AHURI BRIEF

What are Managed Investment Trusts and how can they fund affordable housing?

The Federal Government has proposed stimulating affordable housing through Managed Investment Trusts

4 October 2017

Written in consultation with Professor Graeme Cooper and Manuel Makas, Director and Head of Real Estate at Greenwoods & Herbert Smith Freehills.

In the May 2017 Budget, the Federal Government introduced a tax measure to ‘stimulate affordable housing through Managed Investment Trusts’, but just what does the proposal offer?

What is a Trust?

In essence, a Trust is an arrangement between parties about the shared ownership of a piece of property. Tax law in effect imposes restrictions on the kinds of activities that different kinds of trusts can do, and investing in residential real estate is one of the activities that can present problems.

What is a Managed Investment Trust (MIT)?

The MIT structure allows local and foreign companies and individuals to invest in Australia through ‘passive’ investments, such as in land holdings for the purpose of deriving rent, or investing or trading in certain kinds of securities, such as shares, bonds or derivatives. MIT Trusts can’t otherwise conduct a business or trade. That means, for example, a MIT must hold properties principally to derive rent; it cannot be constructing, refurbishing or developing residential real estate for the purpose of re-sale. In addition, a MIT must be a managed investment scheme—meaning member’s contributions are pooled, and the day-to-day management of the trust’s assets is handled by a professional manager rather than by the investors themselves.

The benefits of being a member of a MIT for non-Australian Trust members

Australian resident individuals who invest in a MIT are able to access the 50 per cent capital gains tax discount on any capital gains made on the sale of assets held by the Trust; superannuation funds enjoy a 33 per cent discount; companies are not entitled to CGT discounts.

How can MITs help fund Affordable Housing?

The Government envisages large local and foreign firms in the property industry may add a special purpose ‘affordable housing MIT’ to the suite of funds they offer to investors and that other fund managers will add affordable housing assets to their investment portfolio. This is being effected by ‘carrots' (incentives) and 'sticks' (regulation). The stick is that MITs will now be explicitly precluded from investing in residential real estate unless it is affordable housing. There are two carrots: an increase to the CGT discount for resident individuals from 50 per cent to 60 per cent where the trust has used residential real estate to provide affordable housing for at least 3 years prior to sale; and for non-resident investors, a 15 per cent withholding tax rate if the MIT has used the residential real estate to provide affordable housing for at least 10 years.