Views on the bill
The measures in 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) seek to improve housing affordability, encourage investment in
affordable rental housing and improve the integrity of the tax system by making
changes to capital gains tax for foreign investors, streamlining and enhancing
the foreign investment framework, and expanding tax incentives for investments
in affordable housing.
This chapter examines the evidence received in relation to the measures
contained in the bills:
- Capital gains tax changes for foreign residents
- Reconciliation payment for near-new dwelling exemption
- Capital gains tax incentive for investments in affordable housing
Capital gains tax changes for foreign residents
The majority of the evidence received by the committee in relation to
this inquiry raised concerns about the proposed changes in Schedule 1 of the
Measures No. 2 bill, which affect the capital gains tax main residence
exemption for foreign residents. In particular, concerns were raised in relation
to how the changes would affect Australians living and working overseas and how
the bill might impact outcomes for future deceased estates.
Australians living and working
The committee heard from a number of Australians currently living and working
overseas, who are concerned about the way in which the changes to the main
residence exemption could affect them, should they need to sell their
Australian property whilst living overseas.
SMATS Group submitted that the Measures No. 2 bill should be amended to
ensure Australian citizens and permanent residents remain eligible for the main
residence exemption regardless of whether they are living abroad at the time. SMATS Group provided a petition signed by 1357 in support of its submission.
One Australian citizen, currently working in New Zealand, submitted that
they felt the changes were 'overly punishing' their decision to 'take an
opportunity to work overseas whilst also having the Australian dream of owning
an investment property in the country I was born and raised in and more so in
[being] able to keep the property that I have worked very hard to own'. They understood that the proposed change to the main residence exemption would
not apply if they moved back to Australia resumed tax residency before selling
the property. However, they also noted their circumstances might change
unexpectedly, making it necessary to sell the property whilst based overseas.
They noted that the capital gain tax rate of 45 per cent would be:
...bearable—if it applied from the date I rented the property
[after moving overseas] (i.e. the period in which it was my main residence is
exempt). However, the law proposed indicates that the CGT will actually be
calculated based on the gain I made from the date I acquired the property.
Another submitter, also an Australian citizen working overseas, argued
that the changes should not apply to Australian citizens, only non-resident,
non-citizens. They argued that:
The existing law-which precludes non-residents from claiming
the CGT discount-is already a sufficient penalty. Most non-resident citizens
who are away for more than six years and renting out their former residences
already have to pay CGT on the full, undiscounted gain from the time they
started to rent out the residence. There is no need for a further penalty, and
the possible future negative impacts on their superannuation position should
not be overlooked.
Mr Frederick Morgan questioned the 'wisdom of denying non-residents, the
entire exemption, rather than pro-rating the exemption, so that it is only
available, for the portion of the ownership period, that the individual is
resident'. In particular, he maintained that the loss of the exemption for
Australians who depart overseas seemed 'massively unfair and intrudes into the
flexibility of Australians'.
The proposed changes to the main residence exemption will also mean that
Australian citizens who are foreign residents will no longer be able to access
a partial main residence exemption for the time the property was their main
residence. CST Tax Advisors opposed this change and were of the view that
Australian citizens who become foreign residents should continue to be eligible
to claim a partial CGT exemption for the period of ownership during which they
lived in the property and were Australian residents.
Impact on housing affordability
The National Affordable Housing Consortium (NAHC) posited that the
removal of the main residence exemption may have the effect of discouraging foreign
residents from selling their properties, thereby reducing available housing
stock. In the event that the amendment does have the desired effect of easing
the general property market, NAHC suggested that the benefits may not necessarily
be passed on to renters.
One Australian working overseas also questioned whether the changes
would in fact improve housing affordability for low income earners or families,
Whilst we would sell before June 2019 rather than
risk-'needing' to sell whilst overseas and having to pay the punitive CGT
(technically yes creating one more house on the market) many expats would hold
onto their properties.
SMATS Group observed:
This proposed legislation is submitted as being a measure
tackling 'foreign investors' and purported to assist in 'reducing pressure on
housing affordability', however the legislation as submitted is far more likely
to affect ordinary Australians that may have chosen, willingly or on forced
assignment, to take up a position overseas for a period of time.
The proposed changes to the main residence exemption will have
implications in relation to deceased estates if the deceased person was a foreign
resident at the time of their death, or if the beneficiary was a foreign resident
at the time of death.
BNR Partners oppose the proposed changes to the main resident exemption
in relation to deceased estates, stating:
The removal of the CGT exemptions of a non-resident at date
of death, is a form of death duty, that is purely imposed on a taxpayer due to
their tax residency status at a single point in time, and does not consider
either their personal circumstances, or prior contributions to Australia
It argued the proposed legislation should be amended so that 'a person
that dies abroad, also be permitted to continue to access these absentee rules,
for the reason stated above. Their premature death should not be penalised by
the Australian Tax System'.
CPA Australia supported BNR Partners' submission and informed the
committee that its members were concerned over the impacts the proposed changes
would have on deceased estates. It outlined these concerns:
For example, the proposed changes in relation to CGT
concessions that apply to a principal place of residence may have significant
impacts on deceased estates where the deceased is considered a non-resident as
at date of death.
These proposed changes may significantly impact the CGT
treatment and classification of their residence during a deceased's entire
ownership period should they die whilst outside of Australia. Examples 1.6 and
1.7 in the explanatory memorandum relating to deceased estates show how the
already complex area of property in deceased estates is about to become even
Some submitters expressed concern that the changes to the main residence
exemption for foreign residents would impose retrospective changes. CST Tax
Advisors considered that 'it is highly inequitable for taxpayers with existing
arrangements to have concessions removed which are likely to have a material
financial impact given recent gains in the property prices'. As such, it proposed amending the Schedule 1 to the Measures No. 2 bill to
include grandfathering provisions to ensure that:
Australian citizens who were foreign residents (not
Australian resident for tax purposes) when the changes were announced on 9 May
2017, should continue to be able to access the 'CGT absence concession' under
current rules, regardless of where they presently reside, on eligible
properties they owned on 9 May 2017.
Some submitters raised concerns that it may be difficult for those
affected by the changes, who will no longer be eligible for the main residence
exemption, to substantiate changes to the cost base of their home as they would
not have maintained the necessary documentation to allow for offset of expenses
as it would not have been necessary or required at the time.
CST Tax Advisors did not believe the timeframe for transitional
arrangements would allow enough time to foreign residents to sell their
properties before the end of the transition period on 30 June 2019. It also
questioned whether it was 'sound tax policy to subject thousands of Australians
living overseas to material tax changes that they are unlikely to become aware
Principal assets 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. The
NAHC queried the effectiveness of this measure, as a group of foreign residents
could potentially swap the membership interests in associates with direct
interests in TARP assets.
Reconciliation payment for near-new dwelling exemption certificates
The Housing Industry Association (HIA) supported the proposed amendments
in relation to near-new dwelling certificates for property developers selling
to foreign investors 'as they represent a logical extension of the current
rules for the purchase of properties by foreign investors and remove the
unintended consequence that could arise where a first property sale fails to
Capital gains tax incentive for investments in affordable housing
The submissions received in relation to the capital gains tax incentive
for investments in affordable housing were broadly supportive of the measure.
The NAHC observed that increasing the capital gains discount from 50 to 60 per
cent, if a CGT event occurs to an ownership interest in residential premises
that has been used to provide affordable housing, would send a positive signal.
However, the NAHC was uncertain that the increased benefit to investors would
be sufficient to make any significant impact for the tenant.
HIA supported this measure and considered that the amendment would
support the establishment of the National Housing Finance and Investment
Corporation (NHFIC). HIA considered the NHFIC would generate a significant
shift in the environment for the funding, construction and operation of long term
managed affordable housing developments in Australia. HIA submitted that:
This change, and the creation of the NHFIC, will provide some
additional incentive for future investors and providers of affordable housing.
However, it is important to recognise that other incentives and appropriate tax
settings such as the current tax treatment of charities and not-for profits,
will still need to be in place if this emerging sector of the housing market in
Australia is to become a viable and effective part of the response to housing
The Property Council of Australia also supported this measure. However,
it also expressed some concerns:
...we believe that this incentive—in isolation—will be
ineffective in encouraging institutional scale investment in the supply of
affordable housing for members of the community earning low to moderate
PowerHousing Australia noted that the changes to the capital gains
discount combined with a new affordable housing Managed Investment Trust (MIT)
could direct more foreign investment in the provision of affordable housing. However,
it queried the exclusion of superannuation funds and public unit trusts from
the capital gains discount. It observed:
This seems like a flaw; the main users of the MIT are meant
to be institutional investors like superfunds (even with their concessional tax
rate it is some benefit).
PowerHousing Australia considered that the government had laid out the
framework for a potential long-term solution to the challenges posed by housing
in Australia's rapidly changing market, stating:
A CGT discount that incentivises longer-term holdings, as
well as other policies pursued by the Federal Government in conjunction with
initiatives currently being undertaken at the State level, has the potential to
vastly improve the lives of many Australians struggling to secure affordable
housing from those working to save for a first home, to those struggling to
meet market rent expectations, to those seeking stable housing options.
Treasury advised the committee in responses to questions on notice that:
This measure aims to create the right incentives to encourage
private investment in affordable rental housing. The value of this incentive
and subsequent take up of this measure will depend on individual circumstances,
including the nominal capital gain on an individual's investment and marginal
The additional capital gains tax discount is one element of
the Government's broader housing affordability plan which, overall, is intended
to reduce pressure on housing affordability for Australians.
The committee believes that housing is fundamental to the wellbeing of
all Australians, and a driver of social and economic participation that
promotes better employment, education and health outcomes. The committee
considers that the measures contained in these bills will form an essential
part of the government's comprehensive and targeted plan to improve outcomes
for Australians across the housing spectrum.
The committee notes that the bills will assist the government's
commitments to implement stronger rules for foreign residents owning Australian
housing to reduce pressure on housing affordability; streamline the foreign
investment framework; and introduce tax incentives to boost investment in
affordable housing, to create the right incentives and improve outcomes for
those in need.
The committee notes that the integrity measures contained in Schedule 1
to the Measures No. 2 bill, along with the foreign resident capital gains
withholding payments which was enacted separately in the Treasury Laws
Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017,
are expected to have a gain to revenue of $570 million over the forward
The committee acknowledges the concerns expressed regarding the changes
to the CGT main residence exemption for foreign residents including Australian
citizens and permanent residents living and working overseas that may be
affected by the changes. The committee acknowledges those people who may be
affected by these changes and notes that it is the government's responsibility
to ensure that they are made aware of the changes and the transitional
arrangements, so they can plan accordingly.
With respect to the capital gains tax incentive for investments in
affordable housing, the committee notes that this measure is part of a broader
package of measures to address housing affordability. As such, the committee
supports the government's broader housing affordability plan, in particular,
the establishment of the National Housing Finance and Investment Corporation.
The committee recommends that the Australian Government ensures that
Australians living and working overseas are aware of the changes to the CGT
main residence exemption for foreign residents, and the transitional
arrangements, so they are able to plan accordingly.
The committee recommends that the bills be passed.
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