Housing and the New Charities Act Some tax and housing background Miranda Stewart

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

2. ‘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

3. 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

4. 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

5. A few housing statistics • 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. 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”)

7. 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

8. 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/

9. 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

10. 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%

11. 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

12. 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

13. Negative gearing (ATO statistics cont.)

14. What is wrong with negative gearing? • Reduces tax revenues but we need to plug the deficit • Gives rental property an advantage compared to other kinds of investment, eg active businesses • Inequitable subsidy (higher incomes benefit more) • Does not generate lower rents where needed • Not targeted at affordable rental property but operates to subsidisedebt funded investment • 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

15. Affordable housing (NRAS subsidy) • 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. Affordable housing (NRAS subsidy) • 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. 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?)

18. 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

19. 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.

20. THANK YOU! Questions? Miranda Stewart m.stewart@unimelb.edu.au