Property

After a number of positive years, tax reform for Australian property investors appears to have stalled, and may even have gone into reverse. There is little good news for the property industry, and non-resident investors. The property industry will be particularly disappointed to see increases in Managed Investment Trust withholding rates and the removal of tax breaks for green buildings.

The budget contains few incentives to increase Australia's position as a financial services hub, and may fall further behind its competitors such as Singapore and Hong Kong.

Managed Investment Trust Withholding

In a significant change, the Managed Investment Trust withholding tax rate will increase from 7.5% to 15% from 1 July 2012, saving $260 million over four years.

The tax is a final withholding tax which applies to certain managed investment fund distributions made to foreign investors. Although a statutory rate of 30% applies, this is reduced to 7.5% for foreign investors residing in countries with whom Australia has an exchange of information agreement. Most of Australia's main trading partners fall within this category, so in practice the 7.5% rate is common. Unfortunately the rate will now increase to 15%; doubling the tax rate for most foreign investors.

Removal of CGT discount for non-residents

The 50% CGT discount will be removed for non-resident investors from 7:30pm on 8 May 2012. Previously, non-resident individuals, partnerships and trusts have been able to discount any capital gains. Foreign residents are generally only taxed on direct and indirect investment in real property assets, so this measure will disproportionally impact on the property industry.

From a practical perspective, this measure will require registry services to include additional disclosure on investor statements. The increase in transaction costs is likely to be a deterrent for nonresidents to realise capital gains by disposing of their investments, and may also deter future investment.

Tax breaks for green buildings gone

The Government will not proceed with its previously announced tax breaks for green buildings program. This program had been flagged to commence on 1 July 2012, and would have provided property groups with additional tax deductions for energy efficient investment. This valuable measure will be missed by many in the industry as they prepare for the introduction of the carbon pricing scheme.

Green building fund closed

The Green Buildings Fund has been closed to new applications. This program was established in 2008 and provided grants of $50,000 to $500,000 for a range of measures to reduce greenhouse gas emissions for energy consumed in buildings.

In the Government's view, this program did not provide value for money when compared with other measures. It believes that the property industry can continue to access funds through the Clean Energy Future package and finance though the Clean Energy Finance Corporation. These measures will provide financing for $10 billion in renewable energy, energy efficiency and low emissions technologies.

Greenhouse and Energy Minimum Standards

$37.1 million in funding will be provided over four years to introduce a nationally-consistent legislative framework to regulate the energy efficiency of equipment appliances.

Investment Manager Regime

The Government has said that it will extend the previously announced conduit income measures of the investment manager regime from 1 July 2011. Broadly, this previously announced regime is intended to increase Australia's attractiveness as a financial services hub. One aspect of the regime ensures that foreign managed funds will not be subject to tax on gains on disposal of foreign assets or non-portfolio conduit foreign income. Australian sourced income and gains on portfolio investments will also be exempt.

While this measure will be welcomed by some funds, it is unclear whether it will have a significant practical impact on Australian asset/fund managers, or foreign funds investing in Australia.

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