On 15 February 2018, the Senate referred the Treasury Laws Amendment (Reducing Pressure on Housing
Affordability Measures No. 2) Bill 2018 [Provisions] (Measures No. 2 bill) and
the Foreign Acquisitions
and Takeovers Fees Imposition Amendment (Near-new Dwelling Interests) Bill 2018
[Provisions] (Near-new Dwelling Interests bill) to the Senate Economics
Legislation Committee (committee) for inquiry and report by 23 March 2018.
The government announced a comprehensive housing affordability plan in
the 2017–18 Budget to improve housing affordability, encourage investment in
affordable rental housing and improve the integrity of the tax system. The
housing package included measures to:
- make changes to capital gains tax for foreign investors;
- streamline and enhance the foreign investment framework; and
- expand tax incentives for investments in affordable housing.
The Measures No. 2 bill contains three schedules which seek to implement
The Near-new Dwelling Interests bill contains technical amendments to support
changes announced in the 2017–18 Budget that streamlined the foreign investment
The Measures No. 2 bill contains measures that support those already introduced
as part of the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 and
the Treasury Laws Amendment (Reducing Pressure on Housing Affordability
Measures No. 1) Bill 2017.
In his second reading speeches, the Treasurer, the Hon. Scott Morrison
MP, stated that the Measures No. 2 bill is 'an important step to ensuring
homeownership is more achievable for Australians'
and the Near-new Dwelling Interests bill is 'further evidence of the government
getting on with the job, reducing compliance, making the law more fair and
getting reforms done'.
Conduct of the inquiry
advertised the inquiry on its website and wrote to relevant stakeholders and
interested parties inviting submissions by 5 March 2018.
The committee received 14 submissions, which are listed at
thanks all individuals and organisations who assisted with the inquiry, and took
the time to make written submissions and provide responses to questions on
Overview of the bills
Capital gains tax changes for
Schedule 1 to the Measures No. 2 bill seeks to amend the Income Tax
Assessment Act 1997 (ITAA 1997) to:
- remove the entitlement to the capital gains tax (CGT) main
residence exemption for foreign residents; and
- modify the foreign resident CGT regime to clarify that, for the
purpose of determining whether an entity's underlying value is principally
derived from taxable Australian real property (TARP), the principal asset test
is applied on an associate inclusive basis.
Changes to the main residence
The amendments in Part 1 of Schedule 1 to the Measures No. 2 bill seek
to remove the entitlement to the CGT main residence exemption for foreign
residents that have dwellings that qualify as their main residence.
The main residence exemption disregards a taxpayer's capital gain or
loss for CGT purposes (providing an exemption) if:
- the taxpayer is an individual; and
- the dwelling was the taxpayer's main residence throughout the
In addition, the main residence exemption provides a partial exemption if
the dwelling was the taxpayer's main residence for only part of the ownership
period or if it was also used in part to produce assessable income.
For the purpose of the main residence exemption, a dwelling includes:
- a building (for example a house) or part of a building (for example,
an apartment or townhouse) that consists wholly or mainly of accommodation;
- a caravan, houseboat or other mobile home; and
- any land immediately under the unit of accommodation.
The main residence exemption may also apply to:
- an individual who is a beneficiary in, or any entity that is a trustee
of, a deceased estate of a deceased person who used the dwelling as a main
- the trustee of a trust that is or has been a special disability trust
where the dwelling was the main residence of the individual who is or has been:
- the principal beneficiary of the trust; or
- another beneficiary who inherits the dwelling upon the death of
the principal beneficiary.
The amendments contained in the Part 1 of Schedule 1 to the Measures No.
2 bill will mean that individuals who are foreign residents at the time a CGT
event occurs to a dwelling in which they have an ownership interest are not
entitled to the main residence exemption for any part of the exemption that
arises from their use of the dwelling.
According to the explanatory memorandum, an individual is a foreign
resident if they are not an Australian resident for taxation purposes—as defined
in section 6 of the Income Tax Assessment Act 1936 (ITAA 1936).
Section 6 of the ITAA 1936 defines a 'resident' or 'resident of
Australia' as follows:
- a person, other than a company, who resides in Australia and includes a
- whose domicile is in Australia, unless the Commissioner is
satisfied that the person's permanent place of abode is outside Australia;
- who has actually been in Australia, continuously or intermittently,
during more than one-half of the year of income, unless the Commissioner is
satisfied that the person's usual place of abode is outside Australia and that
the person does not intend to take up residence in Australia; or
- who is:
- a member of the superannuation
scheme established by deed under the Superannuation Act 1990; or
- an eligible employee for the
purposes of the Superannuation Act 1976; or
- the spouse, or a child under
16, of a person covered by sub-subparagraph (A) or (B); and
- a company which is incorporated in Australia, or which, not being
incorporated in Australia, carries on business in Australia, and has either its
central management and control in Australia, or its voting power controlled by
shareholders who are residents of Australia.
This measure does not affect individuals who are Australian residents
for taxation purposes at the time a CGT event occurs to a dwelling.
The amendments to the main residence exemption in Part 1 of Schedule 1
to the Measures No. 2 bill generally apply to CGT events happening at or after
their announcement at 7.30 pm, by legal time in the ACT, on 9 May 2017
(application time). The transitional provisions do not apply to properties
purchased after the application time. However, a transitional arrangement will
apply for properties that were held before the application time, if the CGT
event occurs on or before 30 June 2019 if:
- an individual, or trustee of a special disability trust held an ownership
interest in the dwelling to which the CGT event relates at all times from
immediately before the application time until immediately before the CGT event
- an individual acquired the property as a beneficiary of a deceased
estate and at all times from immediately before the application time until
immediately before the CGT event happens to the dwelling, the following
entities held the ownership interest in the dwelling:
- that individual;
- the deceased person;
- the trustee of the deceased estate of the deceased person;
- the trustee of a special disability trust on behalf of a
principal beneficiary; or
- a combination of these entities.
Principal asset test
The amendments in Part 2 of Schedule 1 to the Measures No. 2 bill seek
to modify the foreign resident CGT regime to clarify that, for the purpose of
determining whether an entity's underlying value is principally derived from
TARP, the principal asset test is applied on an associate inclusive basis. This
measure is intended to remove any doubt that disaggregated holdings of
membership interests are properly taken into account when applying the
principal asset test.
The Treasurer explained in his second reading speech:
This reform addresses an integrity issue with one of these
tests—the principal asset test—to require a foreign resident to consider any
interests held by its associates, if it disposes of an indirect interest in
Australian real property for example by selling shares in a land rich company.
This integrity fix will ensure that the principal asset test
cannot be circumvented by disaggregating holdings of membership interests.
The amendments to the principal assets test in Part 2 of Schedule 1 to
the Measures No. 2 bill will apply to CGT events happening on or after the
announcement at 7.30 pm, by legal time in the ACT, on 9 May 2017.
Treasury released exposure draft legislation for the measures in
Schedule 1 and conducted a brief consultation process from 21 July to 15 August
The measures contained in Schedule 1 were announced in the
2017–18 Budget as part of 'Reducing pressure on housing affordability—capital
gains tax changes for foreign Investors'. This Budget announcement also
included a measure relating to foreign resident capital gains withholding
payments which was enacted separately in the Treasury Laws Amendment (Foreign
Resident Capital Gains Withholding Payments) Act 2017. Together, the measures
have the following revenue implications:
Table 1: Financial impact (as set out in Explanatory
The revenue gain over the forward estimates has been updated since the 2017–18
Budget announcement to reflect a minor policy change to the measure that will
ensure only Australian residents for tax purposes can access the main residence
This change was announced in the 2017–18 Mid-Year Economic and Fiscal Outlook.
The announcement indicated that the government decided to make this amendment
to the policy following consultation.
Reconciliation payment for near-new
dwelling exemption certificates
Schedule 2 to the Measures No. 2 bill seeks to amend the Foreign
Acquisitions and Takeovers Act 1975 (Foreign Acquisitions Act) to enable a
reconciliation payment to be made by developers who sell dwellings to foreign
persons under a near-new dwelling exemption certificate. Near-new dwellings are
dwellings that have previously been subject to a failed settlement.
On 24 June 2017, the Foreign Acquisitions and Takeovers Regulation 2015 was
amended to introduce a near-new dwelling exemption certificate. The near-new
dwelling exemption certificate enables property developers to sell near-new
dwellings to foreign persons under the Foreign Acquisitions Act in the same way
as they sell new dwellings. Prior to the introduction of a near-new dwelling
exemption certificate, a foreign person had to submit an individual application
for approval to purchase the near-new dwelling.
The measures in Schedule 2 to the Measures No. 2 bill are complemented
by the provisions of the Near-new Dwelling Interests bill, which makes
consequential amendments to the Foreign Acquisitions and Takeovers Fees Imposition
Act 2015 (Fees Act) in order to impose the amount of the fee payable by
developers. As a result of these changes, this bill also includes editorial
amendments to the Fees Act.
This measure forms part of a package of measures aimed at streamlining
the foreign investment regime with a cost of $20.4 million over the forward
Capital gains tax incentive for
investments in affordable housing
Schedule 3 to the Measures No. 2 bill seeks to amend the ITAA 1997 and
the Taxation Administration Act 1953 (TAA 1953) to provide an additional
affordable housing capital gains discount of up to 10 per cent if a CGT event
occurs to an ownership interest in residential premises that has been used to
provide affordable housing.
Several measures in the 2017–18 Budget housing package were specifically
designed to address housing affordability for members of the community earning
low to moderate incomes, by providing incentives for investors to increase the
supply of available affordable housing.
The amendments contained in Schedule 3 seek to provide an additional CGT
incentive to increase private investment in affordable rental housing by
providing individual and institutional investors (including resident investors
in MITs) with the option to retain an increased amount of the capital gains
they realise from their investments in affordable housing. Individual investors
may invest by holding an ownership interest in affordable housing directly or
through certain types of trusts or partnerships (other than public unit trusts
and superannuation funds).
The explanatory memorandum outlines the eligibility conditions which
must be met in order to receive the additional affordable housing capital gains
An individual is eligible for an additional affordable housing capital
gains discount (direct investment) if they:
- make a discount capital gain from a CGT event happening in relation
to a CGT asset that is their ownership interest in a dwelling; and
- used the dwelling to provide affordable housing for at least three
years (1095 days) which may be aggregate usage over different periods.
An individual will also be eligible for an additional affordable housing
capital gains discount on a capital gain (trust investment) if:
that capital gain was distributed or attributed to them:
- directly from a trust; or
- from a trust through a partnership or another trust;
- the capital gain was a discount capital gain for the trust that realised
- the dwelling was used to provide affordable housing for at least
three years (1095 days) which may be aggregated use in different periods; and
- the trust which used the dwelling to provide affordable housing
and any interposed entities (if any) through which the capital gain was
distributed or attributed to the individual was one of the following specified
- a trust (other than a public unit trust or a superannuation fund);
- a MIT; or
- a partnership.
In order to be eligible for the additional affordable housing capital
gains discount, the property management condition requires the tenancy of the additional
affordable housing capital gains discount dwelling or its availability for rent
to be exclusively managed by an eligible community housing provider.
Treasury released exposure draft legislation for the measures contained in
Schedule 3 and conducted a brief consultation process from 14 September to 28 September 2017.
This consultation process also included exposure draft legislation for another
measure which was announced in the 2017–18 Budget housing package, but is not
included in the Measures No. 2 bill—affordable housing through managed
investment trusts (MITs).
This measure is estimated to result in a cost to revenue of $15 million
over the forward estimates period comprising:
Table 2: Financial impact (as set out in Explanatory Memorandum)
Legislative scrutiny committees
The explanatory memorandum to the bills states that the proposed
legislation is compatible with the human rights and freedoms recognised or
declared in the international instruments listed in section 3 of the Human
Rights (Parliamentary Scrutiny) Act 2011.
The Parliamentary Joint Committee on Human Rights considered the Near-new
Dwelling Interests bill in its Report 2 of 2018 and found that it did
not raise human rights concerns.
The Human Rights Committee deferred consideration of the Measures No. 2 bill.
The bills were also considered by the Senate Standing Committee for the
Scrutiny of Bills in its Scrutiny Digest 2 of 2018.
The Scrutiny of Bills Committee raised concerns that all the measures in
the bills would apply retrospectively. In respect to the bills, the Scrutiny of
Bills Committee reiterated its long-standing concern that 'provisions with retrospective
application (including where provisions are back-dated to the date of announcement
of an initiative) challenge a basic value of the rule of law that, in general,
laws should only operate prospectively'.
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