Housing, banks and integrity measures
This year’s Federal Budget focuses on housing affordability, banks and integrity measures. It is a thoughtful Budget, which attempts to address perceived inequities in the tax system and seeks to fund significant infrastructure projects and the National Disability Insurance Scheme (NDIS).
Authorised Deposit-taking Institutions (ADIs) with licensed entity liabilities of at least $100 billion will be required to pay a new levy from 1 July 2017. The levy is expected to raise a staggering $6.2 billion over the forward estimates period. The levy will be calculated at an annualised rate of 0.06% on an ADI’s licensed entity liabilities (such as corporate bonds, commercial paper, certificates of deposit and Tier 2 capital instruments). The levy will not apply to Tier 1 capital and deposits. It seems likely that the levy will be deductible for tax purposes (rather than resulting in a credit to the bank’s franking account). This issue will be subject to consultation and will clearly be of significant interest to the banks and their shareholders.
From 1 January 2018 (or if later, 6 months after the date of Royal Assent), new hybrid mismatch rules will be introduced so that certain cross-border transactions relating to regulatory capital known as Additional Tier 1 (AT1) are no longer tax effective. This will be achieved by:
Preventing returns on AT1 capital from carrying franking credits where such returns are tax deductible in foreign jurisdictions; and
Where the AT1 capital is not wholly used in the offshore operations of the issuer, requiring the franking account of the issuer to be debited as if the returns were to be franked.
There will be transitional arrangements for AT1 instruments issued before 8 May 2017, which should last until the first call date of the instrument that occurs after 8 May 2017.
The Government will be introducing a number of measures aimed at housing affordability. One of the key measures is that from 1 July 2017 a qualifying managed investment trust (MIT) will be able to acquire, construct or redevelop “affordable housing” with access to the concessional withholding tax regime which imposes a final tax of 15% on distributions of rent and capital gains to investors. There will also be some changes to the tax treatment for resident investors (see further below).
To qualify for this concessional regime:
The property must be dedicated to be held for the purpose of deriving rent for at least 10 years.
The housing must be “affordable housing”, being housing that is available to low to moderate income tenants, with rent charged at a discount below the private rental market rate.
At least 80% of the MIT’s assessable income must be derived from affordable housing (with up to 20% of the income of the MIT being derived from other eligible investment activities).
While this is a welcome measure, it does throw into doubt the tax position of all other trusts that invest in housing and currently self-assess as withholding MITs. This measure is responding to a concern from the ATO that such trusts currently may not qualify as MITs on the basis that they conduct trading businesses or do not hold property primarily for the purpose of deriving rent - where affordable housing is concerned, rent is below market and there may be significant capital gains on residential property, which call into doubt whether the primary purpose is to derive rent (especially where the property is negatively geared). It is not clear that this position is correct, but this measure clearly communicates that this is the ATO’s interpretation of the current MIT rules and provides certainty for affordable housing projects.
The other tax changes relating to housing affordability are:
The Government will introduce an annual charge on foreign owners of residential property where the property is not occupied or genuinely available for rent for at least 6 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 by the foreign investor. The measure will apply to foreign persons who make a foreign investment application for residential property from 9 May 2017.
The Government will impose further capital gains tax measures on foreign residents such as, increasing the CGT non-resident withholding amount from 10% to 12.5%, reducing the CGT withholding threshold from $2 million to $750,000 and denying access to the main resident exemption to foreign residents and temporary residents.
People aged over 65 will be able to make a non-concessional contribution of up to $300,000 from the sale of their home into their superannuation fund, to encourage them to downsize. Such a contribution will be exempt from the $1.6m total superannuation balance test for making non-concessional contributions.
Deductions for travel expenses relating to a rental property will be denied from 1 July 2017.
Resident investors will be able to access a higher CGT discount for direct or indirect investments in affordable housing (including through a qualifying MIT, discussed above).
First home owners may make voluntary contributions to their super fund, and then withdraw these contributions to pay for a deposit for their first home.
For investors with rental properties, deductions for plant and equipment depreciation will be limited to outlays actually incurred by investors in residential real estate properties.
New developments will have a 50% ownership cap for foreign residents, through a condition on New Dwelling Exemption Certificates where the application was made from 9 May 2017. Therefore, a minimum proportion of developments will be available for Australians to purchase.
International tax – the MAAL
The focus on international integrity measures has continued in this Budget, with the Government quickly introducing a “fix” to the Multi-national Anti-avoidance Law (MAAL). Some taxpayers had attempted to restructure their operations to avoid the MAAL by introducing partnerships with foreign resident partners, trusts with foreign resident trustees and foreign trusts that temporarily have their central management and control in Australia. This demonstrates that the Government is committed to ensuring that the MAAL operates within its policy intent and will not tolerate aggressive tax planning in this area.
Changes will be made to the Foreign Investment Review Board (FIRB) framework, the purpose of which is to streamline and improve the FIRB framework. The measures include: refining the type of developed commercial property subject to the lower $55 million threshold by removing low sensitivity applications from the meaning of sensitive land; improving the treatment of residential applications by allowing failed off-the-plan purchases to be considered to be “new”; streamlining the application fees; introducing a new exemption certificate that applies to low risk foreign investors; clarifying the treatment of developed solar and wind farms; and restoring previous arrangements whereby companies with significant foreign custodian holdings are not subject to notification requirements.
Superannuation received mixed treatment in the Budget. On the one hand, tax relief for super funds undergoing consolidation (relating to the transfer of losses and deferral of gains) has been extended past its expected lapse date of 1 July 2017. Furthermore, the first home super saver scheme (discussed above) may drive more individual savings into the superannuation sector. On the other hand, new integrity arrangements around limited recourse borrowing and non-arm’s length arrangements may tighten some savers’ returns.
Small businesses will continue to be able to immediately deduct the expense of most capital assets valued at less than $20,000. More valuable assets will also still be able to be accounted for in a simplified depreciation pool. These concessions have been extended to assets ready for use by 30 June 2018.
Integrity measures have also been proposed which are aimed at ensuring that the small business CGT concessions will only be available to investments in small businesses that are actually “small”. The Government has seen investors try to access the existing concessions for investments in larger businesses and will seek to remove access to the concession for such investments.
Several GST integrity provisions have been introduced. Purchasers of newly constructed residential properties will be required to remit GST directly to the ATO from 1 July 2018, to ensure that the ATO collects this money from developers. Similar provisions have been proposed in relation to the supply of precious metals – which may be a response to certain schemes that have drawn the ire of the Commissioner in recent times.
On the other hand, Bitcoin will now be treated as money for GST purposes, removing the real risk of double GST. This is a positive and necessary step for the fin-tech industry.
The Medicare levy is to be increased from 2% to 2.5% from 1 July 2019. This should increase the top marginal rate used for other taxes such as fringe benefits tax and the taxation of trustees. Low income taxpayers should be protected by accompanying increases to the Medicare levy threshold, but high income taxpayers are likely to feel the sting, particularly as the levy applies to gross (not net) income.
The Budget contains a number of other measures, including:
A statutory levy on entities regulated by ASIC;
Businesses will be required to report payments to external couriers and cleaning staff in the same way as payments to employees and construction contractors (in order to combat under reporting of income by taxpayers in those industries); and
Additional funding will be provided to the ATO to help it combat avoidance in specific sectors (eg organised crime and the cash economy).