Property Council of Australia Chief Executive has appeared before the Senate Economics Legislation Committee today, urging modifications to the proposed Thin Capitalisation Bill to support the Australian Government’s housing objectives.
“Even considering the government amendments, genuine, vanilla, third-party debt that is heavily relied upon by the property industry as a necessary means of doing business remains captured by this Bill,” Mr Zorbas said.
“And this is the daftest part which no stakeholder who comes before you today will, or could, have a sensible answer to.
“Australian businesses – investing in Australia with only Australian assets and debt – remain caught in a profit shifting prevention Bill, where there is no offshore jurisdiction to shift profit to. Surely, at least, that must yet be fixed.
“More broadly, if passed in its current form, the Bill will hurt project feasibility such that the investment returns of many large scale projects, think housing projects and especially build-to-rent housing, will be too low to proceed,” he said.
Opening statement from Mike Zorbas – Chief Executive, Property Council of Australia
My name is Mike Zorbas and I am the Chief Executive of the Property Council of Australia. I am joined by Antony Knep, the Property Council’s Executive Director of Capital Markets, by Steve Whittington, Partner at Ashurst and Mitchell Beare, Head of Tax at Charter Hall whose surpassing knowledge of this complex area means they will take the lead in answering detailed questions on the Bill. In speaking, we acknowledge the traditional owners and custodians of the land from which we variously join you – the Gadigal people of the Eora Nation.
Thank you for the opportunity to return to this Committee as it continues to seek improvements to the Bill before it.
My personal thanks to our capital markets division leaders and team who have been at the forefront of actively leading engagement with the Treasury on the proposed amendments since they were announced in 2022.
As established in 2022 and reiterated since, we support the Bill’s stated objectives to prevent base erosion and profit shifting.
These activities are particularly uncommon in the property sector and to my knowledge no party to any of these discussions has ever suggested otherwise.
Although I acknowledge – as we have in our written submission – that the Bill has been improved since the last time we appeared, it remains flawed.
The Bill’s drafting, including the Government’s proposed amendments, continues to impede the genuine commercial and business activities of the property sector.
As a result, it will make the Australian property sector less attractive to global investment and limit the capital required to build our nation.
Unintended consequences
That matters because our country continues to need the provision of property assets in which people live, work and recreate across our capital and regional cities.
These city assets – homes, logistics hubs, shopping centres, schools, hospitals, offices, data centres, underpin the desirability and prosperity of our cities.
In particular we are confronting a shortage in housing supply.
A person’s ability, or inability to repay, rent or access a home can determine opportunities, services and happiness across a lifetime, possibly generations.
This is why the emphasis placed by the Federal government on housing supply over the past few years is welcome.
The government’s 2029 1.2 million home target, productivity payments to boost state and territory housing run rates, the passage of the HAFF and sensible tax changes to promote build-to-rent get a gold star.
Unfortunately the Bill before this Committee has the potential to interfere with much of that good work, to render those targets almost impossible.
Even considering the government amendments, genuine, vanilla, third-party debt that is heavily relied upon by the property industry as a necessary means of doing business remains captured by this Bill.
And this is the daftest part which no stakeholder who comes before you today will, or could, have a sensible answer to.
Australian businesses – investing in Australia with only Australian assets and debt – remain caught in a profit shifting prevention Bill, where there is no offshore jurisdiction to shift profit to. Surely, at least, that must yet be fixed.
More broadly, if passed in its current form, the Bill will hurt project feasibility such that the investment returns of many large scale projects, think housing projects and especially build-to-rent housing, will be too low to proceed.
We continue to hear this directly from our members, who rely on foreign pension funds and sovereign wealth funds to partner with them to build every single type of city asset including commercial, industrial, office and residential buildings.
Although Treasury has sought to amend the Bill to allow trusts to operate, the drafting remains wanting and does not go far enough to ensure trusts have clear access to third party debt.
Let me conclude by summarising the five unanswered problems with the current Bill.
- First, the effective date of 1 July 2023 now clearly needs to be deferred to 1 July 2024. We are now more than seven months into the financial year, and there is still no certainty as to the final form of the Bill or the date for enactment. As it stands, every day that goes by financially penalises taxpayers who face a costly and uncertain scramble whatever happens next. 2
- Second, to ensure development project feasibility (especially of BTR housing), credit support beyond project completion, and lifting the prohibition on foreign associate entity credit support, is necessary for helping solve Australia’s housing crisis.
- Third, The Bill’s “equity” principle is violated by creating a “dead zone” for investors, preventing debt deductions, and needs to align with distributions’ requirements and arrangements.
- Fourth, the property industry will still not have appropriate access to third party debt deductions, which is a pillar of the property trust financing structure. Our submission highlights ongoing concerns for stapled groups, intra-group funding and common swap arrangements. To reiterate, we are referring to normal commercial arrangements, genuine business activities entered into by large property groups to fund their operations and to manage risk.
- Fifth, the debt deduction creation rules remain badly targeted and create uncertainty, as well as onerous compliance obligations. Removing these rules from the Bill at this stage would allow the Bill to better achieve the policy objectives, but at a minimum the Commissioner of Taxation should be provided with a discretion to not apply the rule in appropriate cases.
Next steps
We remain committed to working with Treasury, this Committee and the Senate, to fix the Bill’s flaws in a specific and targeted manner.
We commend to this Committee the amendments set out in our written submission. They will improve the Bill and ensure that it appropriately addresses integrity risks, facilitates standard commercial lending arrangements in the property sector and avoids contributing the Australia’s housing affordability crisis.
I note there are seven key issues that we have with the content of the Treasury and ATO submissions and we are happy to share those with the Committee.
Even if this were to pass unamended we will continue to demonstrate the negative impacts and champion a positive environment for investment in our cities.
We welcome any questions.
