]. Australian
Government, Budget
measures: budget paper no. 2: 2017–18, pp. 26, 29. See also the updated
policy surrounding this related measure in Australian Government, Mid-year
economic and fiscal outlook 2017–18, Appendix A, p. 116.
[14]. The
Treasury, Treasury Laws Amendment (Reducing Pressure on Housing Affordability
No. 2) Bill 2017 [and] Income Tax (Managed Investment Trust Withholding)
Amendment Bill 2017: exposure
draft explanatory material, The Treasury, [14 September 2017], p.
3.
[15]. Housing
Industry Association, Taxing
investors not the answer to affordability, media release,
7 March 2018.
[16]. D
Murray et al., Financial
system inquiry: final report, The Treasury, November 2014, p. 17;
W Byres (Chairman, Australian Prudential Regulation Authority), Address
to the Australian Securitisation Forum 2017, Sydney, speech,
21 November 2017.
[17]. Duncan
et al., ‘The
income tax treatment of housing assets: an assessment of proposed reform
arrangements’, op. cit., Table 7, p. 35.
[18]. S
Morrison (Treasurer) and M Sukkar (Assistant Minister to the Treasurer), Increasing
the supply of affordable housing, joint media release,
14 September 2017.
[19]. Ibid.
See also C Bowen and D Cameron, Slomo's
dangerous policy on the run, media release, 15 September 2017.
[20]. AHURI,
‘Could
“Build to rent” create affordable rental housing?’, AHURI brief,
AHURI website, last updated 5 December 2017. See also Property
Council of Australia (PCA), ‘Numbers
stack up for build-to-rent’, Property Australia, PCA newsletter,
6 September 2017.
[21]. PCA,
Submission
to Senate Economics Legislation Committee, Inquiry into the Treasury Laws
Amendment (Reducing Pressure on Housing Affordability No. 2) Bill 2017
[Provisions] and Foreign Acquisitions and Takeovers Fees Imposition Amendment
(Near-New Dwelling Interests) Bill 2018 [Provisions],
5 March 2018, p. 2.
[22]. Senate
Standing Committees on Economics, Inquiry
into the Treasury Laws Amendment (Reducing Pressure on Housing Affordability
No. 2) Bill 2017 [Provisions] and Foreign Acquisitions and Takeovers Fees
Imposition Amendment (Near-New Dwelling Interests) Bill 2018 [Provisions]
homepage, Parliament of Australia website.
[23]. Australian
Government, Budget
measures: budget paper no. 2: 2017–18, ‘Reducing pressure on housing
affordability—restrict foreign ownership in new developments to no more than
50 per cent’, p. 31.
[24]. Foreign Acquisitions
and Takeovers Fees Imposition Amendment (Fee Streamlining) Regulations 2017,
section 6A; Foreign
Acquisitions and Takeovers Amendment (Exemptions and Other Measures)
Regulations 2017, item 6 of Schedule 2, inserting sections 43A and 43B into
the Regulation.
[25]. 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 in a new
dwelling, to be acquired under the other agreement, if there were no agreements
to which paragraphs (b) and (c) applied.
[26]. Explanatory
Memorandum, Treasury Laws Amendment (Reducing Pressure on Housing
Affordability No. 2) Bill 2018 and Foreign Acquisitions and Takeovers Fees
Imposition Amendment (Near-New Dwelling Interests) Bill 2018, p. 34.
[27]. Foreign
Investment Review Board (FIRB), Residential
real estate—new (and near-new) dwelling exemption certificate, FIRB
guidance note 8, 1 July 2017.
[28]. Senate
Standing Committee for Selection of Bills, Report,
2, 2018, The Senate, Canberra, 15 February 2018.
[29]. Ibid.,
Appendix 6.
[30]. Senate
Standing Committee for Scrutiny of Bills, Scrutiny
digest, 2, 2018, The Senate, Canberra, 14 February 2018, p. 60. The
Near-New Dwelling Interests Bill is considered on p. 18 of the Scrutiny
Digest: it notes the retrospective application of provisions contained in
this secondary Bill also, which are contingent on the Principal Bill becoming
law.
[31]. Ibid.,
p. 61. The Committee raised the same concern regarding related legislation
that was enacted last year, specifically the Treasury Laws
Amendment (Housing Tax Integrity) Act 2017: see Senate Standing
Committee for Scrutiny of Bills, Scrutiny
digest, 11, 2017, The Senate, Canberra, 13 September 2017,
pp. 21–2.
[32]. Senate
Standing Committee for Scrutiny of Bills, Scrutiny
digest, 2, 2018, op. cit., p. 61.
[33]. For
Schedule 1, see Explanatory
Memorandum, op. cit., pp. 29–31; for Schedule 2, see p. 37; for
Schedule 3, see p. 62.
[34]. M
Thistlethwaite, ‘Second
reading speech: Treasury Laws Amendment (Reducing Pressure on Housing
Affordability Measures No. 2) Bill 2018, Foreign Acquisitions and Takeovers
Fees Imposition Amendment (Near-new Dwelling Interests) Bill 2018’, House
of Representatives, Debates, (proof), 1 March 2018,
p. 81.
[35]. A
Leigh, ‘Second
reading speech: Treasury Laws Amendment (Reducing Pressure on Housing
Affordability Measures No. 2) Bill 2018, Foreign Acquisitions and Takeovers
Fees Imposition Amendment (Near-new Dwelling Interests) Bill 2018’, House
of Representatives, Debates, (proof), 1 March 2018,
p. 87.
[36]. Australian
Greens, The
case for capital gains tax reform: a fairer tax system and housing market for
all, Australian Greens political document, 14 May 2016.
[37]. L
Rhiannon, Housing
plans doomed if govt [sic] abandons negative gearing and CGT reform,
media release, 3 May 2017.
[38]. P
Hanson, Senator
Hanson calls for non-resident home ownership crackdown, media release,
14 June 2017.
[39]. The
Statements of Compatibility with Human Rights for each Schedule of the
Principal Bill can be found at pages 31, 38 and 62 of the Explanatory
Memorandum to the Bill. A separate Statement of Compatibility has not been
provided for the Near-New Dwelling Interests Bill, but it may be considered to
be covered by the Statement in relation to Schedule 2 of the Principal Bill.
[40]. Parliamentary
Joint Committee on Human Rights, Human
rights scrutiny report, 2, 13 February 2018, p. 119.
[41]. Ibid.,
p. 42.
[42]. Proposed
section 2, Reducing Pressure on Housing Affordability No. 2 Bill.
[43]. Item
31 and item 34 of Schedule 1 to the Reducing Pressure on Housing
Affordability No. 2 Bill. Note that the Scrutiny of Bills Committee has drawn
the retrospective operation of this Schedule to the attention of the Senate.
[44]. S
Morrison, ‘Second
reading speech: Treasury Laws Amendment (Reducing Pressure on Housing
Affordability No. 2) Bill 2017’, House of Representatives, Debates,
8 February 2018, p. 710; Income Tax
(Transitional Provisions) Act 1997, proposed section 118-110,
inserted by item 30 of Schedule 1 to the Principal Bill.
[45]. Australian
Government, Budget
measures: budget paper no. 2: 2017–18, p. 27; Explanatory
Memorandum, op. cit., p. 7.
[46]. Australian
Government, Budget
measures: budget paper no. 2: 2017–18, op. cit., pp. 27–8. Specifically,
the ‘Reducing Pressure on Housing Affordability—capital gains tax changes for
foreign investors’ measure.
[47]. Explanatory
Memorandum, op. cit., p. 7.
[48]. [The
Treasury], Tax
expenditures statement 2017, The Treasury, Canberra, 25 January 2018,
pp. 102: table E5.
[49]. Explanatory
memorandum, op. cit., p. 16. See also ATO, ‘Types
of CGT events’, ATO website, last modified 17 July 2017.
[50]. ITAA
1997, sub-division 104-A.
[51]. Explanatory
memorandum, op. cit., p. 16.
[52]. ITAA
1997, sub-division 118-B.
[53]. Explanatory
memorandum, op. cit., pp. 13 and 16–17; see also ATO, ‘Foreign
residents and temporary residents’, ATO website, last modified 17 July 2017.
[54]. Foreign
residents are defined in section 995-1 of ITAA 1997 as ‘a person who is
not a resident of Australia for the purposes of the Income Tax Assessment
Act 1936 [ITAA 1936]’. See ITAA 1936, section 6.
[55]. Australian
Government, Mid-year
economic and fiscal outlook 2017–18, Appendix A, p. 109.
[56]. Explanatory
memorandum, op. cit., pp. 19–21.
[57]. ITAA
1997, section 118-145.
[58]. M
Heinrich and S Kneale, ‘Removal
of CGT main resident exemption for foreign residents’, Insights, KPMG Australia,
28 July 2017.
[59]. CST
Tax Advisors, Submission
to Senate Economics Legislation Committee, Inquiry into the Treasury Laws
Amendment (Reducing Pressure on Housing Affordability No. 2) Bill 2017
[Provisions] and Foreign Acquisitions and Takeovers Fees Imposition Amendment
(Near-New Dwelling Interests) Bill 2018 [Provisions],
26 February 2018. See also Tax Institute, Submission
to Treasury consultation Housing tax integrity – Capital gains tax changes
for foreign residents, 15 August 2017; PwC, Australia:
Capital Gains Tax changes for foreign residents, op. cit.
[60]. SMATS
Group, Submission
to Senate Economics Legislation Committee, Inquiry into the Treasury Laws
Amendment (Reducing Pressure on Housing Affordability No. 2) Bill 2017
[Provisions] and Foreign Acquisitions and Takeovers Fees Imposition Amendment
(Near-New Dwelling Interests) Bill 2018 [Provisions], 5 March 2018.
[61]. Thomson
Reuters, Australian
Income Tax 1997 Commentary, [855.1000].
[62]. Ibid.
[63]. National
Affordable Housing Consortium (NAHC), Submission
to Senate Economics Legislation Committee, Inquiry into the Treasury Laws
Amendment (Reducing Pressure on Housing Affordability No. 2) Bill 2017
[Provisions] and Foreign Acquisitions and Takeovers Fees Imposition Amendment
(Near-New Dwelling Interests) Bill 2018 [Provisions], 7 March 2018,
[Summary].
[64]. Proposed
section 2, Reducing Pressure on Housing Affordability No. 2 Bill.
[65]. ITAA
1997, proposed division 980, at item 3 of Schedule 3.
[66]. [The
Treasury], Tax
expenditures statement 2017, op. cit., p. 105.
[67]. ITAA
1997, proposed subsections 115-125(4) and (5) at item 2 of
Schedule 3.
[68]. Proposed
subsections 115-125(4) and (5) complement the proposed amendments to the
main residence exemption under Schedule 1 of the Reducing Pressure on
Housing Affordability No. 2 Bill: the ownership period on which the extra
CGT discount is based will exclude days after 8 May 2012 during which
individuals were a foreign or temporary resident.
[69]. ITAA
1997, proposed sections 115-125(2) and (3). Note that proposed
paragraph 115-125(3)(a) excludes capital gains made by trusts that are
superannuation funds or public units trusts as defined in ITAA 1936,
section 102P.
[70]. ITAA
1997, proposed paragraph 115-125(2)(d) at item 2 of Schedule
3 and proposed sections 980-1 and 980-5 at item 3 of Schedule 3.
[71]. ITAA
1997, proposed section 980-15 and proposed paragraph
980-5(c).
[72]. Explanatory
memorandum, op. cit., p. 47. ITAA 1997, proposed subsections
115-125(2)(d) and 115-125(5).
[73]. ITAA
1997, proposed section 980-10.
[74]. ITAA
1997, proposed section 980-10.
[75]. PCA,
Submission
to Senate Economics Legislation Committee, Inquiry into the Treasury Laws
Amendment (Reducing Pressure on Housing Affordability No. 2) Bill 2017
[Provisions] and Foreign Acquisitions and Takeovers Fees Imposition Amendment
(Near-New Dwelling Interests) Bill 2018 [Provisions], op. cit., p. 1.
[76]. A
Sharam et al., Understanding
opportunities for social impact investment in the development of affordable
housing, AHURI Final report, 294, AHURI, February 2018, p. 53.
[77]. Industry
Super Australia (ISA), Assisting
housing affordability, ISA discussion paper, November 2017,
pp. 43–4.
[78]. NAHC,
Submission
to Senate Economics Legislation Committee, Inquiry into the Treasury Laws
Amendment (Reducing Pressure on Housing Affordability No. 2) Bill 2017
[Provisions] and Foreign Acquisitions and Takeovers Fees Imposition Amendment
(Near-New Dwelling Interests) Bill 2018 [Provisions], op. cit.,
pp. 7–8.
[79]. Items
10 and 11 of Schedule 2 of the Reducing Pressure on Housing
Affordability Bill; items 5 and 6 of the Near-New Dwelling
Interests Bill. As noted in this Bills Digest, the Scrutiny of Bills Committee
has drawn the retrospective operation of these provisions to the attention of the Senate.
[80]. Explanatory
Memorandum, op. cit., p. 8.
[81]. FATA,
amendments to section 4 and proposed subsection 113(4A).
[82]. FATA,
amendments to section 4. Note that residential land (near-new
dwelling interests) certificate is defined as in the Foreign Acquisitions
and Takeovers Regulation 2015, which scheduled to sunset on
1 April 2026.
[83]. FIRB,
Residential
real estate—new (and near-new) dwelling exemption certificate, op. cit.
[84]. Ibid.
For copyright reasons some linked items are only available to members of Parliament.
© 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.