The 2017 Budget is out and many of the mooted changes that were feared by property investors did not eventuate.
However, there has been a lot of tinkering in the property sector in an attempt to tackle Australia’s housing affordability problems.
While the Budget’s housing affordability measures may have an impact on home prices over time if they incentivise states to ramp up supply, however this is likely to be marginal in the short term.
In the meantime, there is nothing in the budget that will slow down the momentum in the Sydney and Melbourne property markets.
“The focus on improving housing supply, keeping rental growth low and closing the deposit gap are all welcome, but the initiatives targeting foreigners will damage Australia’s reputation and will do nothing to help housing affordability” said Ken Morrison, Chief Executive of the Property Council of Australia.
Here is a summary of some of the budget initiatives that will affect property investors based on the commentary of the Property Council of Australia.
New agreement with states and territories to boost housing supply
The Federal Government will continue to provide states and territories with $1.3 billion of funding each year to support the supply of new housing.
However, the current National Affordable Housing Agreement (NAHA) will be replaced with a new National Housing and Homelessness Agreement (NHHA).
The new agreement will have concrete requirements for states and territories to deliver on housing supply targets and reform their planning systems.
$1 billion to fund ‘micro’ City Deals to boost housing supply
The Government will establish a $1 billion National Housing Infrastructure Facility based on the program set up in the UK to work with states and territories to fund deals with local governments to remove infrastructure impediments to developing new homes and apartments on selected sites.
The scheme is described by the Treasurer as “micro” City Deals.
Surplus Commonwealth land to be released for housing
A new online register of under-utilised or surplus Commonwealth land will be created to identify opportunities for developers and the community to propose better use of the land, including for housing.
As a first step, the Commonwealth will release 127 hectares of surplus Defence land in Maribyrnong for housing. This is projected to support up to 6,000 new homes less than 10 kilometres from the Melbourne CBD.
Encouraging seniors to downsize
The Government will allow a person aged 65 or over to make a non-concessional contribution of up to $300,000 ($600,000 for couples) to superannuation accounts from the proceeds of selling their family home, effective from 1 July 2018.
The residence must have been owned for at least 10 years.
There will be no change to the age pension assets test or the transfer balance cap.
According to budget papers, the existing voluntary contribution rules for people 65 and over, as well as the restrictions on non-concessional contributions for people with superannuation balances above $1.6 million, will not apply to these new contributions.
Assistance for first home buyers – salary-sacrifice super contributions
From 1 July 2017, first home buyers can contribute up to $15,000 per year (up to $30,000 in total) in voluntary contributions to their superannuation account, and withdraw the funds for a first home deposit.
Voluntary super contributions are concessionally taxed which is expected to act as an incentive to enable first home buyers to build savings more quickly for a home deposit.
This measure is expected to have a cost of $250 million over the forward estimates period and the ATO will be given $9.4 million to implement the measure.
Negative gearing deductions tightened
Negative gearing arrangements for property investments will remain, however, deductions will be tightened from 1 July 2017.
Deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential property investment will no longer be available – this is expected to raise $540 million over the forward estimates period.
Deductions for plant and equipment (eg. mechanical fixtures, dishwashers, ceiling fans etc) will also be limited to outlays actually incurred by the investor.
This measure is expected to raise $260 million over the forward estimates period.
Creation of new REIT asset class for “affordable housing”
The managed investment trust (MIT) tax regime will be expanded to enable MITs to invest in affordable housing. The eligibility criteria includes:
- At least 80% of the MIT’s assessable income must come from affordable housing
- Housing must be provided to low to moderate income tenants with rent charged at a discount below the private rental market rate
- Affordable housing must be available for rent for at least 10 year
If the 80% affordable housing income requirement is breached in a particular year, non-resident investors in the MIT will be liable to pay a 30% withholding tax rate on investment returns for that income year (as opposed to the 15% rate which is available for certain non-resident investors).
If the 10-year rental period requirement is not met for a property, any net capital gain arising on disposal of the property will be subject to a 30% withholding tax rate.
The measure will apply for income years starting on or after 1 July 2017.
The Government will provide $1.5 million to the ATO to implement the measure.
This will now be the focus of the Property Council’s new Build to Rent Roundtable which the National Board established last month. Importantly, based on research commissioned by the Property Council, the requirement for 80% below market rental income is not expected to be economically viable and will not attract the required institutional investment.
The restriction of the new MIT asset class to “affordable housing” also represents a missed opportunity to facilitate a “build to rent” (or multi-family) asset class which would broaden housing choice for all Australians.
Higher CGT discounts for investors in affordable housing
From 1 January 2018, the CGT discount will be increased from 50% to 60% for Australian resident investors who elect to invest in qualifying affordable housing. To qualify:
- housing must be provided to low to moderate income tenants
- rents must charged at a discount below the private rental market rate
- property must be managed through a registered community housing provider
- investment must be held for a minimum of three years
The higher discount will also be available for resident investors investing in qualifying affordable housing MITs.
The measure is estimated to have a cost of $15 million over the forward estimates period.
Facilitate financing for affordable rental housing – bond aggregator model
A new National Housing Finance and Investment Corporation (NHFIC) will be established by 1 July 2018 to operate an affordable housing bond aggregator.
This is intended to provide long term, low cost finance to community housing providers for affordable housing projects by aggregating their borrowing requirements and issuing bonds to the wholesale market.
National Housing Supply Council
Disappointingly, the Budget did not allocate any funding to restore the National Housing Supply Council.
The Government also announced a range of measures, described as housing affordability measures, which impact foreign investors – these are discussed below under the heading “International Investment”. These of course rarely do anything to improve affordability.
GST and residential property transactions
Ten per cent GST is currently payable on newly constructed residential properties.
This is ordinarily paid by the purchaser to the developer, and the developer is required to remit the GST to the ATO.
Government has stated that some developers are currently failing to remit the GST to the ATO.
From 1 July 2018, purchasers of newly constructed residential properties will be required to remit the 10% GST directly to the ATO as part of settlement.
This is expected to increase GST revenue by $660 million.
Further integrity measures for multi-nationals
The Government has announced further changes to the recently introduced multi-national anti-avoidance legislation (MAAL) to deal with corporate structures involving foreign trusts and partnerships to ensure the original policy intent of the law is achieved.
Government will also allocate funding to a campaign to raise public awareness on the range of tax integrity measures that currently exist to address multinational tax avoidance.
Foreign Property Investors
Increased fees for foreign investment approvals
The number of fee categories for FIRB approvals have been limited to three broad categories.
The new fee categories now include not only developed commercial land, but also vacant commercial land.
Currently vacant commercial land attracts a flat fee of $10,100 for all vacant land irrespective of the value.
The changes in the Budget will raise FIRB approval fees for vacant commercial land greater than $10 million.
Category 1 – FIRB Fees for transactions of $10 million or below
– Reduced fees for transactions of $10 million dollars and below to $2,000 (reduced from $25,300 currently).
Category 2 – FIRB Fees for transactions of above $10 million
– Flat fee of $25,300. No change to fees for transactions above $10 million and up to $1 billion for developed commercial land. However, this represents a fee increase for vacant commercial land (increased from $10,100).
Category 3 – FIRB Fees for transactions of above $1 billion
– Increased fees for transactions above $1 billion to a flat fee of $101,500 (increased from $25,300 currently).
Restrict foreign ownership in new developments to 50%
The New Dwelling Exemption Certificate will be amended to cap foreign ownership in new developments at 50%.
This condition will be applied to applications made from Budget night.
Annual charge on foreign home owners who leave property vacant
The Government will introduce an annual charge on foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months per year.
The charge will be equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired, which starts from $5,000.
The measure will apply to all foreign investment applications from 7.30pm on 9 May 2017. It is expected to raise $16.3 million over the forward estimates period and the ATO will be allocated $3.7 million to implement the measure.
This measure seems more designed to create a headline for the Government than deliver any real affordability outcome.
No CGT main residence exemption for foreign investors
Foreign and temporary tax residents will no longer have access to the CGT main residence exemption from 7.30pm on 9 May 2017. Any existing properties will be grandfathered until 30 June 2019.
Expansion of capital gains tax withholding regime
The capital gains tax withholding regime, which was introduced in 1 July 2016 has been extended by:
- increasing the withholding tax rate from 10% to 12.5%
- lowering the threshold from $2 million to $750,000 which will significantly extend the number of properties subject to the regime.
Tightening of foreign resident CGT principal asset test
The Government will apply the CGT principal asset test on an associate inclusive basis from 7.30pm on 9 May 2017 for foreign tax residents with indirect interests in Australian real property.
This has been described as an integrity measure to ensure foreign residents cannot avoid a CGT liability by disaggregating their interests.
Changes to foreign investment rules
Following consultation with industry, the Federal Government has announced a range of amendments to the foreign investment regime which will have effect from 1 July 2017.
Importantly, this includes:
- Fixing the sensitive land provisions to reduce unnecessary screening of commercial property transactions. The Property Council expects this proposed change is expected to address the concerns raised by industry in relation to the prescribed airspace provision and related provisions. Removing the current provision is expected to provide an exemption to commercial real estate transactions within proximity to airports. This will reduce the types of developed commercial property subject to the lower $55 million threshold for FIRB approval.
- Treating failed off the plan settlements as ‘new’ dwellings for the purposes of developer exemption certificates. ‘New’ dwellings can be purchased by both foreign and local buyers. This formally confirms current government treatment of failed off-the-plan applications.
The Bottom Line:
The 2017-18 Budget has a sensible focus on housing affordability and infrastructure.
The Budget’s housing affordability measures may have an impact on home prices over time if they incentivise states to ramp up supply, but it’s likely to be marginal in the short term.
It looks like there is nothing in the budget that will slow down the momentum in the Sydney and Melbourne property markets.