Affordable housing through Managed Investment Trusts
The Government proposes to further encourage investment into affordable housing by allowing Management Investment Trusts (MITs) the ability to invest in residential properties, allowing investors to receive concessional tax treatment.
Under the current MIT regime, foreign investors receive a concessional treatment and are subject to a 15% withholding tax rate on any fund payments from the MIT. Currently, MITs are limited in their investment capabilities to passive investments, and cannot carry on or control an active trading business.
The ATO has generally taken the view that any investment into residential property is active, with a primary purpose of deriving capital growth from increased value. This means that income from property investment is not subject to the MIT concessions and is subject to tax at a rate of 30%.
Under the new measure, the Government proposes to widen the investment capabilities of MITs, allowing MITs to acquire, construct or redevelop residential properties from 1 July 2017, subject to specific criteria. Any MIT looking to invest in residential property must:
- Hold the property available for rent for a minimum of ten years
- Derive at least 80% of its assessable income from affordable housing. The remaining 20% of income of the MIT continues to be restricted to eligible investment activities as permitted under the existing MIT provisions
- Be provided to low to moderate income tenants
- Charge rent at a discounted rate below the private rental market rate.
Where an MIT fails to derive a minimum of 80% of assessable income from affordable housing, any non-resident investors will be liable to pay withholding tax at 30% on investment returns for that income year. Further, properties held for rent for a period of less than ten years will be subject to a 30% withholding tax rate on the net capital gain arising from that disposal.
Residents investing in affordable housing MITs will continue to be taxed on investment returns at their marginal tax rates, however, will be eligible for the increased Capital Gains Tax discount of 60%.
Given the requirement that 80% or more of the assessable income must be derived from affordable housing, it is not practical for existing MITs to begin investing in residential property. We expect only newly established MITs to consider this proposed measure, likely via a joint arrangement with a registered community housing provider.
Aside from a philanthropic investment, we question the incentive to investors to participate in this scheme. A 10% increase in the CGT discount on a property that is likely to have limited capital growth due to reduced rental returns may be questioned by investors.