As part of the 2017-18 Budget, the Government announced it would be providing tax incentives to increase private and institutional investment in affordable housing. They have now released an exposure draft for comment.
The legislation proposes an additional 10% Capital Gains Tax (CGT) benefit for investors who provide affordable housing via a recognised community housing entity.
It also allows investment for affordable housing to be made via Managed Investment Trusts (MIT).
The purpose of public consultation is to seek stakeholder views on the exposure draft legislation and explanatory material. Deadline for submissions is 28th September.
Changes To CGT.
The Bill encourages investment in affordable housing for members of the community earning low to moderate incomes. This is achieved by allowing investors to have an additional affordable housing capital gains discount of up to 10 percent at the time a CGT event occurs to an ownership interest in a dwelling that is residential premises that has been used to provide affordable housing. By reducing the CGT that is payable upon disposal of affordable housing, it ensures that a greater proportion of the gain realised at disposal is retained by the investor.
The additional capital gains 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 MITs to the extent the distribution or attribution is to the individual and includes such a capital gain.
An individual is eligible for an additional affordable housing capital gains discount (direct investment) on a capital gain 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.
Only dwellings that are residential premises that are not commercial residential premises can be used to provide affordable housing. Therefore this measure does not apply to caravans, mobile homes and houseboats as they are not residential premises.
The tenancy of the dwelling or its availability for rent to be exclusively managed by an eligible community housing provider. Community housing providers provide rental housing to tenants who are members of the community earning low to moderate incomes. Community housing providers may own some of the dwellings, however they also manage dwellings on behalf of investors, institutions and state and territory governments. Many community housing providers specialise in providing accommodation to particular client groups which may include disability housing, aged tenants and youth housing. Community housing providers are regulated by the states and territories. For the purposes of this measure an eligible community housing provider is an entity that is registered as a community housing provider to provide community housing services under a law of the Commonwealth, state or territory or is registered by an Australian.
Affordable housing through managed investment trusts.
The proposals will amend taxation laws to encourage managed investment trusts (MITs) to invest in affordable housing. They:
- allow MITs to invest in dwellings that are residential premises (but not commercial residential premises) that are used to provide affordable housing primarily for the purpose of deriving rent; and
- apply the concessional 15 per cent withholding tax rate to fund payments: – to the extent they consist of affordable housing rental income and certain capital gains from dwelling used to provide affordable housing; and – that are paid or attributed to MIT members who are foreign residents of jurisdictions which Australia has listed as an exchange of information country.
A MIT is a type of unit trust which investors can use to collectively invest in assets that produce passive income, such as shares, property or fixed interest assets. There also currently is significant uncertainty about the eligibility rules for trusts being MITs if investments are made in dwellings that are residential premises. This is because there is a view that investment in residential property is not made for a primary purpose of earning rental income. It is instead for delivering capital gains from increased property values, and therefore not eligible for the MIT tax concessions.
This measure clarifies the eligibility rules for trusts to be MITs if they invest in dwellings that are residential premises. This will help to provide investors with investment certainty. This change will not, however, affect MITs investing in commercial residential premises. This means that trusts can invest in commercial residential premises and qualify as MITs provided this investment is primarily for the purpose of deriving rent consistent with the eligible investment business rules.
