2015 Federal Budget: Property insights

The much anticipated changes to the Managed Investment Trust (“MIT”) rules have now been confirmed.

2015-05-13

Whist there was not much in this budget that is specifically targeted at the property and funds management industries, the much anticipated changes to the Managed Investment Trust (“MIT”) rules have now been confirmed. In addition, their introduction will be effectively deferred a further year to 1 July 2016, with an ability for eligible MITs to opt in early for a 1 July 2015 start date.

There were no significant infrastructure announcements. It was mainly a reshuffle of existing proposed funding as a result of the Victorian Government cancelling the East-West Link project. However, the Commonwealth remains willing to consider investing in other major infrastructure projects of national significance in Victoria.

The Government has decided not to proceed with the previously announced but enacted a measure to replace the current GST-free treatment for supplies of going concerns and farmland with a reverse charge mechanism.

Furthermore, consistent with theme of the recently announced FIRB fees and the Victorian state budget’s focus on foreign property buyers, the Federal Budget has announced that it will increase funding to ensure the integrity of the existing foreign investment framework.

 

Managed Investment Trusts recap

Importantly the Government has confirmed that it will proceed with the previously announced changes to the tax rules that apply to managed investment trusts. These rules will introduce the concept of an Attribution Managed Investment Trust (AMIT). Broadly speaking if a MIT qualifies as an AMIT, it will be eligible for the new tax system. The features of the new tax system for AMITs consist of:

  • Fixed trust treatment;
  • Attribution model;
  • A statutory ‘unders and overs’ regime; and
  • A more equitable process for cost base adjustments.

There are also a number of other significant changes, which include:

  • Debt-like treatment for certain MIT interest;
  • Permitting MITs with multiple classes to treat each class as a separate trust;
  • A non-arm’s length income integrity measure; and 
  • Ensuring tax deferred distributions cannot be assessed as ordinary income.

These changes will apply to all qualifying MIT’s from 1 July 2016 with an option to apply the rules early from 1 July 2015.

While complex, these changes are expected improve the current taxation regime for MITs by increasing certainty, allowing greater flexibility and reducing compliance costs.

 

Strengthening Australia’s foreign investment framework

The Government has announced that it will strengthen Australia’s foreign investment framework through improved compliance and enforcement and stricter penalties for breaches of the Foreign Acquisitions and Takeovers Act 1975. Specifically, the ATO will be charged with the responsibility for regulating foreign investment in residential real estate, including stronger enforcement, audit and compliance of the existing rules.

The focus on foreign investment compliance will be supported by the introduction of an application fees for real estate investment proposals from 1 December 2015. This will increase the costs for foreign investors looking to acquire residential real estate as follows:

  • Property valued under $1 million - $5,000 fee; and
  • Property valued over $1 million - $10,000 plus an additional $10,000 fee increase per additional $1 million in property value.

 

Victorian Budget on foreign buyers

These proposed changes add insult to injury to foreign land buyers, after the recent Victorian budget which also had a particular focus on land acquisition by foreign buyers. In summary, the Victorian budget contained the following revenue measures:

  • Land transfer duty surcharge
    • Foreign buyers of residential property will pay a surcharge of 3% on the greater of the purchase price or the market value of the property, in addition to any other stamp duty payable. 
    • The surcharge will apply to contracts entered into on or after 1 July 2015 and payable at settlement.
    • Likely to impact off-the-plan purchases in particular.
  • Absentee landowner surcharge 
    • A landowner who does not ordinarily reside in Australia will be liable for an absentee landowner surcharge of 0.5% in addition to any other land tax payable. 
    • The absentee landowner surcharge will apply from the 2016 land tax year.

Although not yet law, legislation was introduced into the Victorian Parliament on 8 May 2015 which would give effect to these proposals.

It is expected that proposed amendments will adversely impact temporary visa holders who buy property in Victoria. It does not impact on property purchased or owned in other Australian states or territories.

Critically, the absentee landowner provisions excludes an Australian citizen or resident but specifically includes a natural person who does not ordinarily reside in Australia and who:

  • was absent from Australia on 31 December of the year prior to the tax year; or
  • was absent from Australia for a period of 6 months in total in the year prior to the tax year.

This means that individuals living overseas for a period of time may be caught by the absentee landowner surcharge.

Furthermore, the provisions extend to absentee corporations, trusts and beneficiaries; essentially where the person with a controlling interest or ultimate beneficiary of the property is an absentee.

 

Access to crowd funding

The Government has made a commitment to provide $7.8 million of funding to ASIC to develop and monitor a regulatory framework to facilitate the use of crowd-source equity funding (CSEF). This will mean that small business and other entrepreneurial enterprises will have access to crowd funding to develop and growth their business.