Tuesday, 12 February 2019
Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018, Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2018, Income Tax Rates Amendment (Sovereign Entities) Bill 2018; Second Reading
That all words after "That" be omitted with a view to substituting the following words:
"whilst not declining to give the bill a second reading, the House notes:
(1) the then Treasurer's shock decision on 14 September 2017 to ban the build-to-rent sector, which had multi-billion dollar ramifications for the Australian property market;
(2) the then Treasurer's failure to reverse the decision, seeing significant damage to Australia's build-to-rent sector before finally capitulating on 26 July last year;
(3) that the same incompetent approach to policy-making saw snap rule changes affecting investors in student accommodation; and
(4) that failure to address the Government's mistakes in student accommodation could see more international students competing with Australians in the rental market".
Labor will support these bills, including the government amendment. I will quickly cover the elements of the bills and address the, frankly, insouciant approach to policy in regard to build-to-rent housing and commercial student accommodation.
Labor never had any particular concern with the majority of the measures in these bills, which seek to implement the government's 2018-19 budget measure 'Stapled structures—tightening concessions for foreign investors'. These bills do four things: they increase the managed investment trust withholding rate on fund payments that are attributable to non-concessional managed investment trust income to 30 per cent; they modify the thin capitalisation rules to prevent double-gearing structures; they limit the withholding tax exemption for superannuation funds for foreign residents; and they codify and limit the scope of the sovereign immunity tax exception. Collectively the measures in the bills have been estimated by Treasury to have a positive revenue impact of $400 million over the forward estimates.
According to the government, the measures in the bills are designed to improve the integrity of the tax laws relating to stapled structures. A stapled structure, as members would be aware, is an arrangement involving two or more commonly owned entities, with at least one of them being a flow-through entity, including managed investment trusts, that are legally bound together so the interest in them cannot be bought or sold separately. The tax office has raised concerns that, while this access to concessional taxation was intentional for passive forms of investment, tax integrity issues arise when a stapled structure deliberately recharacterises active income—that is, income from day-to-day operations, which should be taxed at the company rate—as passive income, to be taxed at a concessional rate through the flow-through entity in the staple. The unintended consequence of that is that some foreign institutional investors are being taxed somewhere between zero and 15 per cent rather than at the corporate tax rate of 30 per cent for large firms.
Schedules 1 and 5 increase the managed investment trust withholding rate on fund payments attributable to non-concessional managed investment trust income to 30 per cent. That applies to income which is managed investment trust cross-staple arrangement income, trading trust income, agricultural income or residential housing income. Transitional arrangements are proposed for existing investments, where the existing 15 per cent rate will continue to apply until a certain date, depending on the type of income involved, and these transitional arrangements are relatively long dated; in one case they go up to 1 July 2034.
The thin capitalisation rules apply to foreign controlled Australian entities, Australian entities that operate internationally and foreign entities operating in Australia. They broadly deny deductions for debt financing expenses if the entity's debt exceeds certain limits. Foreign investors have been entering into double-gearing structures that allow them to convert more of their active business income to interest income, which is then subject to a 10 per cent interest withholding tax, or less in some cases. Double-gearing structures involve multiple layers of flow-through holding entities, being trusts or partnerships, that each issue debt against the same underlying asset. This allows investors to provide a greater proportion of their capital as investor debt and gear higher than the thin-capitalisation limits allow. As a result, investors are able to maintain and deduct higher levels of debt financing expenditure.
Schedule 2 of the bill lowers the associate entity threshold from 50 per cent to 10 per cent. In addition, in determining the arms-length debt amount, an entity must consider the debt-to-equity ratios in entities that are relevant to the considerations of an independent lender or borrower. That said, what this bill does not do on thin capitalisation is address one of the largest and most glaring multinational tax loopholes, which has to do with debt shifting. Large firms can still artificially load debt onto Australia and thus claim large deductions for their interest payments, because the government refuses to take full action on debt deduction loopholes. Labor announced in 2015, in the first half of our first term in opposition, how we would go about fully closing debt deduction loopholes. Our plans have been costed to deliver approximately $3 billion over the decade to the budget bottom line.
I turn now to limiting the withholding tax exemption for superannuation funds for foreign residents. A foreign resident deriving dividends or interest paid by an Australian resident generally has a liability to withholding tax in respect of the payment. But such a liability does not arise for superannuation funds for foreign residents, which are exempt from income tax in the country they reside in. This makes it attractive for these superannuation funds to gear their Australian equity investments by using investor debt to lower their overall tax bill. Schedule 3 will limit this exemption by ensuring that these superannuation funds will not be liable to withholding tax on amounts of interest, dividends or non-share dividends that they receive from an Australian entity only if, first, the income derived by the superannuation fund is exempt from income tax in the country in which it resides; second, the superannuation fund has a portfolio-like interest in the entity that pays the dividends, non-share dividends or interest to it; and third, the superannuation fund does not have influence, directly or indirectly, over decisions that comprise the control and directions of the operation of the entity that pays the dividends, non-share dividends or interest to it.
Turning to sovereign immunity, certain income and gains from Australian investments are currently exempt from Australian tax law if they are derived by a foreign government or by a foreign entity that's wholly owned by a foreign government—commonly known as sovereign wealth funds. This is based on the international law doctrine of sovereign immunity. The current practice is that the tax office exempts investment income and gains derived by foreign governments and foreign government agencies from tax where the moneys invested are and will remain government moneys and the income is derived from a non-commercial activity.
Schedule 4 of the bill codifies and limits the scope of this tax exemption. Under the government's proposal, an amount of ordinary income or statutory income of a sovereign entity will be non-assessable, non-exempt income if, broadly, the amount is a return on a portfolio-like membership interest, debt interest or non-share equity interest in an Australian company or managed investment trust and if no member of the sovereign entity group has influence, directly or indirectly, over divisions that comprise the control and directions of the operation of the Australian company or managed investment trust. The amount of ordinary income or statutory income that is non-assessable, non-exempt income of a sovereign entity is also exempt from withholding tax. Unless another provision in the Income Tax Rates Act 1986 applies to set a different rate, a sovereign entity will be liable to pay income tax on its taxable income at a rate of 30 per cent.
I turn now to the issue of the government's bungling of student accommodation and build-to-rent, the issues canvassed in my second reading amendment—as we've seen, the then Treasurer's shock decision on 14 September 2017 to ban the build-to-rent sector, which had multibillion-dollar ramifications for the Australian property market. The then Treasurer failed to reverse the decision, seeing significant damage to the build-to-rent sector before finally capitulating on 26 July last year.
We've seen a government which has, for a while at least, feigned an interest in housing affordability, but, extraordinarily, it is now running two different scare campaigns. It is saying that somehow house price declines under it are good—nothing to be scared about there—and then, conversely, that if Labor were to win office house prices would decline and that would be a very, very bad thing. This is contrary to Treasury advice, which says that any impact of Labor's grandfathered negative gearing and capital gains tax reforms on property prices would be modest at most. We have a government which has jumped the shark, is running outrageous scare campaigns on the opposition and has, indeed, begun setting up House economics committee inquiries into the opposition. You know you're ready to take your policies to the Australian people when the very government of Australia is treating you like the government and behaving like the opposition. 'Apoplectic and apocalyptic' would be its new three-word slogan.
Instead of all this overheated hyperbole, the government could at least have taken build-to-rent seriously as part of their policy toolkit on housing affordability. As the shadow Treasurer, Chris Bowen, has pointed out, build-to-rent remains too small in Australia. It has potential—$300 billion worth of residential assets, according to CBRE—but the then Treasurer's approach to the build-to-rent sector has seen that nascent sector stymied. On 14 September 2017, then Treasurer Morrison and the member for Deakin announced that managed investment trusts would no longer be able to invest in residential property, with the exception of affordable housing. That policy completely ambushed the property and construction sector. The bizarre banning of managed investment trust purchases of residential property would have directly hit housing supply, and it came at a time when the rest of the world was embracing build-to-rent. While now Prime Minister Morrison was banning investment in affordable housing, Britain had 17,000 build-to-rent units completed just that month, with another 24,000 under construction and nearly 55,000 granted planning permission. Tumbleweeds rolled on for 10 months, and the former Treasurer Morrison then had an epiphany. He waited until after the close of business on 26 July 2018 to announce a backdown and then tried to bury that backdown in the next stage of a consultation process on stapled security. I don't think the word 'lackadaisical' has been used as much in Hansard of any government before the Abbott-Turnbull-Morrison government. Perhaps we should get the Parliamentary Library to check.
But it isn't just lackadaisical, because the managed investment trust debacle didn't end there. We saw purpose-built student accommodation arbitrarily cut out of eligibility for the concessional managed investment trust regime. As part of a Senate inquiry into the bill, concerns were raised that the bill not allow off-site student accommodation to be treated as commercial residential properties and, as such, to face a typical 30 per cent withholding tax, compared to the concessional rate of 15 per cent. A second concern raised was that the transitional arrangements only apply where a project had a construction contract signed on or before the date the legislation was introduced into parliament. Stakeholders raised concerns that, while some projects had not reached the later stage of signing a construction contract, significant commitments such as the purchase of land and project development work had been made under the assumption of a 15 per cent withholding rate. These are significant issues. They have potentially damaging effects on the international student market and on the housing market generally. When you add to housing supply in one sector you push out the housing supply curve right across the board, and you ensure that housing becomes more affordable.
Australia now has a homeownership rate that's the lowest it's been in six decades. It places us in the bottom third of the OECD for homeownership. Back in the early 1980s, the ratio of house price to disposable household income was two. Now it's gone to five, even after some of the recent softening that has occurred under this government. We still have a situation in Australia where young couples of modest means, such as a couple who might be a teacher and a police officer, struggle to break into the housing market in many of our capital cities. Yes, prices have come off, particularly in Sydney and Melbourne, but the decline in prices that we've seen over the last year has been dwarfed by the increase in prices over the prior decade.
We understand that the government will be moving amendments that will fix the problems that this regime created for the build-to-rent sector and for student accommodation. We're pleased that the government has come to this sensible position, which ensures we maintain the tax integrity of the measure and that the student accommodation sector is not unfairly affected. That's vital, given that education is now Australia's third-largest export and that students living away from home, whether they be Australian students or foreign students, have basic needs to be met. Safe, convenient, cheap and suitable accommodation is at or near the top of that list.
I have visited many university campuses in Australia. One of the major focuses for our higher education market is ensuring the quality of student accommodation. That's vital as our universities are increasingly relying on overseas students as part of their business model. It's important too, as we try to build a more competitive university sector in which Australian students are willing to consider not just universities in their home town but universities right across Australia. We get the accommodation piece of that right and we get a better functioning student choice market in which students are able to pick an institution that is best suited for them and their talents.
Labor will be supporting this bill. We're pleased that the government has come to its senses on the issue of build-to-rent and student accommodation. It is absolutely vital that we close tax loopholes. I commend to the government Labor's multinational tax plan, cracking down on tax havens and multinational profit-shifting. This bill takes a step towards improving the integrity of our tax system, but it's a very small step in contrast with Labor's robust, carefully costed multinational tax plan.