www.law.unimelb.edu.au/tax housing and the new charities act some tax and housing background miranda...

www.law.unimelb.edu.au/tax

Housing and the New Charities Act

Some tax and housing backgroundMiranda Stewart

[email protected] December 2013

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‘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

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Overview – Housing in the tax law Housing “tenures” and tax treatment

Income taxGoods and Services taxStamp dutyLand tax

Taxing housing as a collective investmentTaxable investorsNot for profits

Henry Tax Review and other reform proposals

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Housing tenures and policy goals Housing tenures:

Home owners (owner-occupation)Private rental: Landlords and tenantsSocial 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

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A few housing statistics

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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


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”)

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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

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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/

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Rental housing Tenants

No income tax deduction for rental paymentsie, 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

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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%

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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

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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

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Negative gearing (ATO statistics cont.)

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What is wrong with negative gearing?1. Reduces tax revenues but we need to plug the deficit2. Gives rental property an advantage compared to

other kinds of investment, eg active businesses3. 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

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Affordable housing (NRAS subsidy)

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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)


Affordable housing (NRAS subsidy)

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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”


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 gearingCould retain 50% discount, negative gearing for NRAS

Retain CGT exemption for main residenceSome have suggested applying CGT to gains above a high property value threshold (eg $2 m?)

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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

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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.

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THANK YOU!

Questions?

Miranda [email protected]

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www.law.unimelb.edu.au/tax housing and the new charities act some tax and housing background miranda...

Documents

tax income tax

tax law housing tenures

home ownership

tax treatment income

income tax deduction

overview housing

housing statistics

housing occupancy