Helen Portillo-Castro
Housing affordability for both renters and purchasers has
declined significantly in recent decades, leading policymakers to have considered
the contributing factors through numerous inquiries.[1]
In the 2017–18 Budget, the Government proposes a number of
measures to address this social and economic issue. Broadly speaking, the
Government’s three-pronged approach seeks to improve the supply of housing,
including affordable housing, to support first home buyers and dampen demand
from domestic and foreign investors.
There are over 12 interrelated measures in the Government’s
housing affordability package.[2] This brief focuses on
those taxation measures with the greatest impact on revenue and expenditure,
and measures that may represent a policy shift in relation to superannuation. A
related Budget Review article, ‘Social Housing and Homelessness’, explains
the measures that provide mechanisms for investment in the social housing
sector.[3]
Changes to tax arrangements and
deductions
The share of new housing finance flowing to investors has
increased over recent years, as illustrated in Figure 1. Increasing investor
involvement in the market is widely considered to be a driver in increasing housing
prices in some geographical markets.[4]
Figure 1: Share of new housing finance for dwellings, 1991–2017
Source: Australian Bureau of Statistics (ABS), Housing finance, Australia, March 2017, cat. no. 5609.0, Table 11.
Note: includes re-financing.
The Treasurer has announced several measures to increase the
tax burden on residential property investors and to reduce the incentive for
foreign investors to purchase residential property in Australia. The aggregated
projected revenue from these measures is in excess of $1.3 billion over
the forward estimates.[5]
Proposed restrictions on foreign
investors
Currently, there are several
restrictions on foreign ownership of residential property in Australia. The
Reserve Bank of Australia states that ‘the limited and partial data available
from the Foreign Investment Review Board (FIRB) suggest that approvals for all
non-residents applying to purchase residential property have increased
substantially of late’.[6] Foreign investment
approvals in real estate increased from 11,668 approvals in 2012–13 to 40,141
in 2015–16.[7] More than three-quarters
of approved FIRB applications were for housing stock valued at less than
$1 million.[8]
The existing system for
new dwelling exemption certificates, administered by the FIRB, ‘act as
pre-approval’ for property developers to sell new dwellings in a specified
development to foreign investors. The Government proposes to limit foreign
ownership of dwellings in new developments by introducing a new condition to
the existing certification scheme. From Budget night, the certificates will
include a 50 per cent cap on foreign ownership in multi-storey
development projects that have obtained development approval from the relevant
government authority.[9] This measure has no
revenue impact in the forward estimates, but is to ‘ensure a minimum proportion
of developments are available for Australians to purchase [and to send] a clear
message that the Government expects developments to increase the housing stock
for Australian purchasers’.[10]
The Government also
proposes to place a charge on vacant property ‘equivalent to the relevant
foreign investment application fee’ that will be levied 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’.[11]
Where otherwise vacant properties are made available for rent, this is expected
to increase supply in the private rental market.[12]
The measure is expected to raise $16.3 million in revenue over the forward estimates.
The Budget includes several changes to increase the rate of
capital gains tax (CGT) faced by foreign investors and temporary tax residents.[13]
This is projected to raise $581 million over the forward estimates.
Reducing allowable deductions for property
investors
The Treasurer has announced restrictions on the deductions
that property investors can claim. The following changes are expected to
increase revenue by $800 million over the forward estimates:
- From 1 July 2017, investors will be able to claim ‘plant and
equipment depreciation deductions’ only if they are actually incurred. This measure
is intended to prevent items ‘being depreciated by successive investors in
excess of their actual value’, and is expected to increase revenue by $260 million
over the forward estimates.[14]
- From 1 July 2017, travel expenses related to ‘inspecting,
maintaining or collecting rent for a residential rental property’ will no
longer be deductible. This measure is expected to increase revenue by $540 million
over the forward estimates.[15]
The Australian Tax Office
publishes data on the number of individuals claiming certain deductions
associated with their rental income. In 2014–15, travel expenses reported in
individual rental property schedules comprised $456 million, while $2.6 billion
in ‘plant depreciation’ was reported (comprising depreciating assets such as
stoves and air conditioners).
Measures affecting superannuation
Under the proposed budget measures
related to housing affordability, both younger and older Australians will be eligible
to use the amount of their superannuation derived from voluntary superannuation
contributions differently.
Saving for a deposit for a first
home—addressing the ‘deposit hurdle’
First home buyers represent a smaller proportion of the
market than other purchasers seeking home loans, as illustrated in Figure 2.
Figure 2: First home buyer finance
commitments, percentage as a total of all new housing finance
Source: ABS, Housing finance, Australia, March 2017, cat. no. 5609.0, Table
9a.
First home buyers are in different
position from established home owners, who typically have sufficient equity in
their homes and do not need additional money for a deposit. As house prices
rise in some places, and as lenders tighten lending requirements, including
minimum deposits, the amount required by first home buyers increases. The
challenge of accumulating a deposit has become known as the ‘deposit hurdle’.[16]
The First Home Super Saver Scheme introduced in the Budget
‘to encourage home ownership’ is intended to address this financial barrier.[17]
Under the proposal, first home buyers will be able to withdraw voluntary
superannuation contributions made after 1 July 2017, in order to contribute to
a deposit for a first home. Withdrawals can be made from 1 July 2018, up to a
limit of $30,000, and will be taxed at an individual’s marginal rate, less 30
per cent. The measure is expected to cost $250 million over the forward
estimates.
An earlier policy to support first home buyers, the First
Home Saver Account (FHSA), was introduced in 2008, and provided concessional
savings and government co-contributions. Banks criticised FHSAs because of the
additional administration involved, and FHSAs were closed in 2015 after lower
than expected take-up.[18]
Encouraging downsizing: tax
treatment of assets
The Budget introduces a scheme that allows individuals over
65 to make non-concessional contributions into their superannuation from the proceeds
from the sale of their home. This is intended to reduce ‘a barrier to
downsizing for older people’, to ‘enable more effective use of the housing
stock by freeing up larger homes for younger, growing families’.[19]
The measure will apply from 1 July 2018. The contribution will be capped at
$300,000 per person (whether a person is partnered or not) and be exempt from tests
otherwise applicable to non-concessional contributions.[20]
The measure will come at a cost to revenue of $30 million over the forward
estimates.
The 2013–14 Budget provided for a pilot to incentivise
downsizing through a means test exemption for age pension recipients.[21]
This pilot never commenced, however, due to a reversal of the funding in the
subsequent 2014–15 Budget as a result of a recommendation from the National
Commission of Audit.[22] The Government cited a
lack of evidence that the measure would achieve its objective.[23]
Commentary prior to the release of this year’s Budget pointed to evidence which
shows that non-financial considerations are more significant than financial
barriers to downsizing among older Australians.[24]
Other measures in the housing
affordability package
The Treasurer has announced a range of other measures to
increase housing supply. These include:
- encouraging managed investment trusts (MITs) to ‘acquire,
construct, or redevelop affordable housing to hold for rent’.[25]
MITs ‘allow investors to pool their funds to invest in primarily passive
investments and have them managed by a professional manager’.[26]
MITs must derive 80 per cent of their assessable income from affordable
housing, and the housing must be available for rent for at least 10 years[27]
-
increasing the capital gains tax (CGT) discount for affordable
housing—that is, housing rented to low-to moderate-income tenants at below-market
rates through a registered community housing provider. Investors will be
eligible for a higher CGT discount of 60 per cent (instead of the standard
50 per cent discount) when the investment is held for three years. Individual
investors who are Australian residents will be eligible for a CGT discount
above 60 per cent when placing their investment through an MIT[28]
- trialling incentive payments under the Western Sydney City Deal,
‘to support planning and zoning reform’.[29] The amount of funding
under the Western Sydney City Deal will depend on its final form, and the
incentive payments that are made.
- establishing a National Housing Infrastructure Facility (NHIF) to
provide financial assistance to local government from 2018–19 ‘for
infrastructure that supports new housing, particularly affordable housing’.[30]
An initial $118 million will come from the Contingency Reserve to fund
grants and ‘the fiscal balance impact of concessional loans’.[31]
The NHIF proposal includes an unquantified revenue impact
tied to interest on concessional loans and is contingent on the establishment
of the National Housing Finance and Investment Corporation, which will also
administer the housing bond aggregator, an explanation of which can be found in
the Budget Review article on ‘Social Housing and Homelessness’.
Responses
Economists
Economists have questioned whether this package of measures
will have a significant impact. The Grattan Institute described the package as
‘a grab-bag of “easy solutions”’, and argued that ‘a few of them sound good;
fewer still will make a difference’.[32] KPMG chief economist Brendan
Rynne said that ‘it’s not [enough]’, and argued that other tax changes would be
more effective, including reducing the CGT discount from 50 to 25 per cent.[33]
Economist Saul Eslake supported some of the supply measures targeting
affordable housing, but argued that overall, the package ‘won’t make a huge
difference’.[34]
Industry and other stakeholders
The Australian Council of Social Services welcomed what it
called ‘first steps to address housing affordability’, but argued that ‘the
extension of super tax breaks to people buying a first home or downsizing is a
backward step that will increase house prices and waste public revenue’.[35]
The Property Council of Australia supported the package in
general, but argued that ‘the initiatives targeting foreigners will damage
Australia’s reputation and will do nothing to help housing affordability’.[36]
The Housing Industry Association described the ‘focus on
housing’ as ‘an important step in addressing the complex housing affordability
challenge’, but argued that restrictions on foreign investors would reduce
investment.[37]
[1].
Australian Bureau of Statistics (ABS), Housing
occupancy and costs, 2013–14, cat.no. 4130.0, 16 October 2015. See also M Thomas and A Hall, ‘Housing affordability in Australia’, Briefing book: key issues
for the 45th Parliament,
Parliamentary Library, Canberra,
2016, pp. 86–89; T Dale, ‘Housing
affordability and home ownership: previous inquiries and reports’,
FlagPost, Parliamentary Library blog, 29 March 2017.
[2].
These measures are entitled as ‘Reducing pressure on housing
affordability’ combined with the following sub-titles and appearing in Australian Government, Budget measures: budget paper no. 2: 2017–18, 2017 in the following order: ‘affordable housing through
Managed Investment Trusts’; ‘annual charge on foreign owners of underutilised
residential property’; ‘capital gains tax changes for foreign investors’; ‘contributing
the proceeds of downsizing to superannuation’; ‘disallow the deduction of
travel expenses for residential rental property’; ‘expanding tax incentives for
investments in affordable housing’; ‘first home saver scheme’; ‘limit plant and
equipment depreciation outlays actually incurred to investors’; ‘restrict
foreign ownership in new developments to no more than 50 per cent’;
‘Western Sydney’; ‘a new National Housing and Homelessness Agreement’; ‘Social
Impact Investments’; ‘support for the Homes for Homes Initiative’;
‘establishment of the National Housing Finance and Investment Corporation’; and
‘National Housing Infrastructure Facility’. (There are additional measures that
a related but do not bear the same title, such as ‘Social Impact Investing
Market—trials’.)
[3].
M Thomas, ‘Social
housing and homelessness’, Budget review 2017–18, Research paper
series, 2016–17, Parliamentary Library, Canberra, 2017.
[4].
Investors in this context include established Australian households
with one or more residential investment properties. See, for example, J Yates,
‘Housing
in Australia in the 2000s: on the agenda too late?’, in H Gerard and J
Kearns, eds, The Australian economy in the 2000s, Reserve Bank of
Australia (RBA) conference papers, RBA, Sydney, December 2011. Investor
activity is not considered in terms of cause and effect in relation to house
prices, but rather as an amplifier to underlying supply and demand dynamics,
particularly in major cities: see P Lowe (Governor, RBA), Household
debt, housing prices and resilience: speech to the Economic Society of
Australia (Queensland) business lunch, Brisbane, media release,
4 May 2017.
[5].
The budget figures in this brief have been taken from the following
document unless otherwise sourced: Budget measures: budget paper no. 2: 2017–18, op.cit.
[6].
RBA, ‘Box B: Chinese demand for Australian property’, Financial Stability Review, RBA, April 2016.
[7].
Foreign Investment Review Board (FIRB), Annual
report 2015–16, FIRB, p. 34.
[8].
Ibid., p. 20. Unfortunately, there is limited publicly available
data on the proportion of the dwelling stock currently owned by non-residents:
estimates around proportion of new housing supply purchases are based on
freedom of information requests. See, for example, M Robin, ‘Chinese
buyers to prop up Australian housing market: Credit Suisse’, The Sydney Morning Herald
(online), 24 March 2017.
[9].
Budget measures: budget paper no. 2: 2017–18, op.cit., p. 31; see also FIRB, Residential real estate—new
dwelling exemption certificate, Guidance note 8,
updated 9 May 2017.
[10].
Budget measures: budget paper no. 2: 2017–18, op.cit., p. 31.
[11].
Ibid., p. 27.
[12].
Ascertaining an accurate estimate for vacant dwellings in relation to supply
of housing stock presents methodological difficulties: see, for example,
Australian Government, National
Housing Supply Council: Housing supply and affordability issues 2012–13,
Treasury, Canberra, 2013, pp. 119–24.
[13].
The primary test for being a resident or non-resident for tax purposes is
the ‘resides’ test. This test looks at a range of factors to determine whether
Australia is your usual abode, including intention of stay, location of assets
and family and business ties. In this context, the 2012–13 Budget removed the
50 per cent capital gains tax discount for non-residents on capital gains
accrued after 8 May 2012. Further detail, including links to guidance
notes, is available in FIRB, ‘Budget
2017 changes’, FIRB website.
[14].
Budget measures: budget paper no. 2: 2017–18,
op. cit., pp. 30–31.
[15].
Ibid., p. 29.
[16].
CoreLogic, Housing affordability report, CoreLogic Australia,
Sydney, December 2016.
[17].
Budget measures: budget paper no. 2: 2017–18,
op. cit., p. 30.
[18].
T Dale, ‘First
Home Saver Accounts scheme closure’, FlagPost, Parliamentary Library blog, 18 June 2014.
[19].
Budget measures: budget paper no. 2: 2017–18,
op. cit., p. 28.
[20].
This measure can be read alongside changes to non-concessional
contributions due to come into effect in the 2017–18 financial year in
Australian Tax Office (ATO), ‘Change
to non-concessional contributions cap’, ATO website, 5 May 2017.
[21].
Australian Government, Budget
measures: budget paper no. 2: 2013–14, 2013, p. 152.
[22].
Australian Government, Budget
measures: budget paper no. 2: 2014–15, 2014, p. 201; J Hockey
(Treasurer) and M Cormann (Minister for Finance), Our
response to the National Commission of Audit report, joint media
release, 13 May 2014.
[23].
K Andrews (Minister for Social Services), Budget
2014: delivering our commitments to Australian seniors, media release,
13 May 2014.
[24].
B Coates and J Daley, ‘Why
older Australians don’t downsize and the limits to what the government can do
about it’, The Conversation, 5 May 2017; see also B Judd
et al., Downsizing
amongst older Australians, Australian Housing and Urban Research Institute
(AHURI), final report no. 214, AHURI, Melbourne, January 2014.
[25].
S Morrison (Treasurer), Budget
2017: address to the ACOSS post-budget breakfast, Sydney, media
release, 15 May 2017.
[26].
Budget measures: budget paper no. 2: 2017–18,
op. cit., p. 26. See also, M Felsman, ‘Difference
between active and passive investing’, Investor Update, Australian
Securities Exchange newsletter, August 2016.
[27].
Ibid.
[28].
Ibid., p. 29.
[29].
Ibid., p. 142; see also S Morrison (Treasurer) and A Taylor (Minister for
Cities), Budget
2017: Western Sydney housing package: more homes in right locations,
media release, 16 May 2017.
[30].
Budget measures: budget paper no. 2: 2017–18,
op. cit., p. 170.
[31].
Ibid.; Australian Government, Portfolio
budget statements 2017–18: budget related paper no. 1.16: Treasury Portfolio,
p. 21.
[32].
J Daley and B Coates, 'Another
lost opportunity for housing affordability', Inside Story, 10 May
2017.
[33].
G Hutchens, ‘Budget
2017: Coalition’s housing package won’t fix affordability crisis, experts say’,
The Guardian (online), 10 May 2017.
[34].
E Alberici, ‘Saul
Eslake and Lenore Taylor dissect the 2017 federal Budget’, Lateline,
Australian Broadcasting Corporation (ABC), 9 May 2017.
[35].
Australian Council of Social Service, Welcome
change of tack in health education and housing, but vilification of people who
are unemployed continues, media release, 9 May 2017.
[36].
Property Council of Australia, Budget
tackles fundamentals of housing affordability, media release, 9 May 2017.
[37].
Housing Industry Association, Budget
is a step to housing affordability, media release, 9 May 2017.
All online articles accessed May 2017.
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