1. www.law.unimelb.edu.au/tax Housing and the New Charities Act Some tax and housing background Miranda Stewart m.stewart@unimelb.edu.au 2 December 2013 1

2. www.law.unimelb.edu.au/tax ‘The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable.’ Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776) book V, Ch II, pt 2, art 2, p 355 2

3. www.law.unimelb.edu.au/tax Overview – Housing in the tax law  Housing “tenures” and tax treatment  Income tax  Goods and Services tax  Stamp duty  Land tax  Taxing housing as a collective investment  Taxable investors  Not for profits  Henry Tax Review and other reform proposals 3

4. www.law.unimelb.edu.au/tax Housing tenures and policy goals  Housing tenures:  Home owners (owner-occupation)  Private rental: Landlords and tenants  Social housing or cooperatives (intermediary)  Public housing  Housing policy goal: tenure-neutrality for home ownership and private rental markets  Tax policy goal: raise adequate revenue fairly without distorting investment decisions 4

5. www.law.unimelb.edu.au/tax A few housing statistics 5  Proportion of Australian households owning their own home is 67% in 2011-12  Decline from 71% in 1994-95  31% of households own home outright (decreased from 42%)  37% have a mortgage (increased from 30%)  Proportion of Australian households renting in the private market increased form 18% to 25%  Only 4% are in public rental housing See ABS Publication 4130.0 - Housing Occupancy and Costs, 2011-12 released 28/08/2013

6. www.law.unimelb.edu.au/tax Home ownership and tax  Income tax  No income tax on “imputed rent” ie, benefit from living in your own home is tax-free  No deduction for home mortgage interest  CGT main residence exemption (up to 2 hectares)  GST  No GST on “imputed rent”  No GST on sale of your home  But, GST at 10% on sales of new housing (developer pays, but may access “margin scheme”) 6

7. www.law.unimelb.edu.au/tax Home ownership and tax  Stamp duty  States levy stamp duty on the purchaser  Victoria: progressive from 1.4% up to 5.5%  First home owner grants/exemptions  Land tax  Main residence exemption  Rates  Levied by councils  Developer levies on new housing  May be passed on in price to purchasers 7

8. www.law.unimelb.edu.au/tax Home ownership and tax  Welfare system  Principal home is exempt from asset test for age pension and other federal welfare benefits  First Home Saver Accounts  Income tax concession: 15% rate  In 2013-14, maximum contribution is $6,000 eligible for 15% tax rate; government co-contribution of up to $1,020  See, http://www.ato.gov.au/Individuals/First-home- saver-account/http://www.ato.gov.au/Individuals/First-home- saver-account/ 8

9. www.law.unimelb.edu.au/tax Rental housing  Tenants  No income tax deduction for rental payments ie, tenants are taxed on rent, contrast home owners who are not taxed on imputed rent  Landlords  Rent received is assessable to income tax  Deductions allowed for all costs including mortgage interest on investment, maintenance, depreciation on building, fixtures etc  No GST on supply of rental property 9

10. www.law.unimelb.edu.au/tax Rental housing (landlords)  State taxes  Stamp duty on purchase of investment property  Land tax applies at progressive rate on aggregate basis, ie rate increases with no. of properties  Council rates  Land tax and rates are deductible for income tax  CGT on capital gain on investment property  CGT 50% discount (max. rate approx 24%)  Reduce taxable CG by stamp duty, purchase costs  Capital loss can only be used against capital gains  If in a business, marginal rates; companies 30% 10

11. www.law.unimelb.edu.au/tax Negative gearing  Rental expenses deductible against all sources of landlord income eg salary, business profits  Majority of deduction is mortgage interest  ie, net rental loss “shelters” other income from tax  But, only half capital gain is taxable  NB. Can “negatively gear” share investments, but less common 11

12. www.law.unimelb.edu.au/tax Negative gearing (ATO statistics)  In 2010-11, net rental losses of $7.8 billion in total  80% of individuals claimed interest deductions  Most rental losses sheltered other income from tax 12

13. www.law.unimelb.edu.au/tax Negative gearing (ATO statistics cont.) 13

14. www.law.unimelb.edu.au/tax What is wrong with negative gearing? 1.Reduces tax revenues but we need to plug the deficit 2.Gives rental property an advantage compared to other kinds of investment, eg active businesses 3.Inequitable subsidy (higher incomes benefit more) 4.Does not generate lower rents where needed  Not targeted at affordable rental property but operates to subsidise debt funded investment 5.Subsidises “cottage industry” of individual investors  Does not benefit large scale investment in affordable rental property  90% of rental investors own 1 or 2 properties only 14

15. www.law.unimelb.edu.au/tax Affordable housing (NRAS subsidy) 15  Designed to encourage large scale investment in affordable housing  Income tax credit for investment that qualifies for NRAS, in 2012-13 (indexed):  $7,486 per dwelling/year  Refundable; can apply even if property is also negatively geared (generating net rental loss)  State/Territory contribution $2,495 per dwelling/year  Applies for a period of 10 years  Companies, super funds; individuals can invest through unit trusts, partnerships ( “consortium” model)

16. www.law.unimelb.edu.au/tax Affordable housing (NRAS subsidy) 16  Does participating in NRAS impact on charitable status for tax purposes?  ATO says:  Existing charities could participate in establishment phase (2008-09, 2009-10) without affecting charitable status, due to transitional provisions  Since 2010-11, “the charitable status of a charity may be affected by participating in the NRAS, as normal definitions of a charitable purpose apply”

17. www.law.unimelb.edu.au/tax Henry Tax Review and other reform proposals  40% savings discount for investment income and gains including net interest income, net residential rental income, capital gains and losses, and interest in respect of share investments.  This would reduce negative gearing  Could retain 50% discount, negative gearing for NRAS  Retain CGT exemption for main residence  Some have suggested applying CGT to gains above a high property value threshold (eg $2 m?) 17

18. www.law.unimelb.edu.au/tax Henry Tax Review reform proposals (State taxes)  Eliminate stamp duties (v. difficult)  Reform land tax (ditto)  Expand base to include home ownership  Reform minimum thresholds, harmonise valuations on unimproved value (this could be achieved)  Ensure land tax applies per separate property not on aggregate holding (removes disincentive to hold multiple property)  Councils should be able to increase local rates 18

19. www.law.unimelb.edu.au/tax Reforms to support collective investment in housing  Remove impediments for eg Real Estate Investment Trusts and super funds esp. for NRAS program.  Reform land tax so that it does not increase exponentially with multiple holdings  Ensure that residential investments are classified as “capital” investments so CGT concessions apply  Ensure that residential investments do not cause property trusts to be taxed as companies because seen as a “business” activity. 19

20. www.law.unimelb.edu.au/tax THANK YOU! Questions? Miranda Stewart m.stewart@unimelb.edu.au 20