Morrison hits back at critics of move to restrict managed investment trusts

Treasurer Scott Morrison has slammed critics of the government’s recent move to restrict managed investment trusts to buying affordable residential property.

Reacting to Labor’s criticism and the property industry’s negative reactions,  Morrison said they are effectively demanding for developers a tax concession that is out of reach for most other Australian investors.

"You cannot currently put residential properties in a MIT," Morrison told The Australian Financial Review.

"The sector is asking for a tax concession not available for Australian investors,” he added, while speaking from China.

Morrison's decision was announced on September 14 with immediate effect.

It triggered a strong reaction from the property industry which sees opportunity in the build-to-rent sector.

According to them, the federal government’s recent move risks killing off build-to-rent development before it even starts, and will affect the industry's ability to deliver more low-cost rental accommodation.

Managed investment trusts are defined by the Australian Tax Office as a type of unit trust that invests in passive income assets such as shares, property or fixed-interest. Tax on the income from the trusts is paid directly by individual beneficiaries at their top marginal tax rates.

Property Council of Australia chief executive Ken Morrison said until the government’s  announcement, property companies have been able to lodge applications to the ATO for tax rulings that build-to-rent would satisfy MIT arrangements as they are primarily about income and not capital gains.

"We have seen the ATO issue individual rulings" to that effect, he added.

"We look forward to working with the government on this issue as we believe build-to-rent offers enormous possibilities for Australia.

Earlier, Shadow treasury spokesman Chris Bowen slammed the move to restrict MITs, saying the Treasurer's announcement had ambushed the property and construction sector over a potential billion dollar addition to the real estate market.

The treasurer hit back over the weekend, criticising Labor's approach to housing affordability, which he said amounted to increasing taxes "on mum and dads investing in real estate while giving foreign investors a new 50 per cent tax cut."

The government said last week the MIT restriction was an "integrity measure" that would prevent trusts from investing in houses, units and apartments to hold for long-term rent.

"This change provides legislative clarification of the long-standing convention that the primary purpose of the MIT concessional tax treatment is to apply to passive investment income," the Treasurer said in a statement on Thursday.

"This change is crucial to maintaining the integrity of the tax base and will help direct foreign investment to where it's needed most."

Meanwhile, developers such as Mirvac are already planning big build-to-rent projects.

Earlier this year, Mirvac appointed investment bank UBS to seek off-market expressions of interest from institutional groups to form a club to develop and own build-to-rent housing in Australia.

The model has been successful in the US. 

While the model promises to help address one of the greatest complaints of renters – the lack of stable long-term professional landlords and too many "cottage-industry" players – the build-to-rent model is uncertain due to the collapse in rental yields in cities around the nation, especially Sydney.

But declining commercial property yields has made the prospect of build-to-rent more attractive.