With housing prices remaining in the spotlight and amidst the constant calls for government action, the federal government announced in its 2017-18 Budget that it would provide an additional incentive for investment into affordable housing by extending the operation of the managed investment trust (MIT) regime and increasing Capital Gains Tax (CGT) discount available to Australian tax resident individual investors.
The Managed Investment Trust (MIT) regime
Under the current law, the Australian Taxation Office (ATO) has generally taken the view that investment in residential property is active, with a primary purpose of delivering capital gains from increased property values, and therefore taxed on income at a 30 per cent rate as it is not eligible for the MIT tax concessions which apply to passive investments only.
Consistent with current MIT withholding tax rules, non-resident investors who invest in these MITs from countries with which Australia has a recognised exchange of information arrangement, will generally be subject to a concessional 15 per cent final withholding tax rate on investment returns, including income from capital gains. Resident investors in these MITs will continue to be taxed on investment returns at their marginal tax rates. Income from capital gains will be eligible for the increased CGT discount of 60 per cent, where applicable.
MITs must hold, and make available for rent, affordable housing assets for at least 10 years. If these assets are held for a period of less than 10 years, non-resident investors can still receive the concessional 15 per cent final withholding tax rate on investment returns, but will be subject to a 30 per cent final withholding rate on the proceeds of any capital gains. Moreover, MITs must ensure that at least 80 per cent of their income is derived from affordable housing in an income year. Failing that, non-resident investors will be subject to a 30 per cent final withholding rate on all investment returns for any year this requirement is not met.
Increasing Capital Gains Tax (CGT) discount for investors in affordable housing
From 1 January 2018, the Australian government has provided an additional 10 per cent CGT discount to resident individual investors in respect of a qualifying affordable housing investment where:
- the resident invests in an affordable housing MIT; or
- the resident holds their investment outside of a qualifying MIT and the property is a qualifying affordable housing investment and is managed through a registered community housing provider.
A critical difference for resident individual investors as compared to non-resident investors is that in order to access the additional 10% CGT discount, the property is only required to have been held as affordable housing for a period of three years. This is compared to the 10-year holding requirement for a qualifying affordable housing MIT. No reason is given for this difference, and the discrepancy in the holding period creates an anomalous outcome for resident and non-resident investors.
To qualify for the additional discount, the housing must be provided at below market rent and made available for eligible tenants on low to moderate incomes. Tenant eligibility will be based on household income thresholds and household composition. The affordable housing must also be managed through a registered community housing provider and the investment held as affordable housing for a minimum period of three years. The additional discount will be pro-rated for periods where the property is not used for affordable housing purposes
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