14 February 2018
On 8 February 2018 the Government introduced the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 (the Bill) into the House of Representatives. The Bill will enact the announcement in the May 2017 Budget about managed investment trusts (MITs) investing in affordable residential housing. An Exposure Draft (the ED) of the proposal was released for consultation in September 2017; the consultation appears to have had some effect as the Bill does depart from the ED in one important respect.
Our assessment in May last year was that this measure was largely a smoke-screen – it was more about the Government addressing its political problems than solving any tax issue. Hence, the claim in the Budget that the measure would, "encourage investment into affordable housing by enabling … MITs to invest in affordable housing" was misleading in at least two ways: any limit which prevented MITs investing in residential housing stemmed from debatable ATO theories rather than any clear position expressed in the law; and the level of encouragement would be modest at best because the proposed affordable housing MITs will not be attractive to foreign investors or local institutional investors.
Our assessment in September last year was that this measure had now become a Trojan horse – the September ED contained unexpected rules that a trust could not qualify as a MIT if it holds residential premises unless it satisfies the affordable housing requirements or is holding commercial residential premises. The prohibition on holding residential property in a MIT would have demolished Australian REITs holding offshore residential real estate for no obvious reason, and thwarted any further development of the Build-to-Rent residential ownership models which some property groups had been exploring.
These provisions have been removed from the Bill. We understand however that this is not because the Government has changed its mind but rather because it is still considering its position regarding the holding of residential real estate by MITs. It is expected that the Government will announce its position regarding MITs investing in residential property at a later time.
What remains are the same basic design elements from the September ED:
an individual who makes a capital gain (including a capital gain made through a trust) on a dwelling situated in Australia and used to provide affordable housing for at least 3 years is entitled to a 60% CGT discount;
a dwelling will be "used to provide affordable housing" if it is residential premises (but not commercial residential premises) and is tenanted or available to be tenanted; and
the dwelling (or its leasing) must be managed by an eligible community housing provider which must give each owner a certificate stating that the dwelling was used to provide affordable housing.
Once enacted, the measure will apply to CGT events occurring after 1 January 2018.
The Government’s own modelling suggests that this measure will prove uninteresting. The estimated revenue loss from this measure over the next three years totals only $15m while (according to the December 2017 Mid-Year Economic and Financial Outlook), the Government expects to collect almost $1.4tr over the same period. The measure amounts to little more than a rounding error.
Managing Director, Head of Real Estate
Professor Graeme Cooper