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Estimates: Economics Legislation Committee: Treasury Portfolio: Australian Taxation Office 

Estimates & Committees
Lee Rhiannon 14 Jun 2017

Tuesday 30 May

Senator RHIANNON: Is part of the rationale for changes to MITs in relation to housing to encourage foreign investment?

Senator Cormann: It is to encourage additional investment in social housing, but I will let Treasury take you through it.

Ms Mrakovcic : As the minister indicated, the government is introducing a new investment vehicle in order to encourage affordable housing.

Senator RHIANNON: But it is to encourage foreign investment to some extent, isn't it?

Ms Mrakovcic : Certainly foreign investors can invest in a managed investment trust.

Senator RHIANNON: And it has been made more attractive to encourage that. It has been made more attractive, so that would appear to be part of the motive.

Senator Cormann: The objective is to increase supply of affordable housing, and as such this is one measure of a comprehensive package of measures—

Senator RHIANNON: This is one way to achieve that.

Senator Cormann: to boost investment in affordable housing. That is right.

Senator RHIANNON: If so, how is that consistent with the government's other proposal to discourage foreign investment in Australian real estate?

Senator Cormann: You have to be a bit more specific.

Senator RHIANNON: You are restricting foreign investment in new apartment buildings to less than 50 per cent.

Senator Cormann: There is still a substantial amount of foreign investment that is able to be directed into these relevant developments.

Senator RHIANNON: But you have another trend going on there—there is one to encourage and one to discourage.

Senator Cormann: We are not discouraging investment. We are limiting foreign investment in a particular category of development. The overall effect of the package is that it will facilitate additional investment from a variety of sources, including, as far as the managed investment trust measures are concerned, in the form of foreign investment, in order to boost the supply of affordable housing.

Senator RHIANNON: But, to achieve that, what is the government's estimate of the additional affordable housing supply from managed investment trusts?

Senator Cormann: I think we went through this yesterday and took a whole series of questions on notice in relation to this. We will cross-reference it, but I am happy to take that question on notice again to see whether we can add some members to that for you.

Senator RHIANNON: It is also relevant here. What happens to the community housing providers and tenants after three years if the investor wants to sell to realise a capital gain?

Ms Mrakovcic : I would assume that there would be an ongoing stream of investors who would be signing up to these measures in order to provide affordable housing. So I do not think it will be a one-off in and out. I think there is a sense that investors interested in contributing to or investing in affordable housing would sign up to these community housing providers and become part of that investment stream into affordable housing. Ms Davy, I am not sure if you can add anything to that.

Ms Davy : I can add something. The affordable housing MIT is required to hold the property for at least 10 years, so that should provide consistency of tenancy.

Senator Cormann: The beauty of the managed investment trust is that investors can move in and out. So it is not as if, because somebody wants to cash out, the managed investment trust will not continue to operate. That is a very important point here.

Senator WHISH-WILSON: [inaudible]

Senator Cormann: That is a different question. The implication of the question by Senator Rhiannon was that because an individual investor wants to leave somehow that puts the overall investment at risk, and that is not true.

Senator RHIANNON: I just want to understand this because it seems as though there have been some contradictory statements there. Ms Mrakovcic, you said that you are expecting an ongoing stream signing up and that it will not be just one-offs. I certainly was not suggesting it would be one-offs. That is precisely what I am trying to understand. My question was: what happens after three years if the investor wants to sell to realise a capital gain? That is something that you need to come to grips with and you have not answered.

Ms Mrakovcic : Can I just clarify: are you talking about the managed investment trust—

Senator RHIANNON: Yes.

Ms Mrakovcic : or are you talking about the ability for individual investors to gain a benefit in terms of CGT if they invest in affordable housing? Both measures were actually in the budget. I may have misinterpreted—

Senator RHIANNON: I am going to go on to CGT, but I am still on MITs with regard to that question.

Ms Mrakovcic : Just to clarify, my answer went more broadly to the investment in affordable housing by individuals.

Senator RHIANNON: Okay, then I will ask it again. What happens to the community housing providers and tenants after three years if the investor wants to sell to realise the capital gain?

Ms Davy : That sale of the investment in the MIT should not affect the tenants and the community housing providers. To qualify for concessional treatment under the affordable housing MIT, the investment MIT has to hold the property for 10 years. If it sells the property in a period sooner than 10 years then there will be a 30 per cent final holding tax rate on the proceeds of any capital gains. But investors in the MIT who hold units in the MIT, if they are individual resident investors, can get a 60 per cent CGT discount on the sales of their investment in the MIT if they hold that for at least three years.

Senator RHIANNON: So if you hold it for at least three years this CGT benefit kicks in. Is that what you are saying?

Ms Davy : Yes.

Senator RHIANNON: I want to clarify this some more. There is a proviso in the qualification for the 60 per cent CGT discount that the discount will be pro rataed for periods when the property is not used for affordable housing purposes. Does that mean that the property's tenancy and rent levels can change?

Mr Brine : I think that might be a feature of the alternative policy that the deputy secretary mentioned earlier. There were two policies around affordable housing. One is a tax incentive for investments in affordable housing where you have to hold the property for three years and make it available below market rates through a charitable body. If you make it available for less than three years that capital gains tax is pro rataed. There is a separate policy around managed investment trusts where a managed investment trust manages a suite of properties and people buy and sell the units in that managed investment trust. But that managed investment trust needs to hold the property for 10 years. So I think it might be possible we have the two slightly mixed up.

Ms Mrakovcic : Yes, I was just going to clarify the same point. I think that that description that I heard actually relates to the operation of the individual investor in affordable housing.

Senator RHIANNON: Thank you for clarifying that. I will need to read more on this. Is this in one of those summary documents that you have that you can provide us with a link to? I think I would like to go back and read it and then come back and put questions on notice.

Ms Mrakovcic : We can provide you with the detailed information on this.

Senator RHIANNON: Thank you very much. I know there are two reforms to negative gearing—investors can no longer claim travel to their property as a deduction and only the original investor can claim the depreciation on appliances. Will these reforms have any impact on house prices? Have you made an estimation with regard to that?

Ms Mrakovcic : These are largely seen as integrity measures.

Senator RHIANNON: What does that mean?

Senator Cormann: There was a view that in particular the deduction that was available for the cost of travel to an investment property was not being used for its intended purpose and that in all of the circumstances it should not continue as an allowable deduction. When it comes to depreciation for relevant plant and equipment on relevant properties, the judgement is that, if you pay for it yourself, you depreciate it and, if you do not pay for it yourself, you do not depreciate it.

Senator RHIANNON: The capital gains tax discount has gone from 50 to 60 per cent. Has Treasury accounted for a possible inflationary effect on prices from this increase to the discount?

Ms Mrakovcic : Do you mean in relation to the costing?

Senator RHIANNON: To house prices. I am just trying to understand. You have made a decision, and it is quite a big decision. I think many people were expecting it to go the other way. You have increased it. On what basis have you increased it? What did you figure out it would do to the market?

Ms Mrakovcic : I go back to the point that the intention of the measure was to promote investment in affordable housing.

Senator Cormann: Again—and we went through this with you yesterday in Fiscal Group in some detail—the intention and the objective of the package overwhelmingly is to reduce housing affordability pressure by facilitating an increase in the supply of housing. We expect that an increase in the supply of housing will have the effect of reducing housing affordability pressure. We will of course monitor the effect of the policy measures moving forward and, if and as required, will make further judgements.

Senator RHIANNON: That did not really give us much detail, Minister.

Senator Cormann: That is because it is very difficult to make the sorts of assessments that you are seeking. You are essentially asking us for a theoretical assessment of what will happen in a market where there are a lot of moving parts. That is not a straightforward proposition.

Senator RHIANNON: I think that is why the foundation of your affordable housing package is sand at the moment, as we found out yesterday.

Senator Cormann: I disagree. The foundation is to facilitate an increase in supply in order to reduce housing affordability pressures. It is the most substantial housing affordability package by a federal government ever.

Senator RHIANNON: Just because you declare it as 'housing affordability' does not mean it will deliver that. You have not been able to consolidate or detail how it is going to deliver it.

Senator Cormann: Let us go back to basic economics. Basic economics is that to the extent that you have an affordability issue it is because demand exceeds supply. If demand is higher than supply, prices will go up. If supply is higher than demand, prices will go down. If you want to make something more affordable in the context of strong and growing demand, you have to make sure that supply can keep up with demand, and that is precisely what the government is seeking to do through this package. The government is seeking to boost supply in order to take pressure off housing affordability in the context of strong demand in certain markets around Australia—I hasten to add, not all markets around Australia but certain markets around Australia.

Senator RHIANNON: Minister, you have just detailed there that, by increasing supply, prices will go down—your very words—and that price is keeping up with demand. Does Treasury think and do you think that these measures will affect prices?

Senator Cormann: You are actually again verballing me.

Senator RHIANNON: No, I am not. I am just repeating your lines back to you.

Senator Cormann: I will tell you precisely what I said. I said that, in a market where supply exceeds demand, prices will go down. That is basic market dynamics.

Senator RHIANNON: Yes, 101.

Senator Cormann: Exactly. What you then said was that I have somehow suggested that, because we are taking measures to increase supply, prices will go down. What I am suggesting to you is that, because we are increasing supply, we are reducing pressure on housing affordability. Obviously there continues to be both supply-side and demand-side parts of the equation. We believe that demand for housing will continue to be strong moving forward, but, to the extent that we can increase supply to help ensure that it can absorb that strong and growing demand moving forward, it will mean that housing affordability pressures will be reduced.

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