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Federal Budget Brief 2017-18

What does Scott Morrison’s federal budget mean for the real estate market and property investors? The  Property Council of Australia released its member briefing, which gave an excellent summary and analysis of key policies. You can read the briefing in its entirety, below:

Scott Morrison’s second budget delivers a substantial housing package, talks a big book on infrastructure and is predicated on an economic upswing in Australia and around the world.

On housing, the federal government is targeting supply and will pull levers to enlist the states to fix blockages. Incentives will be built into the Western Sydney City Deal, and the national housing agreement will make funding contingent on delivering concrete supply outcomes.

First home buyers will be able to accelerate savings towards a deposit by using their superannuation fund as a bank, but only for salary-sacrificed amounts. A superannuation-based downsizer incentive will also be put in place.

Plus the Government wants to seed institutional investment into affordable housing with a well-flagged bond aggregator scheme and MIT changes (which don’t go far enough in their current form).

The budget largely resists measures which would make affordability worse, but does repeat a foreigner blame game that is becoming far too common.

While there is a welcome focus on new metro lines in our cities, almost all of the mooted $10 billion in funding will be beyond the four-year forward estimates.

There are lots of welcome measures in this budget – including several red tape cuts we have been seeking – but the attacks on foreign investment are disappointing and we will be testing the fine print on several measures in coming days.

Fundamentally the budget (once again) relies on an economic growth upswing to kick in next year. Let’s hope they’re right (this time).

KEN MORRISON
Chief Executive
Property Council of Australia

 

2017 budget snapshot

KEY ECONOMIC DATA

  F2017 F2018
FORECAST
F2019
FORECAST
Economic Growth (real GDP) 1.75 % 2.75% 3.00%
Inflation (headline CPI) 2.00% 2.00% 2.25%
Employment Growth 1.00% 1.50% 1.50%
Underlying cash balance ($b) -$37.6 -$29.4 -$21.4
Net operating balance ($b) -$38.7 -$19.8 -$10.8


Housing affordability

New agreement with states and territories to boost housing supply

The Federal Government will continue to provide states and territories with $1.3 billion of funding each year to support the supply of new housing.  However, the current National Affordable Housing Agreement (NAHA) will be replaced with a new National Housing and Homelessness Agreement (NHHA).  The new agreement will have concrete requirements for states and territories to deliver on housing supply targets and reform their planning systems.

$1 billion to fund ‘micro’ City Deals to boost housing supply

The Government will establish a $1 billion National Housing Infrastructure Facility based on the program set up in the UK to work with states and territories to fund deals with local governments to remove infrastructure impediments to developing new homes and apartments on selected sites.  The scheme is described by the Treasurer as “micro” City Deals.

Surplus Commonwealth land to be released for housing

A new online register of under-utilised or surplus Commonwealth land will be created to identify opportunities for developers and the community to propose better use of the land, including for housing.

As a first step, the Commonwealth will release 127 hectares of surplus Defence land in Maribyrnong for housing.  This is projected to support up to 6,000 new homes less than 10 kilometres from the Melbourne CBD.

Encouraging seniors to downsize

The Government will allow a person aged 65 or over to make a non-concessional contribution of up to $300,000 ($600,000 for couples) to superannuation accounts from the proceeds of selling their family home, effective from 1 July 2018. The residence must have been owned for at least 10 years.

There will be no change to the age pension assets test or the transfer balance cap. According to budget papers, the existing voluntary contribution rules for people 65 and over, as well as the restrictions on non-concessional contributions for people with superannuation balances above $1.6 million, will not apply to these new contributions.

Assistance for first home buyers – salary-sacrifice super contributions

From 1 July 2017, first home buyers can contribute up to $15,000 per year (up to $30,000 in total) in voluntary contributions to their superannuation account, and withdraw the funds for a first home deposit.

Voluntary super contributions are concessionally taxed which is expected to act as an incentive to enable first home buyers to build savings more quickly for a home deposit.

This measure is expected to have a cost of $250 million over the forward estimates period and the ATO will be given $9.4 million to implement the measure.

Negative gearing deductions tightened

Negative gearing arrangements for property investments will remain, however, deductions will be tightened from 1 July 2017.

Deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential property investment will no longer be available – this is expected to raise $540 million over the forward estimates period.

Deductions for plant and equipment (eg. mechanical fixtures, dishwashers, ceiling fans etc) will also be limited to outlays actually incurred by the investor.  This measure is expected to raise $260 million over the forward estimates period.

Creation of new REIT asset class for “affordable housing”

The managed investment trust (MIT) tax regime will be expanded to enable MITs to invest in affordable housing.  The eligibility criteria includes:

  • At least 80% of the MIT’s assessable income must come from affordable housing
  • Housing must be provided to low to moderate income tenants with rent charged at a discount below the private rental market rate
  • Affordable housing must be available for rent for at least 10 year

If the 80% affordable housing income requirement is breached in a particular year, non-resident investors in the MIT will be liable to pay a 30% withholding tax rate on investment returns for that income year (as opposed to the 15% rate which is available for certain non-resident investors).

If the 10-year rental period requirement is not met for a property, any net capital gain arising on disposal of the property will be subject to a 30% withholding tax rate.

The measure will apply for income years starting on or after 1 July 2017.  The Government will provide $1.5 million to the ATO to implement the measure.

This will now be the focus of the Property Council’s new Build to Rent Roundtable which the National Board established last month.  Importantly, based on research commissioned by the Property Council, the requirement for 80% below market rental income is not expected to be economically viable and will not attract the required institutional investment.  The restriction of the new MIT asset class to “affordable housing” also represents a missed opportunity to facilitate a “build to rent” (or multi-family) asset class which would broaden housing choice for all Australians.

Higher CGT discounts for investors in affordable housing

From 1 January 2018, the CGT discount will be increased from 50% to 60% for Australian resident investors who elect to invest in qualifying affordable housing. To qualify:

  • housing must be provided to low to moderate income tenants
  • rents must charged at a discount below the private rental market rate
  • property must be managed through a registered community housing provider
  • investment must be held for a minimum of three years

The higher discount will also be available for resident investors investing in qualifying affordable housing MITs.

The measure is estimated to have a cost of $15 million over the forward estimates period.

Facilitate financing for affordable rental housing – bond aggregator model

A new National Housing Finance and Investment Corporation (NHFIC) will be established by 1 July 2018 to operate an affordable housing bond aggregator.

This is intended to provide long term, low cost finance to community housing providers for affordable housing projects by aggregating their borrowing requirements and issuing bonds to the wholesale market.

National Housing Supply Council

Disappointingly, the Budget did not allocate any funding to restore the National Housing Supply Council.

Foreign investors

The Government also announced a range of measures, described as housing affordability measures, which impact foreign investors – these are discussed below under the heading “International Investment”. These of course rarely do anything to improve affordability.

 


 

Cities and Infrastructure  

Western Sydney City Deal

The Western Sydney City Deal has adopted incentive-style payments to State and Local Governments (eight in total) to support planning and zoning reform, accelerate housing supply and deliver affordable housing outcomes in Western Sydney.

The Minister’s office has told us they see this as a pilot program to be replicated in other city deal regions where housing affordability is a major challenge.

The Property Council has championed the use of national competition style incentives to unblock housing supply and will continue to work with the Government to implement this approach in other jurisdictions.  In research commissioned by the Property Council, Deloitte Access Economics estimated a broader approach could boost the economy by $3 billion per annum.

SEQ City Deal

The budget commits to developing a city deal strategy for south east Queensland, indicating it may be the next focus of the Government’s City Deal program.

The Property Council has been collaborating with the Queensland Government and SEQ Mayors to investigate how a city deals model could work in the region, including the development of a strategic business case and definitive proof-of-concept to model options for specific projects. This partnership has set up the SEQ region to fully leverage this opportunity.

National cities agenda

The Federal Government’s support for cities is boosted with $23.5 million over four years to expand the capacity of the Department of Prime Minister and Cabinet to deliver the National Cities Agenda.

National rail program

The budget announces a $10 billion, ten year National rail program to help fund metro rail projects in our major cities.

This focus is very welcome, however only $600 million will be spent in the four year forward estimates period, and nothing until 2019/20. Many infrastructure business cases for these projects are not yet developed, and the budget also provides extra funding to finalise these.

Major infrastructure commitments

The new Western Sydney Airport and the Inland Rail Freight line are the headline infrastructure projects funded in this budget. Both the airport and inland rail will be partly financed through an equity injection by government.

Other signature commitments include:

  • $792 million for Perth Metronet
  • $30 million toward development of a business case for Melbourne Airport Rail Link
  • $20 million to progress business cases for faster rail connections between our major cities and their surrounding regional centres

A series of road projects in each capital city and state.


Stapled Structures

As announced by the Treasurer last week, Treasury’s review of stapled structures has been extended to the end of July.  The decision to extend the review is the right path that should provide certainty to industry and investors while ensuring that integrity of the tax system is maintained.

The Property Council has been working closely with Government throughout the consultation process and looks forward to co-designing a sensible solution to deal with integrity issues whilst maintaining the acceptable use of stapled structures for the property industry.


Tax

GST and residential property transactions

Ten per cent GST is currently payable on newly constructed residential properties.  This is ordinarily paid by the purchaser to the developer, and the developer is required to remit the GST to the ATO.

Government has stated that some developers are currently failing to remit the GST to the ATO.  From 1 July 2018, purchasers of newly constructed residential properties will be required to remit the 10% GST directly to the ATO as part of settlement.

This is expected to increase GST revenue by $660 million.

Further integrity measures for multi-nationals

The Government has announced further changes to the recently introduced multi-national anti-avoidance legislation (MAAL) to deal with corporate structures involving foreign trusts and partnerships to ensure the original policy intent of the law is achieved.

Government will also allocate funding to a campaign to raise public awareness on the range of tax integrity measures that currently exist to address multinational tax avoidance.


Capital markets and regulation

Government to review state of competition in the financial system

The Federal Government has tasked the Productivity Commission to review the state of competition in the financial system, as recommended by the Financial System Inquiry.

The Productivity Commission will look at how to improve consumer outcomes, the productivity and international competitiveness of the financial system and economy more broadly, and support financial system innovation, while balancing financial stability objectives.

The Inquiry will commence on 1 July 2017 and is due to report to the Government by 1 July 2018.

Extend APRA powers to non-bank lenders

The Australian Prudential Regulation Authority (APRA) will be given new powers over non-bank lenders. APRA will also be given powers to use geographically-based restrictions on the provision of credit where APRA considers it appropriate.

APRA will be given $2.6 million over four years to resource this expansion of its powers.  APRA will also receive an additional $28.6 million over the period to undertake new regulatory activities to support a stable, efficient and competitive financial system.

Incentives fund for states and territories to cut red tape for small businesses

The Government will provide $300 million over four years to incentivise states and territories to remove regulatory restrictions on small businesses and competition.

Reforms will be based on bilateral agreements to be negotiated with states and territories and builds upon the Government’s response to the Harper Competition Policy Review.


International investment

Increased fees for foreign investment approvals

The number of fee categories for FIRB approvals have been limited to three broad categories. The new fee categories now include not only developed commercial land, but also vacant commercial land. Currently vacant commercial land attracts a flat fee of $10,100 for all vacant land irrespective of the value. The changes in the Budget will raise FIRB approval fees for vacant commercial land greater than $10 million.

Category 1 – FIRB Fees for transactions of $10 million or below
– Reduced fees for transactions of $10 million dollars and below to $2,000 (reduced from $25,300 currently).

Category 2 – FIRB Fees for transactions of above $10 million
– Flat fee of $25,300. No change to fees for transactions above $10 million and up to $1 billion for developed commercial land. However, this represents a fee increase for vacant commercial land (increased from $10,100).

Category 3 – FIRB Fees for transactions of above $1 billion
– Increased fees for transactions above $1 billion to a flat fee of $101,500 (increased from $25,300 currently).

Restrict foreign ownership in new developments to 50%

The New Dwelling Exemption Certificate will be amended to cap foreign ownership in new developments at 50%.  This condition will be applied to applications made from Budget night.

Annual charge on foreign home owners who leave property vacant

The Government will introduce an annual charge on foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six 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, which starts from $5,000.

The measure will apply to all foreign investment applications from 7.30pm on 9 May 2017.  It is expected to raise $16.3 million over the forward estimates period and the ATO will be allocated $3.7 million to implement the measure.

This measure seems more designed to create a headline for the Government than deliver any real affordability outcome.

No CGT main residence exemption for foreign investors

Foreign and temporary tax residents will no longer have access to the CGT main residence exemption from 7.30pm on 9 May 2017.  Any existing properties will be grandfathered until 30 June 2019.

Expansion of capital gains tax withholding regime

The capital gains tax withholding regime, which was introduced in 1 July 2016 has been extended by:

  • increasing the withholding tax rate from 10% to 12.5%
  • lowering the threshold from $2 million to $750,000 which will significantly extend the number of properties subject to the regime.

Tightening of foreign resident CGT principal asset test

The Government will apply the CGT principal asset test on an associate inclusive basis from 7.30pm on 9 May 2017 for foreign tax residents with indirect interests in Australian real property.  This has been described as an integrity measure to ensure foreign residents cannot avoid a CGT liability by disaggregating their interests.

Changes to foreign investment rules

Following consultation with industry, the Federal Government has announced a range of amendments to the foreign investment regime which will have effect from 1 July 2017.

Importantly, this includes:

  • Fixing the sensitive land provisions to reduce unnecessary screening of commercial property transactions. The Property Council expects this proposed change is expected to address the concerns raised by industry in relation to the prescribed airspace provision and related provisions. Removing the current provision is expected to provide an exemption to commercial real estate transactions within proximity to airports. This will reduce the types of developed commercial property subject to the lower $55 million threshold for FIRB approval.
  • Treating failed off the plan settlements as ‘new’ dwellings for the purposes of developer exemption certificates. ‘New’ dwellings can be purchased by both foreign and local buyers. This formally confirms current government treatment of failed off-the-plan applications.

Industry welcomes these changes as they alleviate inadvertent technical issues and remove uncertainty and unnecessary complexity from Australia’s foreign investment framework.

Environment and energy

Snowy Hydro

The Government has committed to Snowy Hydro 2.0 with a 50% increase in generation capacity. To facilitate the expansion, the Commonwealth may acquire a larger share or outright ownership of Snowy Hydro which would remain in public hands. Funds received by the New South Wales and Victorian Governments would need to be reinvested in priority infrastructure projects.

Inquiry into retail electricity prices

The Australian Competition and Consumer Commission (ACCC) will undertake a review of retail electricity prices. The ACCC will produce a preliminary paper within six months, with the final report due by 30 June 2018. The inquiry will focus on how retailers’ margins and profitability compare to their costs and risks and consider any impediments to consumer choice.

Gas supply and affordability

The Government will provide $86.3 million over four years on a range of measures including $30.4 million for the Bioregional Assessments program to assess impacts from unconventional gas projects and future exploration for new reserves, $28.7 million to encourage responsible development of onshore gas for the domestic market. The Government will also commit $19.6 million to the Gas Reform Group to facilitate gas trading and encourage greater competition to relieve pressure on prices.

Energy efficiency and renewable energy

No new funding was announced for either the Australian Renewable Energy Agency (ARENA) or the Clean Energy Finance Corporation (CEFC). The Government has confirmed its commitment to a long-term plan informed by the Finkel Review into the future security of the national electricity market with the final report due mid-2017.


Government property assets and resources

National Capital Authority

The Government will provide additional funding in 2017-18 to enable the National Capital Authority to undertake essential maintenance of Commonwealth assets and for strategic investment in improved asset management systems.  The expenditure amount is not disclosed in the Budget Papers due to commercial-in-confidence sensitivities.

Additional resources for Treasury

Government has allocated $29.5 million over two years to Treasury to build capability on issues including taxation policy and forecasting of revenue, macroeconomic modelling and foreign investment.

An additional $16.9 million will be provided to Treasury and $5.2 million to the Office of Parliamentary Counsel over four years to ensure dedicated drafting resources are available to progress financial services and taxation reform legislation.