Introduction of a major bank levy from 1 July 2017
Effective 1 July 2017, a major bank levy will be imposed on Authorised Deposit Institutions (ADI) with licenced entity liabilities of at least $100 billion. It is expected that this will apply to CBA, ANZ, NAB, Westpac and Macquarie. The levy is budgeted to raise $6.2 billion over the next four years, one of the most significant revenue raising measures announced in the Budget.
It is expected that the levy will apply to a wide range of ADI liabilities including corporate bonds, commercial paper, certificates of deposits and Tier 2 capital instruments. The levy will not be imposed on additional tier 1 capital and deposits afforded protection by the Financial Claims Scheme. Such deposits are in respect of individuals and businesses.
As part of this measure, the Australian Competition and Consumer Commissioner (ACCC) will undertake a residential mortgage pricing inquiry until 30 June 2018. Under the inquiry the ACCC will have the power to require ADIs to explain any changes (or proposed changes) to residential mortgage pricing, fees, charges and interest rates. Despite the ACCC being empowered to make the necessary enquiries, it is unclear at this stage whether the ACCC can prevent the banks from adjusting prices.
There are two important impacts of this announcement. Firstly, this may increase cost of funding to the larger banks, which ultimately may seek to be compensated by increased mortgage interest rates. While the ACCC inquiry may help to reduce the impact of this, it is unclear whether this inquiry will be effective at this stage. Therefore, this levy may result in higher interest rates for individuals and businesses and less liquidity for business lending.
Secondly, more opportunities will arise for the smaller banks and alternative debt financing providers (e.g. mortgage funds) that may seek to capitalise on this opportunity to provide more competitive alternative financing.
New tax incentives for investing in affordable housing
The Government has introduced tax incentives to encourage investment in affordable accommodation for low to moderate income households. This includes specific incentives for Managed Investment Trust (MIT) vehicles, as well as a CGT concession for resident investors who invest in these schemes.
From 1 July 2017, MITs will have the ability to acquire, construct or redevelop property to hold as affordable housing. Investors in these vehicles may therefore access concessional taxation treatment. In order for investors to gain access to these tax concessions, MITs will need to meet specific criteria prescribed under the new rules, these include:
- The affordable housing must be available for rent for at least 10 years
- The MIT must derive at least 80% of its assessable income from affordable housing
- Up to 20% of the MIT’s income may be derived from other eligible investment activities
- Qualifying housing must be provided to low to moderate income tenants
- Rents must be charged at a discount below the private rental market
In circumstances where particular requirements are breached, both domestic and non-resident investors may be taxed at a higher rate. For example, where properties are held for rent as affordable housing for less than 10 years, the returns on disposal of the property can be subject to a 30% withholding rate on the net capital gain for non-resident investors.
To further encourage investment in new and existing affordable housing, the Government has announced from 1 January 2018, Australian resident individuals investing in qualifying affordable housing will be entitled to a 60% discount on capital gains where they hold their investment for three years.
These proposals will provide an opportunity for a new asset class to be held by managed funds. Due to the 80% income requirement, the managed fund will need to be a vehicle that is dedicated to holding affordable housing assets, which will mean that the managed fund will not be able to hold diversified property assets. Whether this structure will be feasible will ultimately depend on the impact that reduced rental income will have on lower internal rates of return, as compared to the additional tax discount on capital gains on the ultimate disposal after the 10-year holding period.