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Wednesday, 28 February 2018
Page: 2317

Dr LEIGH (Fenner) (17:38): We have before the House today another set of bills that talk about reducing pressure on housing affordability but don't tackle the real issue. It's another example of the government's inadequate response to tackling housing affordability in Australia. With the homeownership rate as low as it's been in 60 years, Australians need more than the half-baked measures contained in the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018. Labor won't be opposing the bill in the House, but we need to be clear that these measures, along with everything else the government has announced on housing affordability, are simply insufficient.

The International Monetary Fund last week released its latest article IV consultation with Australia. It is a useful exercise, and the Treasurer was very quick to jump on the release. He put out a media alert saying 'IMF endorses Australia's economic performance'. There was one notable exception from the Treasurer's media announcement, and it's not surprising to have an omission, given that the government had been caught out misleading the House on the impact of Labor's policies on negative gearing and the capital gains tax discount. What was that omission? The IMF endorsed changes to negative gearing and the capital gains tax discount. The IMF surmises that the Commonwealth's housing tax settings favour leveraged housing investments in upswings that might encourage excess demand for housing. It's a point that federal Labor has been making for years. Reforming negative gearing and the capital gains tax is good for housing affordability, but it's also good for the budget and good for financial stability.

The Treasurer hasn't only failed millions of young Australians when it comes to dealing with housing affordability; he's also presiding over an economy and a housing market that is more vulnerable to future economic shocks. We have household-debt-to-income ratios at record highs. The system is suffering a degree of instability that is unnecessary as well as unfair. The IMF report explicitly states:

On the investment side, the combination of high capital gains tax discount rates and unlimited negative gearing can encourage leveraged real estate investment in market upswings. While similar tax incentives are also present in other countries, they tend to be more limited.

The IMF goes on to say:

The capital gains discounts on housing should be reduced and other tax incentives limited.

That's not Labor saying that; it's the IMF. The IMF also notes the government's budget position is 'predicated on a rapid rebound of nominal growth'. This is at a time when the government's unfunded company tax cut will deliver a structural hit to revenue over the medium term.

We have the Treasurer out there talking about tax relief for low- and middle-income households, but in fact his company tax cut is paid for by raising income taxes on low- and middle-income Australians. Under the coalition, seven million Australians with earnings between $21,000 and $87,000 will see their income tax rates go up. Under Labor that will not happen. The Parliamentary Budget Office has analysed the extent to which the return to surplus is built on the backs of middle-income Australians paying more income tax. It found that it's the middle quintile that is paying the lion's share in order to get the budget back into surplus.

As I mentioned before, we're also dealing with an issue of financial stability. The Treasurer recently declared 'mission accomplished' on housing affordability, after arguing that, after the introduction of APRA's macroprudential measures, there's no need to scale back the most generous set of tax concessions for property investors in the world. But macroprudential measures have their limits. The Customer Owned Banking Association noted that, for banks with a relatively small share of the investment market, placing caps on their loan book stymies competition and has led to some of those smaller providers pulling out of the market. The consequence of these macroprudential measures is less competition in the market to provide investment loans. Indeed, it is a point which is even made by some of the smaller of the big banks.

The IMF specifically goes to the interaction of APRA's macroprudential measures with housing tax reform. It concludes:

Housing-related policies have begun to address housing-related imbalances and should be complemented by tax reform.

But these bills don't provide the sort of tax reform that Labor has been advocating. Instead they give effect to three of the government's measures from last year's budget. Here we are, just a handful of sitting weeks away from the 2018 budget, and the coalition is still bringing into the House measures from the 2017 budget. The measures in the bills remove the entitlement to the capital gains tax main residence exemption for foreign residents, enable a reconciliation payment for near-new dwelling certificates and provide a capital gains tax incentive for investment in affordable housing.

On the CGT main residence exemption, these bills—in conjunction with the Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017, which passed the parliament with Labor's support—remove the entitlement to the capital gains tax main residence exemption for foreign residents. There has been a concern that this would affect certain New Zealand constituencies. A clarification to specifically state that Australian tax residents can access this exemption appears to mean these constituencies are not impacted, but there will be a short Senate inquiry specifically to confirm this issue.

As to the reconciliation payment, the Near-New Dwelling Exemption Certificate was introduced in June 2017 to allow developers the flexibility to sell near-new dwellings—that is, dwellings previously subject to a failed settlement to foreign persons. Consistent with the process for payment under the new dwelling certificate, the bills introduce a reconciliation payment for the New-Near Dwelling Exemption Certificate, by which developers pay additional fees for each near-new dwelling that was sold to a foreign person by the developer under the exemption certificate. This ensures equivalent treatment to that given under the New Dwelling Exemption Certificate, which allows property developers to sell new dwellings, to foreign persons, paying a reconciliation fee for each dwelling under the exemption certificate.

On the CGT incentive, from 1 January 2018 an additional 10 percentage points capital gains tax discount will be provided—increasing the discount from 50 to 60 per cent—if a CGT event occurs to an ownership interest in residential premises used to provide affordable housing. The additional capital gains tax discount applies to investments by individuals directly in affordable housing or investments in affordable housing by individuals through trusts, other than public unit trusts and superannuation funds, including managed investment trusts, to the extent the distribution or attribution is to the individual and incurs a capital gain. The dwellings must have been used to provide affordable housing for a period or periods totalling at least three years. Similarly, a trust or managed investment trust must have used the dwellings to provide affordable housing for a period or periods totalling at least three years.

I would note the interaction of this last measure with build-to-rent developments. We are more than used to this government lecturing us repeatedly on the notion that housing affordable is all about supply. It's why they tell us they care about rental affordability and why they won't deal with negative gearing and the capital gains tax discount. But this does make it all the more perplexing that the Treasurer chose, without any consultation, to kill off an emerging sector of Australia that could have played a role in increasing the supply of rental accommodation. Build to rent isn't yet a big thing in Australia, but it has potential—according to CBRE, up to $300 billion of residential assets. Or, at least, that was the potential before the Treasurer decided to kill it off. Build to rent, as honourable members would be aware, is simply corporate investment in large-scale rental accommodation. It is quite a big thing in Britain and the United States. In the United Kingdom, as of the middle of last year, 17,000 build-to-rent units were completed with another 24,000 with under construction and nearly 55,000 granted planning permission. In the United States, the build-to-rent market is valued at US$163 billion a year. Many residents in cities such as New York will be renters in buildings which are owned by a single owner.

Build to rent doesn't simply add to supply. Large scale rental accommodation provides economies of scale in terms of building maintenance and it provides benefits in terms of lower construction costs leading to potentially lower rents. It also solves a potential market failure. When the builder is the owner, then the incentive for the builder to cut corners in ways that might increase subsequent maintenance costs is reduced. Just as an owner-builder is pretty careful about the quality of their build, because they know they're going to have to live in the place, build-to-rent developers will be especially careful about the quality of their apartment buildings knowing that they will own the entire apartment building and rent it out. Leaky balconies are less likely to be prevalent in a build-to-rent environment. An experience in Britain has pointed to some high-quality offerings with well-developed communal facilities, attractive to segments of the rental market which aren't searching for standalone houses.

There are relatively light tenants' rights in Australia, and I refer anyone interested in this to the Grattan Institute's terrific report that looks at the rights that tenants have in various countries compared to Australia. The ability of an Australian tenant to have a dog on the premises or to hammer a nail into the wall is far less than it is in many other advanced countries. Given this, it's worth noting that corporate or superannuation fund landlords would be highly unlikely to evict tenants to move into the property themselves or because the landlord has decided to sell. Build to rent therefore gives good tenants peace of mind. It gives enhanced security of tenure and it creates an opportunity for those long-term leases that are so absent from the Australian market.

Another factor makes build to rent attractive in the Australian context, and that is our large pool of superannuation savings. That means that institutional investors could find a build-to-rent investment highly attractive. Experts, participants in the housing industry, have told Labor about the potential for the development of a build-to-rent sector. It's not a silver bullet, but it is potentially part of the answer, and the shadow Treasurer, the member for McMahon, and the shadow housing minister, Senator Cameron, have engaged actively with the sector and have heard back from the sector about the benefits of build-to-rent developments. There are issues to be dealt with, the interaction of the GST system with build to rent being one, but genuine consultation could well deal with this.

But that was before 14 September last year, when the Treasurer announced he was banning managed investment trusts from investing in housing, apart from narrowly defined 'affordable housing'. The announcement took immediate effect. There wasn't any warning. There wasn't a skerrick of consultation. When the government handed down what they told us was a comprehensive housing affordability plan, in the 2017 budget, the crackdown wasn't mentioned. If there were a compelling and urgent case for the announcement the Treasurer made on 14 September last year, why wouldn't it have been part of the government's housing affordability package? The Treasurer said that this announcement was part of the fairness of the tax system. Goodness knows Australians prick up their ears when they hear that the Treasurer actually has an interest in fairness. This is, after all, the Treasurer that says that we don't need to care about inequality because it's falling in Australia—contrary to the words of every expert. But, of all the elements of the managed trust regime which could be the subject of legitimate scrutiny and debate, he chooses to close down the one area that was showing the potential to contribute to alleviating Australia's housing affordability crisis.

The Treasurer wants to initiate a debate on or a review of concessions that managed investment trusts receive. Labor will work with him on that. But what we'll oppose is clunky policy on the run that harms housing affordability. It is not just federal Labor that has concerns here. New South Wales Liberal Treasurer Dominic Perrottet has been pushing for this, and the federal Treasurer simply says no. As the Financial Review reported:

In a blow, Mr Perrottet's push for federal government tax breaks for developers in the build to rent sector was swiftly slapped down by Treasurer Scott Morrison.

'He wants to give a tax cut to foreign investors in high-end, high-rent housing,' Mr Morrison told the Financial Review in the US on Friday. 'We haven't been in favour of foreign tax breaks for housing.'

I've canvassed the limitations of these measures today—the fact they don't tackle the core challenges of housing affordability in Australia, such as the reforms that are necessary to capital gains tax and negative gearing, the importance of reinstating a housing minister and the importance of a national housing supply measure. But Labor won't oppose the passage of this bill through the House. It will go to a short Senate inquiry to ensure that our concerns, particularly the effect of the GST main residence exemption, are addressed.

Debate adjourned.