Right up until the point Scott Morrison cleared his throat to deliver this Budget, there were 255 pre-budget submissions made to Treasury. Throw in a white paper tax reform process that went nowhere (not to mention the Henry Review that has been largely ignored) and one thing is clear: speculating on a Budget is like picking the winner of the Melbourne Cup.
In Australia, tax policy has largely been promoted behind the scenes by the Board of Tax and Treasury with significant contributions by various industry bodies. A look at the organisations that submit ideas gives a good indication of the depth and breadth of contributors to the process.
However, in terms of process, in relation to the some major Government announcements, we are still locked into a system where tax changes are a surprise to many handed down on Budget night. We then descend into the inevitable arguments around fairness and class warfare where ‘rich’ is defined as anyone earning $180k or more a year.
But this budget saw a tax announcement that should be the blue-print on how to implement policy. The substance of the change is designed to boost affordable housing for Australians through investment tax incentives.
In early January last year, the Australian Government announced the establishment of an Affordable Housing Working Group (Working Group). This group undertook a public consultation process before delivering its report to Heads of Treasuries in November. A month later, Treasurers agreed to the recommendations of the report, in particular the establishment of a bond aggregator taskforce.
The Working Group comprised members of the Commonwealth Treasury and Department of Social Services as well as members from the New South Wales, Victorian and West Australian Governments. The list of contributors through submissions was substantial.
There were four key recommendations:
Establishment of an expert taskforce to design a proof of concept for a bond aggregator model to provide for greater private and institutional investment in affordable housing.
Government support to efficiently leverage long-term institutional investment for affordable housing and provide greater value for government expenditure.
Investigating how housing policies and practices can be utilised, expanded or redesigned to support the effective implementation of a housing bond aggregator.
Government consideration of complementary reforms to enhance the ability for a housing bond aggregator model to boost the supply of affordable housing.
On Budget night we learned of:
$1 billion National Housing Infrastructure Facility that will finance the critical infrastructure needed to speed up the supply of new housing.
$1 billion over 5 years to support local governments through a range of options to finance critical infrastructure such as:
power and water infrastructure; and
site remediation works.
The NHFIC will also operate an affordable housing bond aggregator to encourage greater private and institutional investment and provide cheaper and longer-term finance to registered providers of affordable housing.
Increasing the capital gains tax (CGT) discount for investors in affordable housing. From 1 January 2018, the Government will provide an additional 10 per cent CGT discount to resident individuals investing in qualifying affordable housing. This means investors in qualifying affordable housing will be entitled to a 60 per cent discount on capital gains tax.
Encouraging Managed Investment Trusts (MITs) to invest in affordable housing.
For income years starting on or after 1 July 2017, the Government will introduce new rules that enable MITs to acquire, construct or redevelop property to hold for affordable housing. Under the current law, the ATO has generally taken the view that investment in residential property is active, with a primary purpose of delivering capital gains from increased property values, and therefore taxed on income at a 30 per cent rate as it is not eligible for the MIT tax concessions which apply to passive investments only.
Consistent with current MIT withholding tax rules, non-resident investors who invest in these MITs from countries with which Australia has a recognised exchange of information arrangement, will generally be subject to a concessional 15 per cent final withholding tax rate on investment returns, including income from capital gains.
Resident investors in these MITs will continue to be taxed on investment returns at their marginal tax rates. Income from capital gains will be eligible for the increased CGT discount of 60 per cent, where applicable.
MITs must hold, and make available for rent, affordable housing assets for at least 10 years.
Should these assets be held for a period of less than 10 years, non-resident investors can still receive the concessional 15 per cent final withholding tax rate on investment returns, but will be subject to a 30 per cent final withholding rate on the proceeds of any capital gains.
As the Working Group stated “Housing is fundamental to the welfare of all Australians. From a social perspective it promotes and improves employment, educational and health outcomes. From an economic perspective it is a driver of participation and productivity as well as consumption, investment and savings in the economy”.
Equally, Australia has seen how positive change can come about through consensus, consultation and bipartisanship. We’ll only really know whether the policy is a success over time, but in terms of process, it’s a wonderful example of what can be achieved and in a relatively short time frame.
Source: The Commonwealth of Australia. Source: Budget Paper No 2, and Budget Fact Sheets The Commonwealth of Australia does not endorse me or my use of the work.
 Report: Innovative Financing Models to Improve the Supply of Affordable Housing, October 2016, Affordable Housing Working Group page 1
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.