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Economics Legislation Committee—Senate Standing—Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 [Provisions] and the Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling Interests) Bill 2018 [Provisions]—Report, dated March 2018


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The Senate

Economics

Legislation Committee

Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 [Provisions]

Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling Interests) Bill 2018 [Provisions]

March 2018

ii

© Commonwealth of Australia 2018

ISBN 978-1-76010-742-0

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License.

The details of this licence are available on the Creative Commons website: http://creativecommons.org/licenses/by-nc-nd/3.0/au/

Printed by the Senate Printing Unit, Parliament House, Canberra.

iii

Senate Economics Legislation Committee

Committee members Senator Jane Hume (Chair) Victoria, LP

Senator Chris Ketter (Deputy Chair) Queensland, ALP

Senator David Bushby Tasmania, LP

Senator the Hon. Ian Macdonald (to 22 March 2018) Queensland, LP Senator Jenny McAllister New South Wales, ALP

Senator Peter Whish-Wilson Tasmania, AG

Senator Amanda Stoker (from 22 March 2018) Queensland, LP

Participating members Senator the Hon. Doug Cameron New South Wales, ALP

Secretariat Mr Mark Fitt, Secretary Ms Penny Bear, Senior Research Officer Ms Hannah Dunn, Administrative Officer

PO Box 6100 Ph: 02 6277 3540

Parliament House Fax: 02 6277 5719

Canberra ACT 2600 E-mail: economics.sen@aph.gov.au

Table of Contents

Membership of the Committee ........................................................................ iii

Chapter 1.............................................................................................................. 1

Introduction .............................................................................................................. 1

Conduct of the inquiry ............................................................................................ 2

Overview of the bills .............................................................................................. 2

Legislative scrutiny committees ............................................................................. 8

Chapter 2............................................................................................................ 11

Views on the bill ...................................................................................................... 11

Capital gains tax changes for foreign residents .................................................... 11

Reconciliation payment for near-new dwelling exemption certificates ............... 15

Capital gains tax incentive for investments in affordable housing ...................... 15

Committee view .................................................................................................... 16

Additional Comments from Labor Senators .................................................. 19

Appendix 1 ......................................................................................................... 23

Submissions and additional documents ................................................................ 23

Chapter 1 Introduction

1.1 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 2018.1

1.2 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.

1.3 The Measures No. 2 bill contains three schedules which seek to implement these measures.2 The Near-new Dwelling Interests bill contains technical amendments to support changes announced in the 2017-18 Budget that streamlined the foreign investment framework.3

1.4 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 2017.4

1.5 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'5 and the Near-new Dwelling Interests bill is 'further

1 Journals of the Senate, No. 87, 15 February 2018, p. 2739.

2 The Hon. Scott Morrison MP, Treasurer, Second Reading Speech, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018, House of Representatives Hansard, 8 February 2018, p. 710.

3 The Hon. Scott Morrison MP, Treasurer, Second Reading Speech, Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling Interests) Bill 2018, House of Representatives Hansard, 8 February 2018, p. 712.

4 The Hon. Scott Morrison MP, Treasurer, Second Reading Speech, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018, House of Representatives Hansard, 8 February 2018, p. 710.

5 The Hon. Scott Morrison MP, Treasurer, Second Reading Speech, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018, House of Representatives Hansard, 8 February 2018, p. 710.

2

evidence of the government getting on with the job, reducing compliance, making the law more fair and getting reforms done'.6

Conduct of the inquiry 1.6 The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting submissions by 5 March 2018.

1.7 The committee received 14 submissions, which are listed at Appendix 1.

1.8 The committee thanks all individuals and organisations who assisted with the inquiry, and took the time to make written submissions and provide responses to questions on notice.

Overview of the bills

Capital gains tax changes for foreign residents

1.9 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.7

Changes to the main residence exemption

1.10 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.

1.11 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 ownership

period.

1.12 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.

1.13 For the purpose of the main residence exemption, a dwelling includes:

6 The Hon. Scott Morrison MP, Treasurer, Second Reading Speech, Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling Interests) Bill 2018, House of Representatives Hansard, 8 February 2018, p. 712.

7 Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018; Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling Interests) Bill 2018, Explanatory Memorandum, p. 7.

3

• 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.

1.14 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 residence; and

• 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.8

1.15 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.9

1.16 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).10

1.17 Section 6 of the ITAA 1936 defines a 'resident' or 'resident of Australia' as follows:

(a) a person, other than a company, who resides in Australia and includes a person:

(i) whose domicile is in Australia, unless the Commissioner is

satisfied that the person's permanent place of abode is outside Australia;

(ii) 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

(iii) who is:

8 Explanatory Memorandum, p. 12.

9 Explanatory Memorandum, p. 16.

10 Explanatory Memorandum, p. 16.

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(A) a member of the superannuation scheme established by deed under the Superannuation Act 1990; or

(B) an eligible employee for the purposes of the

Superannuation Act 1976; or

(C) the spouse, or a child under 16, of a person covered by sub-subparagraph (A) or (B); and

(b) 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.

1.18 This measure does not affect individuals who are Australian residents for taxation purposes at the time a CGT event occurs to a dwelling.11

Transitional provisions

1.19 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 happens; or

• 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. 12

11 Explanatory Memorandum, p. 16.

12 Explanatory Memorandum, pp. 29-30.

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Principal asset test

1.20 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.13

1.21 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.14

1.22 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 2017.15

Consultation

1.23 Treasury released exposure draft legislation for the measures in Schedule 1 and conducted a brief consultation process from 21 July to 15 August 2017.16

Financial Impact

1.24 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:

13 Explanatory Memorandum, p. 27.

14 The Hon. Scott Morrison MP, Treasurer, Second Reading Speech, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018, House of Representatives Hansard, 8 February 2018, p. 711.

15 Explanatory Memorandum, p. 31.

16 Treasury, 'Housing tax integrity—Capital gains tax changes for foreign residents', https://treasury.gov.au/consultation/c2017-t204155/ (accessed 19 March 2018). At the time of reporting, the submissions for this consultation process had not been published on the consultation website.

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Table 1: Financial impact (as set out in Explanatory Memorandum)17

2016-17 2017-18 2018-19 2019-20 2020-21

* $150m $100m $150m $170m

* Unquantifiable

1.25 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 exemption.18 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.19

Reconciliation payment for near-new dwelling exemption certificates

1.26 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.20

1.27 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.21

1.28 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.22

17 Explanatory Memorandum, p. 7.

18 Explanatory Memorandum, p. 7.

19 Commonwealth of Australia, Mid-Year Economic and Fiscal Outlook 2017-18, December 2017, p. 109.

20 Explanatory Memorandum, p. 8.

21 Explanatory Memorandum, pp. 33-34.

22 Explanatory Memorandum, p. 36.

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Financial impact

1.29 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 estimates.23

Capital gains tax incentive for investments in affordable housing

1.30 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.24

1.31 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.25

1.32 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).26

1.33 The explanatory memorandum outlines the eligibility conditions which must be met in order to receive the additional affordable housing capital gains discount.

1.34 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.

1.35 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 that gain;

23 Explanatory Memorandum, p. 8.

24 Explanatory Memorandum, p. 8.

25 Explanatory Memorandum, p. 41.

26 Explanatory Memorandum, p. 41.

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• 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 entities:

- a trust (other than a public unit trust or a superannuation fund);

- a MIT; or

- a partnership. 27

1.36 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.28

Consultation

1.37 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).29

Financial impact

1.38 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)30

2016-17 2017-18 2018-19 2019-20 2020-21

- - * -$5m -$10m

* Unquantifiable

- Nil

Legislative scrutiny committees 1.39 The explanatory memorandum to the bills states that the proposed legislation is compatible with the human rights and freedoms recognised or declared in the

27 Explanatory Memorandum, p. 45.

28 Explanatory Memorandum, p. 51.

29 Treasury, 'Increasing the supply of Affordable Housing', https://treasury.gov.au/consultation/ increasing-affordable-housing/ (accessed 19 March 2018). At the time of reporting, the submissions for this consultation process had not been published on the consultation website.

30 Explanatory Memorandum, p. 8.

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international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

1.40 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.31 The Human Rights Committee deferred consideration of the Measures No. 2 bill.32

1.41 The bills were also considered by the Senate Standing Committee for the Scrutiny of Bills in its Scrutiny Digest 2 of 2018.

1.42 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'.33

31 Parliamentary Joint Committee on Human Rights, Report 2 of 2018, 13 February 2018, p. 42.

32 Parliamentary Joint Committee on Human Rights, Report 2 of 2018, 13 February 2018, p. 119.

33 Senate Standing Committee for the Scrutiny of Bills, Scrutiny Digest 2 of 2018, 14 February 2018, pp. 19 and 62.

Chapter 2 Views on the bill

2.1 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.

2.2 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 certificates

• Capital gains tax incentive for investments in affordable housing

Capital gains tax changes for foreign residents 2.3 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 overseas

2.4 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.

2.5 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.1 SMATS Group provided a petition signed by 1357 in support of its submission.2

2.6 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

1 SMATS Group, Submission 7, p. 6.

2 SMATS Group, Submission 7, p. 7.

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the property that I have worked very hard to own'.3 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.4

2.7 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.5

2.8 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.6

2.9 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'.7

2.10 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.8

Impact on housing affordability

2.11 The National Affordable Housing Consortium (NAHC) posited that the removal of the main residence exemption may have the effect of discouraging foreign

3 Name withheld, Submission 3, p. 2.

4 Name withheld, Submission 3, p. 2.

5 Name withheld, Submission 3, p. 2.

6 Name withheld, Submission 11, p. 4.

7 Mr Frederick Morgan, Submission 1, p. 1.

8 CST Tax Advisors, Submission 2, p. 3.

13

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.9

2.12 One Australian working overseas also questioned whether the changes would in fact improve housing affordability for low income earners or families, noting:

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.10

2.13 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.11

Deceased estates

2.14 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.12

2.15 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 society.13

2.16 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'.14

2.17 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:

9 National Affordable Housing Consortium (NARC), Submission 12, p. 4.

10 Name withheld, Submission 3, p. 3.

11 SMATS Group, Submission 7, p. 1.

12 Explanatory Memorandum, pp. 21-24.

13 BNR Partners, Submission 9, p. 4.

14 BNR Partners, Submission 9, p. 4.

14

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 more so.15

Transitional arrangements

2.18 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'.16 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 2017.17

2.19 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. 18

2.20 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 of'.19

Principal assets test

2.21 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

15 CPA Australia, Submission 10, p. 2.

16 CST Tax Advisors, Submission 2, p. 1.

17 CST Tax Advisors, Submission 2, p. 1.

18 CPA Australia, Submission 10, p. 2; Name withheld, Submission 3, p. 3.

19 CST Tax Advisors, Submission 2, p. 3.

15

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.20

Reconciliation payment for near-new dwelling exemption certificates 2.22 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 proceed'.21

Capital gains tax incentive for investments in affordable housing 2.23 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.22

2.24 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 affordability nationally.23

2.25 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 incomes.24

20 National Affordable Housing Consortium (NARC), Submission 12, p. 4.

21 Housing Industry Association (HIA), Submission 14, p. 1.

22 National Affordable Housing Consortium (NAHC), Submission 12, p. 19.

23 Housing Industry Association, Submission 14, p. 1.

24 Property Council of Australia, Submission 4, p. 1.

16

2.26 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).25

2.27 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.26

2.28 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 tax rate.

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.27

Committee view 2.29 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.

2.30 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.

25 PowerHousing Australia, Submission 8, p. 4.

26 PowerHousing Australia, Submission 8, p. 4.

27 Treasury, Answers to written questions on notice, received on 19 March 2018, p. 2.

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2.31 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 estimates period.

2.32 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.

2.33 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.

Recommendation 1

2.34 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.

Recommendation 2

2.35 The committee recommends that the bills be passed.

Additional Comments from Labor Senators 1.1 Labor Senators are broadly supportive of these bills and won't stand in the way of them, but at the outset want to reiterate that the Government's so called 'comprehensive affordability plan' is a sham. The plan is heavy on slogans, light on substance and many stakeholders have criticised the piecemeal approach to reform in this area.

1.2 Labor Senators support the measures in these bills related to capital gains tax changes for foreign residents and near-new dwelling interests.

1.3 Regarding foreign residents, Labor Senators note answers to Questions on Notice that confirm that temporary tax residents are not impacted:

The changes to deny foreign residents access to the main residence capital gains tax exemption, contained in the Treasury Laws Amendment (Reducing Pressure on Housing Affordability No. 2) Bill 2018, will not affect temporary tax residents who meet the definition of Australian tax resident at the time they sell their main residence.1

1.4 Labor Senators wish to make a number of comments on the elements in these bills related to the additional capital gains tax (CGT) discount for affordable housing:

• While these bills implement the measure 'expanding tax incentives for investments in affordable housing' set out in the budget,2 these bills do not contain any elements which would enable Managed Investment Trusts (MITs) to invest in affordable housing, as set out in the measure 'affordable housing through Managed Investment Trusts'.3 This measure was announced in May 2017. It is now March 2018 and legislation has yet to be introduced into Parliament. A Government committed to genuine reforms in housing affordability would have acted with more haste.

• Labor Senators note comments from the National Affordable Housing

Consortium (NAHC) which states that the Government has failed to provide clear evidence about the benefits of introducing this measure:

The increase in the discount from 50% to 60% is grossly inadequate to drive investment into sub market rental housing. We need an evidence-based approach to the level of incentives required and the distribution of those benefits between the investor and tenant outcomes.4

• The Property Council of Australia also shared this same concern and had

doubts about how effective this tax discount would be:

1 Additional Documents, Answers to written questions on notice, received from Treasury on 19 March 2018, p. 1.

2 Budget Paper No. 2—Budget Measures 2017-18—Part 1: Revenue measures, p. 29.

3 Budget Paper No. 2—Budget Measures 2017-18—Part 1: Revenue measures, p. 26.

4 National Affordable Housing Consortium (NAHC), Submission 12, p. 4.

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…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 incomes.5

• Questions on Notice from Treasury officials also failed to adequately explain

how this tax incentive would lead to new supply:

Q: What level of new affordable housing supply is estimated to be created in each year over the forward estimates due to this measure?

A: 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 tax rate.6

• Given this evidence, it is incumbent on the Government to adequately

demonstrate the benefits expected from this measure and how it will contribute to new supply of affordable housing.

• Labor Senators are also not convinced that the increase to the CGT discount

will actually add to the amount of housing stock, and not simply cause more churn through. The minimum holding period in order to qualify for the increased capital gains tax discount appears to be unduly short to provide stable, long-term increases in the stock of affordable housing. It may result in affordable rental dwellings rapidly falling out of the affordable rental sector, particularly if prices continue to rise rapidly in markets such as Sydney and Melbourne.

1.5 Regarding MITs, it should not be forgotten that the Treasurer and Minister Sukkar announced in September 2017, without warning, that MITs would no longer be able to invest in residential property, with the exception of affordable housing.

1.6 This shock move could kill the fast emerging 'build-to-rent' movement that has already taken off in the US and more recently in the United Kingdom. It’s a potential new billion dollar addition to the Australian real estate market.

1.7 The Government tells the public that increasing housing supply is a crucial part of dealing with Australia's housing affordability crisis. Labor Senators agree. However, this bizarre banning of MIT purchases of residential property will directly hit housing supply.

1.8 It's one thing to have a discussion with the property sector on what a Government may or may not want to do to encourage or facilitate 'build-to-rent' in Australia, but it's another to kill it before it even begins.

5 Property Council of Australia, Submission 4, p. 1.

6 Additional Documents, Answers to written questions on notice, received from Treasury on 19 March 2018, p. 2.

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1.9 The Property Council, in their submission to this inquiry, continues to reiterate its support for the 'build-to-rent' sector. They also make concerning comments that the Government's actions have increased sovereign risk:

The September 2017 Treasury Laws Amendment (Reducing Pressure on Housing Affordability No. 2) Bill has created significant uncertainty for investors and increased sovereign risk for international capital looking to support the supply of new residential in Australia.7

1.10 Labor Senators continue to urge the Treasurer to reconsider this policy on the run and engage properly with experts in the field instead of making it up as he goes.

1.11 Labor Senators believe that the better policy approach to these tax issues as they affect the emerging build-to-rent sector, would have been to review and consider them in a holistic way—something that Federal Labor has been calling for since October 2017.

1.12 Finally, when it comes to a comprehensive plan for housing affordability, only the Labor Party has a plan that will deliver for all Australians. Labor's announcements on housing affordability include:

• Reforming negative gearing and capital gains tax concessions, resulting in the

construction of 55,000 new homes and a boost to employment by 25,000 new jobs per year;

• Improving the National Housing Affordability Agreement, re-establishing the

National Housing Supply Council and appointing a dedicated Minister for Housing and Homelessness;

• Establishing a bond aggregator to increase investment in affordable housing;

• Working closely with the States and Territories on supporting and reforming

the national housing agreement to strengthen benchmarks across the housing affordability spectrum such as housing supply, planning reform and inclusionary zoning;

• Providing $88 million for a Safe Housing Fund to increase transitional housing options for women and children escaping domestic and family violence, young people exiting out-of-home care and older women on low incomes who are at risk of homelessness;

• Boosting homelessness support for vulnerable Australians;

• Facilitating a COAG process to introduce a uniform vacant property tax

across all major cities;

• Limiting direct borrowing by self-managed superannuation funds; and

• Increasing foreign investor fees and penalties.

7 Submission 4, p. 21.

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Senator Chris Ketter Senator Jenny McAllister

Deputy Chair Senator for New South Wales

Senator Doug Cameron Senator for New South Wales

Appendix 1

Submissions and additional documents

Submissions 1 Institute of Internal Auditors 2 Mr Frederick Morgan 3 CST Tax Advisors 4 Name Withheld 5 Property Council of Australia 6 Financial Planning Association of Australia 7 Name Withheld 8 SMATS Group 9 PowerHousing Australia 10 BNR Partners 11 CPA Australia 12 Name Withheld 13 National Affordable Housing Consortium (NAHC) 14 Pitcher Partners

Answers to questions on notice 1 Answers to written questions on notice, received from Treasury on 19 March 2018.