Exposure draft legislation on stapled structures
Exposure draft legislation on stapled structures – managed investment in housing & agricultural
land
By Michael Potter
On 13 Augusts 2018, the Financial Services Council (FSC) made a submission on the second stage legislation relating to stapled structures contained in the exposure draft Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax and Other Measures) Bill 2018 and related explanatory materials.
The submission specifically relates to managed investment in residential housing and agricultural land.
Managed investment in residential housing
The FSC welcomes the policy in the draft bill stating that managed investment trusts (MITs) can invest in residential housing, specifically Build-to-Rent housing. As we indicated in our submission to the Government of 5 October 2017,
there are substantial benefits to permitting this type of investment, in particular Build-to-Rent is likely to be an important solution to Australia’s housing affordability and supply problems.
Permitting Build-to-Rent also means MITs can invest in 'mixed use’ developments that involve some element of residential investment. There are many investments by Australian funds, offshore and locally, that are mixed use property developments. This may for example include apartments above a shopping centre, which can sometimes be a requirement of a local council. In some cases the residential investment may be a small part of the total investment.
Nevertheless, the FSC has concerns about the proposal contained in the draft bill to impose a higher withholding tax rate on Build-to-Rent. In the FSC’s view this is unnecessary and inappropriate, for
the following reasons:
- Build-to-Rent properties are likely to reduce rent pressures, making renters better off.
- This measure is not protecting revenue. The Government would currently be receiving almost no revenue from Build-to-Rent as the asset class is nearly non-existent in Australia.
- If Build-to-Rent expands, then any revenue impact of a lower withholding tax rate would be offset by factors including:
- The costs to governments from rent assistance and social housing is likely to decline (as noted earlier, Build-to-Rent is likely to reduce rent pressures).
- If prospective home owners instead choose to rent long-term in a Build-to-Rent property, then the impact on government budgets is likely to be positive as home ownership is significantly tax preferred over rental properties.
- If prospective housing investors instead choose to invest in a Build-to-Rent property, then tax revenue of governments could increase as state land tax treats individual investors more favourably, and the extent of negative gearing could decline.
- There is no clear policy rationale to have a higher withholding tax rate on managed investment in housing compared to commercial property such as office and retail — particularly commercial accommodation such as hotels.
- This tax differential is likely to show up, in part, as higher rents for tenants in these properties. Similarly, there is no clear rationale why a resident in a Build-to-Rent property should pay higher rent than a tenant in commercial property including an office block or shopping centre. A tax penalty causing higher housing rents is, on the face of it, inequitable.
- The Build-to-Rent sector is well developed in some other countries, such as in the USA, and Australia needs to support, not penalise, the participation of foreign managers and investors with substantial expertise in this sector.
- If Build-to-Rent expands in Australia, this will mean the one missing domestic managed investment asset class (residential property) will at last be available in volume to local and foreign investors. This will aid diversification and allow investors to gain exposure to residential property without having to buy a property directly.
Managed investment in agricultural land
We also do not support the proposals contained in the draft Bill to impose a higher withholding tax rate on MIT investment in agricultural land. Some of the FSC’s concerns are similar to the concerns with Build-to-Rent, while some are specific to agricultural land.
Download the paper to read the submission in full, including the FSC's recommendations.