Yesterday evening, the Government released for public consultation the exposure draft legislation (the Exposure Draft) to implement its affordable housing managed investment trusts (MITs) proposal as announced in the 2017/18 Federal Budget. This was accompanied by a Press Release from the Treasurer.
Broadly, the key highlights in the Exposure Draft which are consistent with the announcement made in the 2017/18 Federal Budget include:
- MITs will be allowed to invest in dwellings that are residential premises that are used to provide affordable housing primarily for the purpose of deriving rent;
- a concessional 15% withholding tax rate will apply to fund payments paid to foreign investors from exchange of information (EOI) countries and that relate to:
- affordable housing rental income; or
- gains realised from dwellings that the MIT has used for affordable housing for at least 10 years;
- a 30% withholding rate will continue to apply to fund payments that do not satisfy these criteria; and
- a CGT discount of up to 60% will apply for Australian residents to the extent that the fund payment includes a capital gain realised in relation to a residential dwelling the MIT used for affordable housing for at least 3 years. To qualify, the tenancy or occupancy of the property managed by the MIT must also be exclusively managed by an eligible community housing provider.
The concessional rates do not apply to residential premises that are commercial residential premises.
These changes are intended to generally apply from 1 July 2017. However, the amendments to the CGT discount will apply for CGT events occurring on or after 1 January 2018. For a recap on what was announced in the Federal Budget, please click here.
Unexpectedly, the Exposure Draft also contains measures that state that a trust cannot qualify as a MIT if it holds residential premises unless:
- it satisfies the affordable housing requirements; or
- it is commercial residential premises.
As clarified in the Press Release from the Treasurer this will prevent MITs from investing in houses, units and apartments to hold for long term rent (other than affordable housing). This will put a significant dent in plans for Build to Rent residential ownership models being considered by many property groups.
A transitional provision will apply for MITs that have invested in residential premises (that are not commercial residential premises) prior to the announcement of the change. If the transitional rule applies, the trust will need to either only use that dwelling for affordable housing or dispose of that dwelling by 1 October 2027 if it wants to continue to be a MIT. It is not clear whether trusts that have entered into, but not completed, a contract to acquire residential premises will be covered by the transitional rule.
Trusts that invest in commercial residential premises will still qualify as MITs provided the investment is primarily for the purpose of deriving rent consistent with the eligible investment business rules. This will generally permit MITs to hold serviced apartments, manufactured home estates and some types of student accommodation that are leased to an operator.
Interestingly, the Exposure Draft also contains a discussion on what is meant by a dwelling being held for the purpose or primarily for the purpose of deriving rent. The relevant factors are stated to include:
- the trust’s investment strategy;
- the length of time the dwelling is intended to be held for, and any plan for disposal;
- any arrangements entered into or activities undertaken by the trustee (including in relation to the development of the property, its management, and other incidental activities);
- features of the dwelling affecting its suitability for rent by affordable housing tenants; and
- projected rental yields and capital growth to determine the purpose for holding the dwelling.
The Exposure Draft also states that there is a ‘need to hold dwellings used to provide affordable housing for significantly longer than a period of three or more years’ and ‘the Commissioner, in recent advice had regard to the nature of the investment, such that it ensured that the property would be held for the long-term and that the net rental yield would likely exceed the capital growth of the property over the 10 year rental period.’
The inclusion of this discussion in the Exposure Draft can be seen as a clear signal as to how the Government considers the ‘primarily for the purpose’ test should operate in a broader MIT and Division 6C context.
Public consultation on the Exposure Draft will close on Thursday, 28 September 2017.
For more information and where to find the Explanatory Material and Exposure Drafts, please see the below link: