BILLS DIGEST NO. 43, 2017–18              17 October 2017

Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017 [and] First Home Super Saver Tax Bill 2017

Kali Sanyal and Helen Portillo-Castro
Economics Section

Date introduced: 7 September 2017

House:  House of Representatives

Portfolio: Treasury

Commencement: Various commencement dates between 1 July 2017 and 1 July 2018 as set out in the body of this Bills Digest.

Links: The links to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page.

The links to the First Home Super Saver Tax Bill 2017, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page.

Both Bills can be accessed through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at October 2017.

Glossary

Table 1: abbreviations and acronyms

APRA

Australian Prudential Regulation Authority

Capital gains tax

CGT

Commissioner

Commissioner of Taxation

FHSS determination

First home super saver determination

FHSS Scheme

First Home Super Saver Scheme

ITAA 1997

Income Tax Assessment Act 1997

ITAA 1936

Income Tax Assessment Act 1936

NANE

Non-assessable non-exempt

RSAR 1997

Retirement Savings Accounts Regulations 1997

SISA 1993

Superannuation Industry (Supervision) Act 1993

SISR 1994

Superannuation Industry (Supervision) Regulations 1994

TAA 1953

Taxation Administration Act 1953

Purpose of the Bills

This Bills Digest relates to two Bills.

The principal Bill is the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017 (Reducing Pressure on Housing Affordability Bill). Its purpose is twofold:

1.       the Reducing Pressure on Housing Affordability Bill establishes the First Home Super Saver Scheme (FHSS Scheme) by amending the Taxation Administration Act 1953 (TAA 1953), Income Tax Assessment Act 1997 (ITAA 1997) A New Tax System (Family Assistance) Act 1999 (FA Act), Child Support (Assessment) Act 1989 (CSA Act), Higher Education Support Act 2003, Income Tax Assessment Act 1936 (ITAA 1936), Social Security Act 1991, Student Assistance Act 1973, Superannuation (Government Co-Contribution for Low Income Earners) Act 2003 and the Veterans’ Entitlements Act 1986.

2.       the Reducing Pressure on Housing Affordability Bill amends the ITAA 1997 and the TAA 1953 to allow up to $300,000 from the proceeds of downsizing a main residence to be contributed to superannuation (‘downsizer contributions’).

The companion Bill is the First Home Saver Super Tax Bill 2017 (First Home Saver Super Tax Bill). Its purpose is to impose a tax on recipients of FHSS Scheme amounts if the person has not entered into a contract to purchase or construct their first home or recontributed the required amount into superannuation within a specified time.

These legislative measures give effect to the Government’s 2016–17 budget commitment to ‘provide incentives to improve housing outcomes’ for young Australians, and to reduce financial barriers for older Australians who may wish to sell homes that no longer meet their housing needs.[1]

Structure of the Bills

The Reducing Pressure on Housing Affordability Bill is divided into two Schedules that implement each of the two housing-related superannuation measures:

•          Schedule 1—amends the TAA 1953 to allow individuals who have made voluntary contributions to their superannuation account to be eligible to have those contributions and their associated earnings (up to a specified amount) released for the purposes of purchasing or constructing their first home.

•          Schedule 2—amends the ITAA 1997 to allow individuals aged 65 years or above to use the proceeds of one sale of their main residence to make contributions of up to $300,000 to their superannuation provider.

The First Home Saver Super Tax Bill imposes the FHSS tax where released voluntary contributions of superannuation have not been expended or recontributed to superannuation within the required time. It is in the form of a separate Bill to satisfy the requirements of section 55 of the Constitution that laws imposing taxation must deal only with the imposition of taxation, and any provision dealing with any other matter is of no effect.

Background

Housing affordability encompasses a persistent and complex set of issues before the Parliament.[2] Proposals from both major parties linking access to superannuation and home ownership date back to 1993, but none have been implemented to date.[3]

The current Government floated a proposal for early access to superannuation for first-home deposits in 2015 and,[4] in the 2017–18 Budget, announced the measures reflected in the Bills as part of a budget package entitled ‘Reducing Pressure on Housing Affordability’.[5]

2016–17 budget announcements

Announcing the FHSS Scheme, the Treasurer, the Hon Scott Morrison, articulated several arguments backing the measure, noting:

The Government will encourage home ownership by allowing future voluntary contributions to superannuation made by first home buyers from 1 July 2017 to be withdrawn for a first home deposit, along with associated deemed earnings.

Concessional contributions and earnings that are withdrawn will be taxed at marginal rates less a 30 per cent offset. Combined with the existing concessional tax treatment of contributions and earnings, this will provide an incentive that will enable first home buyers to build savings more quickly for a home deposit. Under the measure up to $15,000 per year and $30,000 in total can be contributed, within existing caps.

Contributions can be made from 1 July 2017. Withdrawals will be allowed from 1 July 2018 onwards. Both members of a couple can take advantage of this measure to buy their first home together. This measure is expected to have a cost to revenue of $250.0 million over the forward estimates period.

The Government will provide $9.4 million to the Australian Taxation Office to implement the measure.[6]

According to the Assistant Minister to the Treasurer, the Hon Michael Sukkar, for most people, the FHSS Scheme could grow savings in super to a greater extent than through a standard deposit account:

This is due to the concessional tax treatment […] and the higher rate of earnings often realised within superannuation. Many employees will be able to take advantage of salary sacrifice arrangements to make pre-tax contributions. Individuals who are self-employed or whose employers do not offer salary sacrifice will be able to claim a tax deduction on personal contributions, meaning savings effectively come out of pre-tax income. The amount of earnings that can be released will be calculated using a deemed rate of return based on the 90-day bank bill rate plus three percentage points (consistent with the shortfall interest charge). The First Home Super Saver Scheme will be administered by the ATO, which will determine the amount of contributions that can be released and instruct superannuation funds to make these payments accordingly. [7]

The First Home Super Saver Tax Bill is designed to introduce a tax that will discourage individuals from taking advantage of the FHSS Scheme by applying withdrawals for any purpose other than to purchase a first home or to recontribute the savings to their super.[8]

The downsizer contributions measure, announced in the same budget package, will:

… allow a person aged 65 or over to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home from 1 July 2018. These contributions will be in addition to those currently permitted under existing rules and caps and they will be exempt from the existing age test, work test and the $1.6 million balance test for making non-concessional contributions.

This measure will apply to sales of a principal residence owned for the past ten or more years and both members of a couple will be able to take advantage of this measure for the same home.

This measure reduces a barrier to downsizing for older people. Encouraging downsizing may enable more effective use of the housing stock by freeing up larger homes for younger, growing families.

This measure is estimated to have a cost to revenue of $30.0 million over the forward estimates period.[9]

The downsizing contributions will not be subject to existing caps or tests for other voluntary non-concessional contributions.[10]

Recent parliamentary consideration: related policy proposals

Following extensive consultation with industry and stakeholder groups during the 44th Parliament, the Senate Economics References Committee (Economics Committee) considered similar proposals in its 2015 report, entitled Out of Reach? The Australian Housing Affordability Challenge.[11] The Economics Committee noted recommendations from stakeholders that first home buyers should be allowed to draw on or borrow from their superannuation balances to contribute to a home deposit but did not recommend such a measure.[12] The report recommends that the ‘government investigate new policy settings that will address barriers to downsizing (or 'rightsizing') by retirees’.[13]

The recommendations in the Economics Committee report were not unanimous: the final report contains a dissenting report from government senators and additional comments from the Australian Greens and Senator Nick Xenophon.

To give context to the amendments proposed by the Bills which are the subject of this Bills Digest, the recommendations and dissenting views related to implementing policies for a first home buyers’ scheme and downsizing contributions are outlined below.

First home buyers’ scheme

The Economics Committee inquiry into housing affordability recommended against providing access to superannuation in order to fund a deposit on a first home:

While recognising the positive intent underlying such proposals, the committee believes providing first home buyers with access to their superannuation would significantly add to demand-side pressures, with the extra money available to first home buyers ultimately capitalised into higher housing prices. Moreover, such moves would leave Australian workers with less money at retirement, and more broadly compromise the integrity of Australia's retirement savings system.[14]

In their dissenting report, government senators did not support this recommendation.[15]

Home owners’ proceeds of sale contributions

The Economics Committee also canvassed views on the creation of a scheme to enable older Australians to contribute to their super balances through selling their main residence.

The Economics Committee recommended that ‘the government investigate new policy settings that will address barriers to downsizing (or ‘rightsizing’) by retirees, including schemes along the lines of the Housing Help for Seniors pilot’.[16] Government senators supported this recommendation in their dissenting report.[17]

Factors related to policy outcomes

There are a number of factors that may affect the incentives that the measures intend to create among the first home buyer demographic and home owners who have reached the preservation age;[18] in particular to the extent that the policy targets behaviours.

In 2015, the Productivity Commission found:

Broadly speaking, Australians are less financially literate in matters relating to superannuation and retirement planning than financial matters in general.[19]

The Financial Services Council produced a report that concluded those aged 18–34 are more focused on near-term goals, such as buying a house, and are generally disengaged in relation to the superannuation system.[20]

Financial considerations have been found to be a third-order factor in decisions about housing among older Australians, behind housing features and location.[21] The Council of the Ageing expressed a concern at their policy summit in June 2017 that there is an ‘inadequate supply of suitable housing for older people to downsize, while remaining in or close to their pre-existing community’.[22]

Committee consideration

Senate Standing Committee for Selection of Bills

In its report to the Senate on 14 September 2017, the Selection of Bills Committee recommended that the Bill not be referred to any Committee.[23]

Senate Standing Committee for the Scrutiny of Bills

In its report to the Senate on 13 September 2017, the Senate Standing Committee for the Scrutiny of Bills made no comment on the Bill.[24]

Policy position of non-government parties/independents

The Australian Labor Party (Labor) has stated it will not support the FHSS Scheme, on the grounds that it will undermine the purpose of superannuation.[25] There appears to be no stated Labor position on implementing the downsizing contributions measure as it stands. However, the Shadow Assistant Minister for Treasury, Matt Thistlethwaite, commented on the Coalition’s housing affordability policy more broadly:

… the 2017 Budget was a shambolic mess of measures that did nothing to address key drivers of housing affordability that are in the Commonwealths [sic] control, such as reform of negative gearing and capital gains tax concessions.[26]

At the time the measures in these Bills were announced in the Budget, the Leader of the Australian Greens, Senator Richard Di Natale, took the position that ‘fresh tax breaks to first-home buyers and baby boomers are going to further overheat the market and make housing less affordable’.[27]

Senator Nick Xenophon has, in the past, endorsed the idea that first home buyers should be able to access super for first home deposits.[28] In March 2017, the Senator reiterated that superannuation should be part of ‘the right balance of solutions’ in addressing housing affordability issues.[29]

Pauline Hanson’s One Nation has issued a policy statement that aligns with the intent of the FHSS Scheme but that would impose additional conditions on eligibility; such as an age threshold of below 38 in order to be eligible, and requirements that the funds be repaid in certain circumstances (for example, if the first home is sold).[30]

Position of major interest groups and commentators

Pre-budget submissions from interest groups advocated policy proposals akin to the budget measures.[31] General reaction to the budget package—and to these measures in particular—was mixed.[32]

Positions expressed on the provisions contained in the exposure draft legislation are discussed in the ‘Key issues and provisions’ section below.

Financial implications

Over the forward estimates period, the Treasury estimated that a total of $280 million revenue loss would occur due to the implementation of the two measures.

Table 2: financial impact of measures proposed by the Bill, 2016–17 to 2019–20 ($ million)

Measure

2016–17

2017–18

2018–19

2019–20

2020–21

First Home Super Saver Scheme

–(a)

-50

-60

-70

-70

Contributing the proceeds of downsizing to superannuation

–

–

..(b)

-10

-20

Total

–

-50

-60

-80

-90

(a) Nil.

(b) Not zero, but rounded to zero.

Source: Explanatory Memorandum, op. cit., pp. 3–4.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[33]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.[34]

Key issues—the FHSS Scheme

Some of the issues raised by stakeholders during the consultation on the exposure draft legislation related to the introduction of the FHSS Scheme are examined in this section, followed by detail on key provisions of Schedule 1. The Bill is in largely similar terms to those in the exposure draft. Some sections have minor changes to provide clarity. Some significant differences are highlighted under the heading ‘Key provisions’.

While broadly supportive of the policy intent to promote home ownership and to address the deposit hurdle, some stakeholders have expressed reservations about the terms of the Bill.[35]

Consistency with broader superannuation policy

The objective of the FHSS Scheme is to assist first home buyers to save for a purchase by leveraging concessional tax treatment in the superannuation system. The FHSS Scheme will release savings from an individual’s superannuation account subject to a standard determination and procedural rules applied by the Commissioner of Taxation (Commissioner).

The Government’s Superannuation (Objective) Bill 2016 was introduced into the House of Representatives on 9 November 2016.[36] At the time of writing this Bills Digest, the Superannuation (Objective) Bill is awaiting further consideration by the Senate. The purpose of that Bill is to establish a legislative framework to guide the development of future superannuation policy.[37] The Superannuation (Objective) Bill was cited in a number of submissions[38] on the grounds that the FHSS Scheme is inconsistent with the goals of the proposed regulatory framework.[39] However, it should be noted that proposed subsection 5(3) of the Superannuation (Objective) Bill 2016 states that the Superannuation (Objective) Act (when enacted) cannot be used to interpret other Commonwealth laws. That being the case, any inconsistency would not appear to be relevant.

Industry representatives also cited the Superannuation Industry (Supervisory) Act 1993 (SIS Act) stating the FHSS Scheme is inconsistent with the sole purpose test stipulated in section 62 of that Act.[40] According to the Australian Prudential Regulation Authority, this test:

… [limits] the provision of superannuation benefits by regulated superannuation funds to a range of prescribed or approved retirement or retirement related circumstances. The test is the legislative expression of the retirement income objective which is the key rationale for superannuation savings.[41]

The Explanatory Memorandum to the Reducing Pressure on Housing Affordability Bill notes that the changes made by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulations 2017 will render FHSS Scheme withdrawals consistent with the sole purpose test as a payment made for an ancillary purpose in accordance with subsection 62(1)(b)(v) of the SIS Act.[42]

Concerns were also raised that FHSS Scheme withdrawals would effectively negate the cumulative effect of compound interest on super balances over decades. In addition it may ultimately increase house prices and put further the strain on the age pension.[43]

Proponents of linking superannuation to home ownership outcomes take a more complementary view of the policy objectives as ‘components of a retiree’s “nest egg” and not competing products’:

By buying earlier in life retirees have every prospect of having a higher quality on retirement and a larger ‘nest egg’ on downsizing.[44]

Administration and operation of the scheme

The operation of the FHSS Scheme commences from 1 July 2017, enabling individuals to make voluntary contributions from that date. From 1 July 2018, individuals can request that the Commissioner issue a release authority for FHSS contributions from superannuation—known as a first home super saver determination (FHSS determination).

The ability to effectively withdraw FHSS contributions from 1 July 2018 coincides with changes to Division 131 of the ITAA 1997 brought about through the enactment of the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016.[45] These provisions and related Regulations bring into effect changes to the standard determination and release rules that will also apply to the operation and administration of the FHSS Scheme.

Considerations particular to determining the release of a total, maximum amount under the FHSS Scheme include:

•          eligibility criteria with respect to individuals and financial contributions

•          limitations on eligible contributions (a $15,000 limit applies in any one financial year and a $30,000 limit applies to total contributions that can be eligible across all years)

•          distinction between voluntary concessional and non-concessional contributions with respect to existing caps and applicable discounts

•          the order in which concessional and non-concessional contributions are counted

•          the inability for contributions in respect of defined benefit interests or to constitutionally protected funds to  be released and

•          the method applicable to calculate associated earnings on releasable FHSS contributions.[46]

Some stakeholders used the example of the discontinued First Home Saver Account scheme to illustrate the potential administrative and operational impact on funds. A related concern was that the administrative architecture of the scheme could be optimised—through greater reliance on financial providers, for example—and does not sufficiently mitigate the risk of misapplication of released FHSS Scheme monies.[47]

Eligibility to participate in the FHSS Scheme

Eligible contributions for an individual are:

•          ‘voluntary’ employer contributions (such as a salary sacrificed contribution) as a concessional or non-concessional contributions and

•          contributions within the relevant concessional and non-concessional contribution caps.[48]

Participating individuals will also have to fulfil  conditions of the FHSS Scheme:

•          they are 18 years or over, and have not used the FHSS Scheme before and never owned residential property in Australia[49]

•          they will have 12 months after releasing the FHSS Scheme amount to sign a contract to purchase or construct residential premises (including vacant land to be built and occupied as a residence, but not a houseboat or motor home). The Commissioner may extend this period by up to 12 months[50]

•          they will need to occupy (or intend to occupy) the premises as soon as practicable as their main residence, and for at least 6 months of the first 12 months after it is practicable to do so[51]

•          they will have to notify the Commissioner within 28 days in the approved form after they enter into a contract to purchase or construct residential premises.[52] The failure to meet this condition is that amounts paid are to be re-contributed to superannuation.[53] Otherwise the person is liable for 20 per cent FHSS tax (due within 21 days of an assessment)[54]

•          failure to pay an amount of tax so assessed by the time it is due and payable, will oblige the individuals to pay a General Interest Charge (GIC) for each day in the period over which the amount is due and unpaid.[55]

Government support payments

An FHSS release amount will be excluded from the means tests as followed in other forms of government assistance to individuals, including social security payments.[56]

Tax treatment of released amounts

The amount released from an individual’s super account, may comprise three components:

•       85 per cent of concessional contributions (reflecting the 15 per cent contributions tax paid by the fund)[57]

•       non-concessional (after-tax) contributions[58] and

•       associated earnings.[59]

Accordingly, the non-concessional contributions in the released amount will be treated as non-assessable non-exempt earnings income (NANE) for the individuals.[60] Any amounts related to the individual’s FHSS-eligible concessional contributions, and the total associated earnings calculated in respect of any contributions, will be treated as assessable income for tax purposes.[61] The rate of tax associated with this part of released amount will, however, be at the individual’s marginal rate of tax but with a tax offset of 30 per cent:[62]

For example, a taxpayer on the 37% tax rate with an income between $87,000 and $180,000 would pay 7% (plus Medicare levy) on the withdrawn amount. Of course, the original contribution would have also been subject to the 15% contributions tax on its way into the fund.

The ‘associated earnings’ compound daily at the SIC rate (eg 4.73% for Jul–Sep 2017) from when the contributions are made up until the date the FHSS released amount is determined. Contributions will be deemed to have been made at the start of the month they are made (or 1 July 2017 for contributions during the 2017-18 start year). This will compound up until the date the released amount is determined.

To calculate contributions (and associated earnings) towards the annual and total FHSS contribution limits, ordering rules apply whereby earlier contributions will count before later ones. This will generally maximise the amount of associated earnings. However, within the same year any non-concessional contributions will be counted before any concessional contributions.[63]

Commissioner’s FHSS determination of release amount

Upon receiving a formal request by an individual with a declaration of eligibility to purchase or construct residential premises, the ATO will issue a first home saver super determination (FHSS determination) and release authority specifying the maximum amount to be released to the ATO.[64]

The Commissioner is required to withhold an amount of tax before releasing the FHSS amount to the individual. This is designed to assist the individuals in meeting any increased tax burden that they may face as a result of having a potentially larger amount included in their assessable income for an income year as a result of such amounts so released.[65]

Key provisions

The FHSS Scheme is guided by the provisions of a proposed Division 313 of the ITAA 1997 [66] and proposed Division 138 of the TAA 1953.[67] This section details the amendments to those tax laws and other existing legislation which have not been detailed above.

Part 1 of Schedule 1 adds Division 138 at the end of Part 3–20 in Schedule 1 of the TAA 1953. The new Division containing provisions that will determine the FHSS Scheme and underpin the operational arrangements of such scheme: determination of the scheme, determination of maximum release amount, treatment of amounts so released, and individual obligations with such released amounts.

Proposed subsections 138-10(1) and 138-10(2) of Schedule 1 to the TAA 1953 define the maximum amount that an individual can request to have released under the FHSS Scheme (the FHSS maximum release amount), as well as the operational mechanism behind such release. There are various components that are calculated in working out that release amount. These components are featured as concessional contributions, non-concessional contributions and notional earnings that are associated with each contribution. Most notably, ascertaining the tax applicable to a taxpayer after the amounts are released will depend on the amount of the concessional contributions and associated earnings that are covered by a FHSS determination.

Proposed subsection 138-10(4) of Schedule 1 to the TAA 1953 allows the Commissioner to amend or revoke a FHSS determination at any time before a release authority is issued under the FHSS Scheme.

Under proposed subsection 138-15 of the TAA 1953 individuals have recourse to review under the provisions set out in Part IVC of that Act, if they are dissatisfied with a FHSS determination by the Commissioner made in relation to them. The review rights are in addition to those already available in relation to excess concessional contributions determinations, excess non-concessional contributions determinations, and excess transfer balance determinations under the provisions of section 97-10, section 97-35 and section 136-15 of the TAA 1953, In such cases, the individual will have the opportunity to object to the determination, and provide the Commissioner with any additional information evidencing why the determined amount was incorrect’.[68]

Under proposed Subdivision 138-B in Schedule 1 of the TAA 1953 there are limits on the amount of contributions that may be eligible for release. The FHSS maximum release amount includes eligible non-concessional contributions, 85 per cent of the eligible concessional contributions, and associated earnings. According to the operative provisions, this ‘FHSS releasable contributions amount’ must be identified by the Commissioner in making a FHSS determination under the proposed section 138-25 and section 138-30 in Schedule 1 of the TAA 1953.

The determination of eligible contributions and the limit of the amount to be released under the FHSS Scheme is dealt with by proposed section 138-35 in Schedule 1 of the TAA 1953. The amount of contributions for an individual first home buyer that may be released is $30,000 maximum and $15,000 in a given financial year.[69] Proposed paragraphs 138-35(2)(a) (b) and (c) enumerate the eligibility criteria for the release of such an amount. These limitations ensure that contributions to a superannuation fund made by other entities in respect of a taxpayer will not be considered towards the release amount.

Proposed subsections 138-35(3) and (4) in Schedule 1 of the TAA 1953 establish rules that determine the maximum amount available to be released in a situation where an individual exceeds one of the contribution caps in a financial year. In such a situation, the excess amount will be ineligible to count towards the FHSS releasable contributions amount.

Proposed subsections 138-40(1) (2) and (3) in Schedule 1 of the TAA 1953 provide guidance as to the method of calculation of the associated earnings with the releasable contributions and the time period of implementing it. This is to allow the Commissioner to follow the provisions as part of the determination process of the FHSS Scheme.

Part 2 of Schedule 1 of the Reducing Pressure on Housing Affordability Bill makes consequential amendments to the ITAA 1997 and the TAA 1953 in order to implement the tax effects of the FHSS Scheme.

The FHSS tax has been designed to ensure that individuals who have neither acquired their first home nor recontributed an amount into superannuation, do not obtain any tax benefit by accessing FHSS Scheme.

Item 10 of Part 2 of Schedule 1 of the Reducing Pressure on Housing Affordability Bill inserts proposed section 290-168 into the ITAA 1997 so that an individual who notifies the Commissioner that they have made non-concessional contributions instead of entering into a contract to purchase or construct their first home, is not able to claim a deduction in respect of the non-concessional contributions to which the notification related.

Item 12 of Part 2 of Schedule 1 of the Reducing Pressure on Housing Affordability Bill inserts proposed Division 313 in the ITAA 1997 to determine the tax treatment of the scheme on individual taxpayers when they opt for FHSS Scheme. The new Division will operate in conjunction with Division 131 of the TAA 1953 that determines the FHSS Scheme.

Proposed subsection 313-20(1) of the ITAA 1997 provides for the treatment of concessional contributions and associated earnings that are identified in the FHSS determination to be included in an individual’s assessable income in the financial year in which the request to release the amount was made. However, proposed subsections 313-20(2) and (3) allow the Commissioner to make an adjustment by reducing the assessable income by any difference between the total amount that was actually released and the FHSS maximum release amount specified in the relevant determination, subject to the amount being not negative at any stage.

Proposed section 313-25 of the ITAA 1997 will entitle an individual under the FHSS Scheme to a non-refundable tax offset of 30 per cent of their assessable FHSS released amount.

Proposed subsections 313-35 (1) and (2) of the ITAA 1997 set out the requirements that an individual taxpayer must fulfil in relation to purchasing or constructing a house under the Scheme. The individuals will have to enter into a contract to purchase or construct a residential premise within 12 months of the time that their first amount was released for the purpose, with a provision that the Commissioner may extend the time period for entering into such contract by up to 12 months.

Proposed sections 313-40 of the ITAA 1997 require a person to notify the Commissioner, in the approved form, within 28 days, or such longer period as the Commissioner allows, after the person enters into the contract to buy or construct premises.

Proposed subsections 313-50(1) and (2) of the ITAA 1997 allow first home buyers to notify the Commissioner if they re-contribute an amount into superannuation because they could not get into a contract or build the house. The notification can only be made if the individual makes one or more non-concessional contributions during the period that they had to enter into a contract.[70] In addition, the total amount of their non-concessional contributions must be at least equal to their assessable FHSS released amount less any amounts that were withheld by the Commissioner.[71]

Proposed section 313-60 of the ITAA 1997 ensures that a person who is entitled to receive amounts under the FHSS Scheme is liable for first home super saver tax if they do not enter into a contract to purchase or construct their first home or recontribute the required amount into superannuation..

Clauses 3 and 4 of the First Home Super Saver Tax Bill impose the first home super saver tax at 20 per cent of an individual’s assessable FHSS released amounts.

Item 17 of Part 2 of Schedule 1 to the Reducing Pressure on Housing Affordability Bill inserts paragraph 155-5(2)(k) into Schedule 1 of the TAA 1953 to utilise the standardised procedures that are available under the provisions of Division 155 regarding making, amending and reviewing assessment.

Part 3 of Schedule 1 makes consequential amendments to a number of other statutes to synchronise the FHSS Scheme with the provisions of these Acts.

Schedule 2—contributing the proceeds of downsizing to superannuation

Background

Schedule 2 of the Bill implements the Budget 2017–18 measures that will allow people aged 65 or over to make additional non-concessional contributions up to $300,000 from the proceeds of selling their home from 1 July 2018.

Industry submissions on the exposure draft legislation were supportive of the measure, with some reservations that have been addressed in the Bill.[72] Issues noted in submissions that appear to remain are:

•       the measure would require individuals to seek financial advice given potential implications for age pension entitlements[73] and

•       indexation applicable to other super contributions caps is absent from the measure.[74]

The new special downsizing contribution cap has the following features:

•       the existing voluntary contribution rules for people aged 65 and older will not apply[75]

•       restrictions on non-concessional contributions for people with balances above $1.6 million will not apply[76]

•       will apply to a principal place of residence held for a minimum of 10 years[77]

•       members of a couple can contribute a total of $600,000 to superannuation through the downsizing cap[78]

•       the contribution will be supplementary to the existing contribution rules and concessional and non-concessional caps.[79]

The other important feature of the measure is that either the individual or their spouse must have owned the home for a minimum of 10 years up to the point of sale. If the person's spouse is not on the title with them, both can still make a downsizer contribution.[80] Caravans, houseboats and mobile homes are specifically excluded.[81]

A period of 90 days after the home changes ownership (generally the date of settlement) will be the window period when a person can make multiple downsizer contributions, provided that they do not exceed the $300,000 cap and meet all other criteria. ‘However, a person cannot make a subsequent downsizer contribution, even if they sell another qualifying house’.[82]

A person is not required to make any subsequent purchase of another dwelling after selling their home and making a downsizer contribution. This means that a downsizer can move into any living situation suitable for them, regardless of its size or cost.[83]

The ITAA 1997 creates two categories of superannuation contributions for taxation purposes: concessional and non-concessional. Concessional contributions are generally from either employer contributions or employee contributions upon which a deduction has been claimed. Non-concessional contributions are however made from after-tax income of an employee and are subject to a maximum cap.[84]

Examples

Helping George and Jane downsize

George and Jane, both retired and aged 76 and 69, sell their home to move into more appropriate accommodation. The sale proceeds are $1.2 million. They can both make a non-concessional contribution into superannuation of $300,000 ($600,000 in total), even though Jane no longer satisfies the standard contribution work test and George is over 75. They can make these special contributions regardless of how much they already have in their accounts.[85]

Helping John and Sarah downsize

John and Sarah, who are still working part-time at age 65, decide to sell the large family home after all the children move out. The sale proceeds are $1.4 million. They are both able to make a non-concessional contribution of $300,000 ($600,000 in total) into superannuation. This is regardless of how much they have in their accounts already. They may also be able to make additional contributions to their superannuation using the sale proceeds under standard contribution arrangements.[86]

Qualification as main residence

Under the existing provisions of the ITAA 1997 regarding capital gains tax, the qualifying condition by reference to the main residence capital gains tax (CGT) exemption (in whole or part) recognises that over the period that an individual owns a dwelling they may not always reside in that dwelling for certain reasons. ‘Main residence is not defined, and takes its ordinary meaning.’[87]

This suggests that for the purpose of this measure, owners can continue to treat a dwelling as their main residence even if they are absent from their main residence (for example, to travel, work or move into a retirement village). If the dwelling is used for income producing purposes, this absence is limited to six years. If not there is no time limit for absence.[88] In this respect, a downsizing contribution should be available for a home unless it was an investment property the person has never lived in as their main residence.

The qualifying condition by reference to main residence CGT exemption (in whole or part) means that a downsizer contribution will also apply in relation to land adjacent to a main residence (such as a garden up to two hectares). It will also apply to individuals with a legal or equitable interest or right or licence to occupy a dwelling.[89]

Social security implications

Under the existing provisions of superannuation law, the family home is exempt from the age pension assets test. Under the arrangements for downsizer contributions, any sale proceeds contributed to a superannuation fund will count toward the assets test. This being the case, it has been suggested that ‘a downsizer contribution will mainly be of interest to those who are already above the Age Pension assets test who have total super account balances above $1.6m’.[90]

In a recent analysis of issues contributing to Australia’s housing affordability problem, the Committee for Economic Development of Australia put forward a suite of recommendations; including that policymakers should ‘further relax rules around means testing of income received from downsizing in situations where it results in greater housing density’.[91]

Date of effect

The measure will only apply to home sales where the contract of sale is entered into (exchanged) on or after 1 July 2018. This means that any exchange of contracts occurring before 1 July 2018 will not be captured by the proposed downsizer provisions even though the settlement of the sale occurs on or after 1 July 2018.

Key provisions amending tax laws

The provisions in Schedule 2 to the Reducing Pressure on Housing Affordability Bill amend the ITAA 1997 and the TAA 1953 in order to provide for an operational framework for the downsizing to superannuation scheme.

Item 3 of Schedule 2 inserts proposed subparagraph 292-90(2)(c)(iiia) into the ITAA 1997 to exclude a downsizer contribution from being treated as a non-concessional contribution. This means it will not be counted towards an individual’s non-concessional cap. Item 2 of Schedule 2 inserts proposed section 290-167 into the ITAA 1997 to accord with this provision so that a contributing individual cannot claim a deduction for any such contributions.

Item 4 of Schedule 2 adds proposed section 292-102 to the ITAA 1997 to determine the criteria for a downsizer contribution. The criteria stipulates that to be eligible for the scheme an individual has to be aged 65 years or older, the contribution must be in respect of the proceeds of the sale of a qualifying dwelling of ten years residence in Australia, and the contribution has been made within 90 days of the disposal of the dwelling.

Item 5 of Schedule 2 is a consequential amendment which adds the definition of related spousal interest to subsection 995-1(1) in the ITAA 1997. Related spousal interest has the meaning given by subsection 292-102(4).

Item 6 of Schedule 2 adds item 11 to the table in subsection 355-65(3) in Schedule 1 of the TAA 53. Its effect is to authorise the Commissioner to notify the superannuation funds that received the downsizer contributions, to ascertain that the amount so contributed not to be treated as such if the individuals are found to be in breach of the criteria specified in section 292-102.

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[1].              M Sukkar, ‘Second reading speech: 'Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017’, House of Representatives, Debates, 7 September 2017, p. 9607.

[2].              M Thomas and A Hall, ‘Housing affordability in Australia’, Briefing book: key issues for the 45th Parliament, Parliamentary Library, Canberra, 2016, pp. 86—89; see also T Dale, ‘Housing affordability and home ownership: previous inquiries and reports’, FlagPost, Parliamentary Library blog, 29 March 2017.

[3].              For details, see T Dale, ‘Superannuation for housing deposits and the “deposit gap”’, FlagPost, Parliamentary Library blog, 4 April 2015.

[4].              J Hockey (Treasurer), ‘Question: Superannuation’, House of Representatives, Debates, 16 March 2015, p. 2369.

[5].              Australian Government, ‘Part 2: expense measures’, Budget measures: budget paper no. 2: 2016–17, May 2017. For a summary of the budget package, see H Portillo-Castro, ‘Housing affordability measures’, Budget review 2017–18, Research paper, Parliamentary Library, Canberra, 19 May 2017, pp. 32–36.

[6].              Ibid.

[7].              M Sukkar, ‘Second reading speech: Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017’, House of Representatives, Debates, 7 September 2017, p. 9607.

[8].              M Sukkar, ‘Second reading speech: First Home Super Saver Tax Bill 2017’, House of Representatives, Debates, 7 September 2017, p. 9609.

[9].              Australian Government, Budget measures: budget paper no. 2: 2016–17, 9 May 2017, p. 28.

[10].              M Sukkar, ‘Second reading speech: Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017’, op. cit., p. 9608.

[11].              Senate Economics References Committee, Out of reach? the Australian housing affordability challenge, The Senate, Canberra, May 2015, pp. 174–76 and 194–98.

[12].              Ibid., p. 186.

[13].              Ibid., recommendation 17, p. xxvi.

[14].              Ibid., p. 186.

[15].              Coalition Senators, ‘Dissenting report by Government senators’, Dissenting report, Senate Economics References Committee, Out of reach? the Australian housing affordability challenge, op. cit., p. 453.

[16].              Senate Economics References Committee, Out of reach? the Australian housing affordability challenge, op. cit., p. 421.

[17].              Ibid.

[18].              Australian Taxation Officer (ATO), ‘Preservation of super’, ATO website, last modified 1 December 2015.

[19].              Productivity Commission (PC), Superannuation policy for post-retirement: supplementary papers, Research paper, 2, PC, Canberra, July 2015, p. 183.

[20].              Financial Services Council, Millennials’ engagement with superannuation, July 2017.

[21].              B Judd, E Lie, H Easthope, L Davy and C Bridge, Downsizing amongst older Australians, Australian Housing and Urban Research Institute (AHURI), final report, 214, AHURI, Melbourne, 7 January 2014.

[22].              Council on the Ageing, The forgotten faces of the looming housing crisis: older Australians, media release, 22 June 2017.

[23].              Senate Standing Committee for Selection of Bills, Report, 11, 2017, 14 September 2017, p. 4.

[24].              Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 11, 2017, 13 September 2017, p. 24.

[25].              K Gallagher (Shadow Minister for Small Business and Financial Services) and D Cameron (Shadow Minister for Housing and Homelessness), Sco-Mo at odds with tax office over first home super scheme, joint media release, 25 July 2017; see also J Chalmers (Shadow Minister for Finance), Transcript of interview with Rafael Epstein: ABC 774 Melbourne, media release, 19 July 2017.

[26].              M Thistlethwaite, Address to 2017 Social and Affordable Housing Symposium: Brisbane, 25 September 2017.

[27].              R Di Natale (Leader of the Australian Greens), Budget 2017: Australian Greens 2017 Budget, media release, 9 May 2017.

[28].              N Xenophon (Leader of the Nick Xenophon Team), Home affordability: a super idea, media release, 28 July 2014.

[29].              N Xenophon (Leader of the Nick Xenophon Team), The political will is lacking to fix our housing affordability crisis, media release, 9 March 2017.

[30].              Pauline Hanson’s One Nation (PHON), Home ownership for young Australians, PHON party document, 1 August 2016.

[31].              Real Estate Institute of Australia (REIA), Submission to Treasury, Pre-budget submission 2017–18, January 2017, p. 11; Housing Industry Association (HIA), Submission to Treasury, Pre-budget submission 2017–18, 19 January 2017, p. 9; National Seniors Australia, Submission to Treasury, Pre-budget submission 2017–18, n.d., p. 17.

[32].              Property Council of Australia, Budget tackles fundamentals of housing affordability, media release, 9 May 2017; Property Council of Australia, Downsizing super scheme a big step forward, media release, 10 May 2017; Urban Development Institute of Australia, Turnbull budget putting Australians' housing needs first, media release, 10 May 2017; Housing Industry Association, Budget is a step to housing affordability, media release, 9 May 2017; S Eslake, ‘Housing affordability and the 2017–18 budget: a missed opportunity’, John Menadue—Pearls and irritations, blog, 19 May 2017; Australian Institute of Company Directors (AICD), ‘Federal Budget 2017: Stephen Walters’ analysis’, AICD website, 9 May 2017; The Tax Institute, ‘Good Budget, Bad Budget: full of positive intentions but a missed opportunity for tax reform’, The Tax Institute website, 9 May 2017; KPMG, ‘Federal Budget 2017: A review of the Budget’s major business implications’, KPMG website, May 2017.

[33].              The Statement of Compatibility with Human Rights can be found at pages 40–41 and 61 of the Explanatory Memorandum to the Bill.

[34].              Parliamentary Joint Committee on Human Rights, Report, 10, 2017, 12 September 2017, p. 33.

[35].              Australian Government, ‘Consultation: housing-related superannuation measures’, Treasury website, 2017.

[36].              Parliament of Australia, Superannuation (Objective) Bill 2016 homepage, Australian Parliament website.

[37].              Explanatory Memorandum, Superannuation (Objective) Bill 2016, p. 11.

[38].              Financial Planning Association of Australia (FPA), Submission to Treasury, Consultation into housing-related superannuation measures, 4 August 2017, p. 2; Industry Super Australia, Submission to Treasury, Consultation into housing-related superannuation measures, 4 August 2017, p. 4; Australian Institute of Superannuation Trustees (AIST), Submission to Housing related superannuation measures, 4 August 2017, p.1.

[39].              The report of the Senate Economics Legislation Committee summarises various stakeholder positions on the intent and proposed implementation of a superannuation objective. See also K Swoboda, Superannuation (Objective) Bill 2016, Bills digest, 69, 2016–17, Parliamentary Library, Canberra, 2017.

[40].              FPA, op. cit.; Industry Super Australia, op. cit.; and AIST, op. cit.

[41].              Australian Prudential Regulation Authority (APRA), The sole purpose test: superannuation circular: no. III.A.4, APRA, Sydney, February 2001, p. 1.

[42].              Explanatory Memorandum, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017, pp. 11–12, paras 1.47–1.53.

[43].              FPA, op. cit., pp. 1–2.

[44].              REIA, op. cit., p. 11.

[45].              Explanatory Memorandum, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017, pp. 7–8.

[46].              Ibid., pp. 15–26.

[47].              AIST, op. cit.; Association of Superannuation Funds of Australia (ASFA), Consultation on the Housing-Related Superannuation Measures: Draft legislation, Submission to Treasury, 7 August 2017; Chartered Accountant of Australia and New Zealand (CAANZ), Housing related superannuation measures, Submission to Treasury, 4 August 2017, CAANZ website.

[48].              Explanatory Memorandum, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017, p. 17.

[49].              TAA 1953, Schedule 1, proposed section 138-10.

[50].              ITAA 1997, proposed paragraph 313-35(1)(a).

[51].              ITAA 1997, proposed paragraph 313-35(1)(c) and (d).

[52].              ITAA 1997, proposed section 313-40.

[53].              ITAA 1997, proposed Subdivision 313-D.

[54].              ITAA 1997, proposed Subdivision 313-E.

[55].              ITAA 1997, proposed sections 313-65 to 313-75; S Jones, ‘First Home Super Saver Scheme—Bills introduced’, Thomson Reuters, Weekly Tax Bulletin, 38, 8 September 2017, para [1334].

[56].              Explanatory Memorandum, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017, pp. 38–9.

[57].              TAA 1953, Schedule 1, proposed paragraph 138-30(1)(b).

[58].              TAA 1953, Schedule 1, proposed paragraph 138-30(1)(a).

[59].              TAA 1953, Schedule 1, proposed section 138-40.

[60].              ITAA 1997, note 2 to proposed subsection 313-20(3).

[61].              ITAA 1997, proposed Subdivision 313-B.

[62].              ITAA 1997, proposed section 313-35.

[63].              Jones, ‘First Home Super Saver Scheme—Bills introduced’, op. cit.

[64].              TAA 1953, Schedule 1, proposed section 138-10.

[65].              TAA 1953, Schedule 1, proposed section 12-460.

[66].              Inserted by item 12 of Part 2 in Schedule 1 to the Reducing Pressure on Housing Affordability Bill.

[67].              Inserted by item 1 of Part 1 in Schedule 1 to the Reducing Pressure on Housing Affordability Bill.

[68].              Explanatory Memorandum, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017, p. 13.

[69].              TAA 1953, Schedule 1, proposed paragraphs 138-35(1)(a) and (b).

[70].              ITAA 1997, proposed paragraph 313-50(1)(b).

[71].              Explanatory Memorandum, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017, p. 33.

[72].              For example, FPA noted a lack of clarity in the exposure draft about CGT treatment of an asset predominantly used for running a business but that includes a main residence (such as a farm). This is covered in the Reducing Pressures on Housing Affordability Bill at section 292-101(1)(b); see also the Explanatory Memorandum, p. 50, para. 2.46.

[73].              AIST, op. cit.

[74].              FPA, op. cit.; ASFA; op.cit. (The ASFA submission also raised the issue of indexation in relation to the FHSS Scheme caps.)

[75].              That is, the work test for 65–74-year-olds. ITAA 1997, section 290-165 prohibits contributions for those aged 75 and over. See also: Australian Taxation Office (ATO), ‘Contributions you can accept’, ATO website, last modified 23 March 2016.

[76].              ITAA 1997, section 295-387 contains the restriction.

[77].              ITAA 1997, proposed subsection 292-102(2).

[78].              ITAA 1997, proposed subsections 292-102(3) and (4).

[79]               Australian Government, Budget 2017: reducing pressure on housing affordability, fact sheet 1.5, 9 May 2017.

[80].              ITAA 1997, proposed paragraph 292-102(1)(c).

[81]               ITAA 1997, proposed paragraphs 292-102(1)(f).

[82]               Jones, ‘Downsizing a home: super contributions up to $300,000—Bill introduced’, Thomson Reuters, Weekly Tax Bulletin, 38, para [1335].

[83]               Ibid.

[84]               Explanatory Memorandum, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017, p. 44.

[85]               Australian Government, Reducing barriers to downsizing, op. cit.

[86]               Ibid.

[87].              Explanatory Memorandum, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017, p. 45.

[88]               ITAA 1997, section 118-145.

[89]               ITAA 1997, section 118-130.

[90].               S Jones, ‘Downsizing a home: super contributions up to $300,000—Bill introduced’, op. cit.

[91].              Committee for Economic Development of Australia (CEDA), Housing affordability, CEDA, Melbourne, August 2017, pp. 10–11.