I want to start this week’s editorial gently because it appears the Australian Government intends to do the right thing on changes to the ThinCap regime, likely to be tabled in the House of Representatives soon.
With that in mind, what would otherwise be a game-ending own goal on the provision of new Australian homes can probably still be intelligently redrafted through the Parliamentary process.
And redrafting is required. The required amendments should and can achieve both tax base erosion prevention and retention of a viable investment market for the world leading Australian listed property trust sector (value circa $135 billion) and its unlisted peers.
The government quite reasonably aims to ‘address risks to Australia’s domestic tax base stemming from … excessive debt deductions … in line with the Organisation for Economic Cooperation and Development (OECD)’s best practice guidance’.
The commitment was made in response to the OECD’s Action 4 item on Base Erosion and Profit Shifting (BEPS) that currently has over 135 countries and jurisdictions joined into a new two-pillar plan to reform international taxation rules and ensure multinational enterprises pay tax wherever they operate.
Readers know this risk is, for all practical purposes, absent from plain vanilla third party debt arranged through property trusts in Australia. Access to debt is also essential to and underpins new construction of many property assets via trusts in Australia.
The US and UK frameworks offer carve outs for the same transactions precisely because they recognise commercial property trusts are not a problem area.
And yet, were it to pass the Parliament as drafted, Australian property trusts, unlike their global competitors in every other OECD country, will no longer be able to access legitimate third-party debt as the design of the policy is incomplete.
Unchanged, the soon to be tabled legislation would endanger property industry’s ability to deliver the one million homes the government has promised by 2029 among many other city-improving assets.
It also puts at risk the fledging investment into the government-encouraged build-to-rent housing sector. Properly constructed, the government’s encouragement of build-to-rent investment should create some 150,000 new homes as long as legitimate access to third party debt is not ended.
The Property Council will continue to work with the government in coming sitting weeks to help solve Australia’s housing crisis.