Scott Morrison announces limits on managed investment trusts

Following on its budget promises to tackle the housing affordability issue, the Turnbull government plans further steps which are directed towards investors and managed investment trusts. 

Last week, the federal government released draft legislation to implement its plan, which includes:

• enabling investors to obtain a 60 per cent capital gains discount in affordable rental housing;
• enabling managed investment trusts (MITs) to invest in affordable housing; and
• MITs cannot acquire residential property, other than affordable housing.

The media release by Treasurer Scott Morrison’s office said from January 1, 2018, there could be a capital gains discount of up to 60 per cent if investors hold their eligible affordable housing property for at least three years, rather than the standard 50 per cent discount.

“From 1 July 2017, MITs can hold affordable housing for the purpose of deriving long-term rent. The same MIT will also be permitted to derive other eligible investment business income from investments including shares or commercial property,” it added.

MITs will be able to construct or develop the affordable housing property within the MIT which is expected to act as an incentive for MITs to invest in affordable housing projects, according to the draft legislation.

“Consistent with current MIT withholding tax rules, eligible foreign residents will generally be able to take advantage of a reduced withholding tax of 15 per cent on investment returns, including income from capital gains,” said the media release.

“This concessional rate will not apply to capital gains income derived from selling affordable housing held for less than 10 years.”

To be eligible for the higher CGT discount and MIT concessions, the affordable housing tenancy will need to be managed by a registered Community Housing Provider, it says. As part of this, housing providers will determine the tenant eligibility criteria, including the rent charged, consistent with state and territory affordable housing policies.

The draft legislation also includes an integrity measure which said that “MITs cannot acquire investments in residential property, except where it is affordable housing. This will prevent MITs from investing in houses, units and apartments to hold for long term rent (other than affordable housing)”.

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

Trusts that currently hold residential property have been given a transitional period until October 1, 2027, for their existing property assets.

The federal government has invited submissions on the draft legislation.