Chapter 2
Issues
2.1
The National Rental Affordability Scheme (NRAS) attracted strong
support from a wide variety of submitters. The underlying reason given by
witnesses for their support was the significant undersupply of affordable
rental housing for those on low incomes. Making the basic shortfall worse is
the fact that in some markets, such as in New South Wales, it is pushing rent
up to 'a truly alarming level'.[1]
The Department of Families, Housing, Community Services and Indigenous Affairs
submitted that unmet demand in the construction of housing is running at about
30 000 dwellings per annum.[2]
2.2
Typical of the support offered in this regard was that of Mr Adam Farrar,
representing the New South Wales Federation of Housing Associations, when he
submitted that:
The introduction of NRAS responds to an absolutely critical
need...unlike the United States, we still have a significant undersupply problem,
and so supply initiatives are very important, and that is one of the things
that is so welcome about NRAS.[3]
2.3
This reasoning was elaborated on by Professor Julian Disney,
representing the National Affordable Housing Summit (NAHS), who submitted that:
NRAS provides the opportunity to substantially improve over time
the range of methods which are available to meet differing opportunities and
challenges for boosting the supply of low-rent housing. In particular, it
provides greater encouragement for the private sector to become involved,
including major institutional investors as the scheme develops. This arises not
only from the direct financial incentive but also from the improved
encouragement and identification of non-profit organisations with the necessary
skills and resources to manage low-rent housing for private investors.
...
It is also reasonable to expect the scheme to have a beneficial
impact on the supply of affordable housing by counteracting inflationary
pressures on rents in the lower-end of the market. This is due partly to the
overall increase in supply which it will generate and also to this increased
supply being rented substantially below market levels.[4]
2.4
The need to increase the supply of affordable rental accommodation,
particularly for those on low to moderate incomes, is widely accepted, as is
the belief that the NRAS will assist the situation. The committee was left in
no doubt that the part of the housing sector concerning itself with low to
moderate income earners considers the passing of the bills to be of utmost
urgency. Mr Adam Farrar explained that:
I do want to stress that it is absolutely essential that the
process that has begun isn't delayed. Our members have been very active in
taking up the opportunity, but that does mean entering into agreements, going
out and identifying opportunities, to acquire land, to acquire new properties
to bring into the marketplace, and they are very concerned that those
opportunities will be lost if there is any greater delay. A number of them have
all the problems that are associated with substantial holding costs.[5]
2.5
However, the committee identified a number of issues of concern. The
most significant of these was the anticipated effect of participation in the
scheme on the tax status of entities operating as charities, or public
benevolent institutions (PBIs).
The possible loss of charitable status
2.6
All witnesses who appeared before the committee representing the community
housing sector agreed that their biggest concern with the Scheme related to the
possibility that participation would jeopardise their charitable or PBI status.
While the PBI issue would primarily affect not-for-profit organisations, the
committee was also told that, although not-for-profit providers constituted
only about half of applicants to the first round, the continued participation
of for-profit entities in the program might also be affected by the PBI issue.
This was because at least some of the for-profit applicants have a
not-for-profit entity as a partner in their venture.[6]
2.7
The concern arose from a position taken by the Australian Taxation
Office (ATO), summarised by Ms Carol Croce as follows:
The ATO have indicated that any organisation with charitable
status will seriously jeopardise that status if they participate in NRAS. They
have further indicated that organisations such as consortiums that participate
in NRAS will not be endorsed as charitable organisations. Furthermore—and this
is one that sent chills down the spine of the sector—participation in NRAS may
cause the ATO to heavily scrutinise all of the activities of a participating
not-for-profit organisation, not just those that pertain to participating in
NRAS. The ATO have indicated that some of the current activities that our
community housing organisations are involved with may no longer satisfy this
test for charitable purpose.[7]
2.8
The rationale behind the ATO's position is that the Scheme aims to
assist not only low income earners, but also people on moderate incomes. In
this way, the ATO argues that participation by a charitable organisation in
NRAS might fall foul of the 'sole purpose test', which requires that
organisations holding PBI status have as btheir sole purpose the provision on
charity.
2.9
The Community Housing Federation of Australia drew attention to the fact
that the Scheme defines low and moderate income levels in a way that might be
inconsistent with other relevant schemes. The Federation pointed out that the
threshold used to define low income households[8]
for the purposes of the Commonwealth-State Housing Agreement (CSHA), fell within
the relevant income threshold of NRAS.[9]
That is, some people who fall outside income eligibility limits under NRAS
would be considered low income earners under the CSHA. The Federation went on
to argue that:
It would appear that providing housing to households whose
income falls within the CSHA low income measure would meet the test for charitable
purpose without concern to the ATO. Providing housing to households with
incomes higher than the CSHA levels (but within NRAS maximum levels) does not
alter the charitable purpose of the organisation... [10]
2.10
The committee consistently heard from community housing organisations
that the Scheme would attract few if any participants from the sector should
the retention of PBI status not be guaranteed. Mr Farrar and Ms Croce agreed
that the Scheme would be 'dead' if the PBI issue remains unresolved.[11]
2.11
On 12 November the Treasurer, Hon. Wayne Swan MP, announced an amendment
to the Extension of Charitable Purpose Act 2004 to expand the definition
of charitable purpose to include participation in the NRAS by an organisation
holding charity status. The definition of charitable purpose would be extended
only for the first 2 years of the Scheme's operation, pending the outcome of
broader reviews into the taxation system currently underway.[12]
The committee anticipates the amendment will address the primary concerns expressed
by witnesses in relation to the possible loss of PBI status, and provide the
necessary certainty for investment in the Scheme to commence.
Other issues
Value for money: is the Scheme the
best way to achieve affordable rental housing outcomes?
2.12
The committee was interested to hear the perspectives of a number of
witnesses on the extent to which the Scheme makes best use of public resources
to achieve its aims. Specifically, the committee queried the fact that, on
average, a landlord would receive significantly more annual benefit under the
Scheme than would be foregone under the requirement that rent be discounted by
20 per cent.
2.13
The committee heard that the most obvious alternative to the
introduction of the Scheme, to expand the current Rental Assistance Scheme,
would have a number of drawbacks. These included vast expense, a lack of
targeting, and a significant risk that rental charges would rise sharply. Perhaps
most importantly, such a move would not resolve the issue of undersupply.[13]
2.14
However, the ability to leverage private investment into low-end rental
housing lies at the heart of the Scheme. Mr Adrian Pisarski explained it this
way:
...[I]f you wanted to build, for example, 100 000 properties of
public housing based on current figures in terms of the average cost of public
housing units, you would be looking at direct government expenditure of
something like $30 billion or more. It might even be as high as $50 billion by
the time you deliver things in remote areas as well. Compared to that, the investment
in NRAS is a very modest investment but will leverage the enormous amounts of
money when it starts to work really properly. I just wanted to make the point
that compared to direct investment, for example, in public housing this is a
very efficient use of government money even if we do not get the stock
permanently. But to get it permanently would cost a level of support that we do
not think governments really have an appetite for at this point in time. I just
wanted to put that comment on record as well.[14]
Enforceability
2.15
As outlined in chapter 2, tenant eligibility rests primarily on
household income in defined circumstances. The Department submitted that
landlords would be required to check on tenant eligibility annually but that no
penalties (other than returning any relevant benefits) apply to landlords who
fail to report accurately on tenant eligibility.[15]
This raises two primary concerns for the committee. The first concern relates
to the lack of a deterrent mechanism for landlords who, in an attempt to fill
vacancies and minimise compliance costs, are less than vigilant in their
assessment of tenant eligibility.
2.16
The second concern relates to the situation in which landlords may be placed
by dishonest tenants. The committee heard that no power exists for landlords to
require tenants to produce income documentation. This renders the landlord
potentially liable to return to the ATO any benefit they received under the
Scheme, notwithstanding their own honesty and diligence. The committee has
become aware that detailed program guidelines have been made available to
applicants for the first round, and that these may address this concern. The
committee would simply raise the concern as a matter for possible further
consideration when the Scheme is reviewed following the second tranche of
allocations.
Adequacy of review arrangements
2.17
The Explanatory Memorandum describes an intention to conduct a
post-implementation review of NRAS to test whether there is scope for
simplification or reduction in the administrative burden associated with it,
whether there are evolving issues of non-compliance, and whether the Scheme is
adequately focussed on those who would otherwise be under rental stress.[16]
2.18
A representative of the Department elaborated on plans for the review at
the committee's hearing, submitting that it was slated to begin at the
conclusion of round two of the Scheme, and would evaluate the public process
and hear from all stakeholders including tenants.[17]
2.19
The committee is encouraged by plans for a comprehensive evaluation of
the Scheme, which Professor Disney was at pains to point out would require
regular adjustment to respond to prevailing conditions.[18]
The committee predicts Professor Disney's prediction will be borne out, and
urges the Department to review the Scheme thoroughly and systematically, and to
respond to findings in a dynamic and timely manner so as to keep the Scheme
efficient and effective over its term.
The need to moderate targeting
2.20
The committee's terms of reference charge the committee with inquiring
into whether NRAS targets its efforts to those most in need. As discussed in a
preceding section, while the Scheme is clearly designed to assist people in
need, it is not directed solely at those on low incomes, but also purports to
offer assistance to moderate incomes earners.
2.21
The National Affordable Housing Summit argued against targeting the
program too tightly. It submitted that:
[the Scheme] needs to learn lessons from the 'over-targeting' of
government housing which has aggravated poverty traps and work disincentives,
created dysfunctional and stigmatised communities and reduced the
cost-effectiveness of housing provision. Accordingly, while the scheme should
make a substantial contribution to the task of housing people in the deepest
distress it should not focus solely or overwhelmingly on them and thereby tend
to entrench their disadvantage. A social mix of tenants also increases the
attractiveness for investors and reduces the necessary size of public subsidy
per dwelling.[19]
2.22
While recognising the need to deploy scarce resources effectively and
efficiently, the committee sees merit in this argument, and trusts that the
Government will carefully consider the ongoing level of targeting when the
Scheme is reviewed at the end of round two.
Conclusion
2.23
The committee is under no illusion that the Scheme will be an instant,
or entire, fix. Indeed, it is clear from the evidence that a medium to long
term approach will be required for institutional investors to become
substantially involved, partly because of the need to establish administrative
procedures but also so as to allow investment through the NRAS to be integrated
with existing corporate investment strategies.[20]
Even should institutional investors be drawn to the Scheme in great numbers, it
is clear from the evidence that NRAS will not in and of itself solve the
housing shortfall, and nor was it designed to. Professor Julian Disney explained
the rationale behind the scheme this way:
The experience of a broadly similar scheme in the United States
clearly shows that it can and needs to develop momentum over time. When we
originally proposed this scheme we had really quite modest projections for what
could be achieved in the first five years or so. We also did not believe that
it was realistic to expect major institutional investors and developers to come
in before the first two years or so. That was one reason why we proposed that,
and the government has adopted a broadly similar approach of an establishment
phase of two years and then an expansion phase. The scheme needs to be bedded
down in the establishment phase to get some of the basic administrative
arrangements and legislative arrangements worked through. Then we can commence
procedures for growing it in the expansion phase and getting institutional
investors and developers involved. But it would be quite unrealistic, we
believe, to expect them to come in in the first year or two, although one needs
to start developing their interests towards perhaps the end of the first year.
I will come back in a moment to how that might be done.
Broadly speaking again, we feel the scheme has the essence of
what is necessary to achieve greater institutional investment. It is important
to bear in mind that it would be unrealistic and unaffordable to expect to
attract investors and developers for all parts of Australia to provide fully
affordable housing for all possible tenants. It would really be a mistake to
try to pitch the scheme in that way. The scheme is an attempt to try to
contribute in a substantial way over time to sharing the load of this problem
of unaffordable rent. It is not meant to work everywhere under all
circumstances for everyone.[21]
2.24
However, the committee is convinced that the Scheme will serve the
purpose of efficiently and effectively supplementing the supply of affordable rental
housing stock in Australia. Any residual matters of concern raised by witnesses
during the hearing, and by the committee in this report, can be adequately
dealt with in the course of the post-implementation review of the Scheme to
take place after the announcement of the second tranche of allocations. On
balance, the committee considers that its concerns do not warrant further
delaying the introduction of the Scheme, and therefore recommends the bills
giving effect to it be passed by the Senate.
Recommendation 1
2.25
The committee recommends that the Senate pass the bill.
Senator Claire
Moore
Chair
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