Tax hurdles too high for housing proposals, say accounting bodies

Reviewing build-to-rent and using superannuation as security for home loans were two of the central recommendations in the inquiry report, entitled The Australian Dream.

Both CPA Australia and CA ANZ acknowledged the importance of the housing affordability issue and longstanding attempts to address it.

But CA ANZ said the build-to-rent recommendation would founder due to the intractable problem of GST reform while CPA Australia said using super “to solve unrelated policy issues” ran contrary to the principles of retirement saving and could even encourage speculation.

Dr Jane Rennie of CPA Australia said Recommendation 7 took previous housing arrangements involving super – such as the First Home Super Saver Scheme – “to a whole new level, which concerns us”.

“Essentially, this is seeking to use super as a honey-pot to solve unrelated policy issues,” Dr Rennie said. “We question whether addressing non-retirement matters is an appropriate use of the retirement savings system.

“Using super to borrow more does not address the issue of housing affordability. While some could probably turn it to their advantage, for others (especially the unadvised) it could be financially catastrophic.”

CPA Australia said a house secured by collateral within a member’s super fund could potentially enable a home owner to inappropriately arbitrage between tax environments.

“It may even create opportunities for money laundering,” Dr Rennie said. “It would also impose external financial risk on fund assets, something which would be unprecedented. This risk could not be managed by trustees in the same way as other financial risks.

“It raises questions over how auditors working with superannuation funds would be able to provide assurance over contingent liabilities in the event of mortgage defaults.”

However, CPA Australia doubted whether the proposal could even get off the ground.

“I query whether this recommendation is in fact achievable. The use of superannuation assets as recourse against non-superannuation borrowings is contrary to the sole-purpose test,” Dr Rennie said

“Moreover, it’s inconsistent with the current policy settings in relation to borrowings within superannuation, which are presently required to be undertaken on both a limited recourse and arm’s length basis.”

Another key proposal, Recommendation 12, suggests reviewing the tax and regulatory settings around build-to-rent housing because it could “provide consumers with more choice and has the potential to increase security of tenure”.

But CA ANZ doubted the viability of this idea, too, because it would founder on the political challenges of reforming GST.

Chair of the indirect tax committee at CA ANZ, Kevin O'Rourke, said: “Social housing and build-to-rent is an issue that has been floating around for some time.”

He said companies or private equity funds looking to invest in an apartment complex or similar project would shun build-to-rent proposals because they would not be able to reclaim the GST paid on inputs.

For example, he said a large project might involve $400 million spent on construction, legal and accounting services and a subsequent GST credit of $40 million. But not in the case of a build-to-rent scheme.

“Because rent is not subject to GST, everything purchased by the developer of a property will not be entitled to a GST credit,” Mr O'Rourke said.

“At the development stage is when all the money is poured in. So an upfront blockage or unavailability of credit involving millions of dollars is enough to prevent many of these projects going ahead.”

He said the review of build-to-rent was worthwhile, but there was no simple answer.

“The whole issue is around whether or not to make these propositions economic and attractive to investors, whether or not the Government will allow these credits on some basis,” Mr O'Rourke said.

“But GST revenue goes to the states. So if the solution becomes allowing the credits, then that’s less that goes to the states.”

Since all the states had to agree to changes in GST law, “unless you can get the buy-in of all the states, which ultimately get the revenue, then it becomes very difficult to get a proposal like this up.”

“It’s quite a political challenge to get all the states aligned in circumstances where they might be losing revenue as a consequence of the decision,” Mr O'Rourke said.

Mr O'Rourke said the situation was complicated even further by the presence of charitable organisations in providing social housing. The different tax treatment of charities, and the provision of below-market rentals, would give their projects a competitive edge over a commercial proposal.