The Voice of the Property Industry
Review of Business Taxation
Department of Treasury
CANBERRA ACT 2600
15th April 1999
A Platform for Consultation
The Property Council of Australia welcomes the strong commitment the government has
made to reform Australia‟s business tax system.
We submit our view to the Review of Business Taxation in response to its second
discussion paper, A Platform for Consultation.
The Property Council looks forward to continuing its discussions with the RBT as your
review continues its work.
PROPERTY COUNCIL OF AUSTRALIA LIMITED
ACN 008 474 422
Level 26 Australia Square 264 George Street Sydney NSW 2000
Telephone: 02 9252 3111 ~ Facsimile: 02 9252 3103 ~ E-mail: firstname.lastname@example.org ~
Submission to the Review of Business Taxation
Property Council of
A Platform for
Executive Summary 1
1.0 Introduction 3
2.0 Review of Business Taxation: A Platform for
3.0 Entity Taxation and Property Trusts 6
3.1 Property trusts must be included within the
definition of CIV
3.2 Flow-through of taxation is crucial
3.3 Defining the “widely held rule” 7
3.4 Sub-Trusts 8
3.5 Flow-through of Tax Preferences 9
3.5.1 Competitive neutrality 9
3.5.2 Capital requirements 11
3.5.3 International Competitiveness 12
3.5.4 Distribution policy 13
3.5.5 Complexity 13
4.0 Building Depreciation 14
4.1 Include Buildings and Structural Improvements in
a Consistent Regime 14
4.2 Advantages of Including Buildings and Structural
Improvements in a Consistent Regime 15
4.3 Implementation Issues 15
4.3.1 Separate valuation of buildings, plant and
equipment and land 15
4.3.2 Buildings are wasting assets 16
4.3.3 Blackhole Expenditure 18
4.3.4 Transitional provisions 18
4.4 Reject Reduction in Depreciation Rate for Buildings 18
5.0 Accelerated Depreciation/ Company Tax Trade-Off 20
6.0 Capital Gains Taxation 21
6.1 Taper System 22
6.2 Indexation 22
6.3 Averaging 23
7.0 Other Issues 24
7.1 Partnerships and CGT 24
7.2 Consolidation 24
7.3 Scrip-for-scrip Rollover Relief 25
7.4 Quarantining of Capital Losses 26
7.5 Abolition of Stamp Duty on Transfers or
Conveyances of Business Property 26
7.5.1 Timing Issues 27
7.6 Fringe Benefits Tax on Car Parking 27
8.0 Revenue Implications 28
The Property Council supports the following package of tax reforms:
1. A corporate tax rate of 30%.
2. A consistent approach to the taxation of entities.
3. Mandating the existence of Collective Investment Vehicles (CIVs)
within the consistent entity taxation framework, where such CIVs
operate on a flow through principal that allows:
income to be distributed untaxed into the hands of
beneficiaries who are then responsible for meeting all
taxation responsibilities; and,
the value of capital deductions (such as depreciation and
Division 43 allowances) to flow to beneficiaries on the
4. A trust which is a CIV should be defined as widely held where:
any of the trust units are listed for quotation on a stock
any of the units were offered to the public;
units are held by 50 or more persons; or
tax exempt entities, and/or a complying ADF, PST fund,
a life insurance company and/or a CIV holding a
beneficial interest, directly or indirectly, cumulatively
hold 75 per cent or more of the property or income of the
5. A tracing provision should be incorporated in the `widely held‟
definition to ensure that where sub trusts are ultimately held
upstream by a CIV, they receive the flow though benefits
conferred upon CIVs.
6. Economic life to replace accelerated depreciation as the basis for
determining write-off rates for the proposed integrated wasting
7. The `economic life‟ concept to include those factors that drive
obsolescence, including functional, economic, legal,
environmental, social and aesthetic obsolescence.
8. Safe harbour write off rates for plant, equipment, fixtures and
structures to be determined by the Tax Commissioner in
consultation with a working party established by the Business
Coalition for Tax Reform. In The interim, the existing Division 43
amortisation rates be mandated as the standard.
9. Replace the existing capital gains tax system with a tapered
approach that is available to individuals and business entities.
The Property Council‟s main arguments in favor of its position are:
National Interest The package of measures supported by the Property Council will
foster a more efficient marketplace and better investment
decision making that rewards enterprise.
The package will allow Australians to build and use their
retirement wealth with greater certainty, while at the same time
creating a pool of savings that can be invested in productive
activities that create more jobs.
Spreading Wealth to the Collective Investment Vehicles let everyday Australians share
Community the benefits of owning many of the nation‟s best performing
More than nine million Australians invest in CIVs through their
24 million life and superannuation policies or unit trust accounts.
CIVs also create retirement cash flow for hundreds of thousands
Promotes Savings and CIVs coupled with an economic life depreciation system will
Creates Jobs help Australia create the world class infrastructure that is
needed to help us compete internationally.
Equity Full flow through of income and depreciation benefits within
CIVs gives ordinary Australians exactly same rights as wealthy
private investors – that‟s only fair.
International Most of our major trading rivals offer their citizens the
Competitiveness equivalent of CIVs, including flow through rights for both trust
income and depreciation deductions.
Simplicity The Property Council opposes the idea of including any part of
trust distributions in the imputation system because such an
approach will create complexity. It will confuse investors,
particularly retirees for no community benefit.
Revenue There is no loss of government revenue from CIVs, such as
property trusts, because all distributed income is taxed in the
hands of beneficiaries. In addition, the government enforces very
stringent and effective safeguards against tax evasion within the
public unit trust industry.
Distort Market Behavior If tax preferred income is to be taxed at the entity level, trust
managers may well be tempted not to distribute these benefits.
That means market behavior will be distorted. Such a market
response could also impact on government revenue.
Accountability The property trust industry is subject to a wide range of
accounting standards, independent valuation practices, the
corporations law, the Managed Investments Act and direct
monitoring by the Australian Securities Investments
Commission. Its activities are transparent and should not be
subject to entity taxation simply as an avoidance measure.
The Property Councils‟ submission also deals with many other technical
issues raised in the Platform for Consultation options paper.
The Property Council endorses the submissions of the Business Coalition
for Tax Reform and the Investment Services Association of Australia.
This submission has been prepared by the Property Council with
assistance from Arthur Andersen, in response to the release of A Platform
for Consultation (“APC”) by the Review of Business Taxation (“RBT”).
The Property Council represents private investors and corporations who
finance, own and manage shopping centres, commercial and industrial
complexes, and hotels. Its members manage the property interests of
more than non million ordinary Australians who are investors in real
estate through their superannuation, life policies, unit trust and direct
The primary purpose of this submission is to outline the taxation,
economic and practical implications of options discussed in APC for the
property industry as a whole, and specifically property trusts. The
submission provides constructive proposals designed to assist the RBT
reform Australia‟s tax system.
The submission focuses on the property sector and property trusts
investors, in particular.
This submission is set out as follows:
Section 2 outlines the Property Council‟s stance on the APC.
Section 3 considers the ramifications of taxing property trusts as
Collective Investment Vehicles.
Section 4 deals with building depreciation.
Section 5 deals with the accelerated depreciation/company tax
Section 6 proposes, in accordance with APC, an alternative treatment
for capital gains.
Section 7 deals with various other issues such as the abolition of
stamp duty in certain circumstances and the treatment of
partnerships for capital gains tax purposes.
Section 8 outlines the revenue implications of the proposals in this
2.0 Review of Business Taxation: A Platform for
The Property Council‟s vision for business income taxation in Australia
corresponds closely with the RBT design principles and the benchmarks
for reform outlined in APC. In particular, the Property Council supports
reforms of business income taxation that result in an internationally
competitive business income taxation system.
Moreover, the Property Council considers that the Government‟s business
tax reform strategy should be directed towards improving Australia‟s
infrastructure, including that provided by the property sector. The
infrastructure industry is a major contributor to economic growth and
living standards as well as a major source of demand for many
commodity areas including mining, wood products, chemicals, electricity
and gas, transport and communications, petrol and coal, as well as the
The property industry provides a livelihood for many professional and
technical groups, such as architects, engineers and builders, as well as
employment and training for hundreds of trades, including carpentry and
The international competitiveness of the property industry is particularly
important to Australia‟s export performance. For example, the property
industry provides the infrastructure that enables Australia to stand out as
a significant and preferred corporate headquarters for the Asia-Pacific
region. Without modern and efficient infrastructure Australia could not
as effectively compete with its trading rivals, leading to a negative
economic impact and loss of employment opportunities in Australia.
Further, the continuing establishment of Australia as a regional financial
centre requires substantial communications and property infrastructure
commitments in order to accommodate growth. Without this
infrastructure, Australia would be unable to offer the required facilities to
multinational businesses, with consequent effects on the wider Australian
economy and business.
Moreover, the property industry plays a key role in providing
accommodation to meet the anticipated needs of the tourism industry.
The property industry is also a significant determinant of business costs
in the wider economy. An internationally competitive economy
provides optimum economic growth, encouraging savings and
investment to provide employment opportunities for Australians.
Property trusts should not be tainted by the characteristics of trusts that
are frowned upon, such as discretionary trusts. Property trusts provide
no more opportunities for “income splitting” than bank accounts.
Moreover, property trusts are already subject to a wide range of
regulatory regimes, including the Corporations Law, the Australian
Securities and Investments Commission Act and the Managed Investments
Act, to name a few.
The Property Council supports many of the business income tax reforms
outlined in APC. Most importantly, the Property Council strongly
supports the following proposed reform options subject to the conditions
discussed in more detail below:
the move to a lower company tax rate (30 per cent or lower);
the movement of the depreciation of buildings and structural
improvements to an economic life basis, in line with plant &
the proposed changes to the capital gains tax (“CGT”), including the
introduction of a taper system of CGT for long term investments and
the introduction of a scrip-for-scrip CGT rollover exemption; and
the replacement of the accelerated depreciation provisions with an
economic life regime, provided:
the rate of company tax is reduced to 30 per cent;
the depreciation of buildings and structural improvements is
moved to an economic life basis, in line with plant & equipment;
tax-preferred income of property trusts is allowed to flow
through to property trust investors.
The Property Council believes that these issues are critical in designing a
business income tax system that will foster Australia‟s long term growth
prospects in an increasingly competitive, global environment.
However, the Property Council has significant concerns with several
proposed business tax reform options and the practical implementation of
such proposals. These are outlined in the following sections of the
The Property Council recognises the design principle of revenue
neutrality adopted in APC. Accordingly the submissions in this paper
have been framed in such a manner as to maximise revenue neutrality.
However, the Property Council considers that the way the revenue
neutrality constraint has been structured by requiring revenue neutrality
to remain consistent with the ANTS announcements is unreasonable.
This is because the Government has already claimed much of the revenue
from the major business tax reforms, even though some of the proposed
measures (such as the Deferred Company Tax option) should clearly not
In the remainder of this submission, certain terms are used which may be
specific to the property industry. We therefore define these terms here.
Property Trust: A trust where the principal source of income is
derived from real estate or interests in real
estate. Property trusts may be listed (as in
have their units traded amongst investors) or
unlisted (such as being owned by other
property trusts). Property trusts operate as
collective investment vehicles, through which
small investors may achieve a pooling of risk to
access large commercial property investments
normally beyond their reach.
Tax-preferred Income Income or capital arising from a permanent or
timing tax benefit.
Tax-free Income Income or capital that arises from a permanent
Tax-deferred Income Income or capital arising from a timing tax
3.0 Entity Taxation and Property Trusts
The major issues of concern to the Property Council regarding the
proposed entity taxation regime are to ensure that:
property trusts are included within the definition of Collective
Investment Vehicle (“CIV”), and taxed on a flow-through basis; and
flow-through taxation of tax-preferred income is retained.
3.1 Property trusts must be included within the definition of CIV
The Property Council emphasises that property trusts must be included
in the definition of CIV and subjected to flow-through taxation.
In this regard, the Property Council welcomes the Treasurer‟s
announcement that cash management trusts and other CIVs, including
property trusts, will be excluded from the proposed entity tax regime,
and subjected to “flow-through” taxation instead.
“The Government has decided that „flow-through‟ taxation will apply
to cash management trusts and, in principle, to other collective
investment vehicles. Collective investment vehicles include widely
held unit trusts that distribute all, or virtually all, of their income
annually, such as bond trusts, common funds, managed funds and
Property trusts are widely held collective investment vehicles, through
which many ordinary Australian small investors can achieve a pooling of
risk for investing into large commercial properties, such as shopping
centres, office buildings and infrastructure projects. Further, property
trusts generally distribute substantially all of their annual profits to
participants, including tax-preferred income.
3.2 Flow-through of taxation is crucial
The Property Council strongly supports the taxation of CIVs on a
flow-through basis, as it would provide individual taxpayers with the
same capital aggregation and risk pooling benefits as the alternative
entity treatment, but would offer major compliance benefits relative to
that treatment. Entity taxation of property trusts would impose a major
compliance burden on retirees and other small investors.
In particular, the proposed flow-through treatment of property trusts will
ensure that there are no adverse cash flow effects for investors receiving
distributions of income from these property trusts. This is critical
because property trusts are a common investment for retirees, and other
small investors, in Australia. For such investors, the regular distribution
of profits from property trusts may be a major component of their
Although overall beneficiaries will not pay any extra tax, provided there
are no other changes to the treatment of tax preferences or depreciation,
there would be a significant negative timing impact on the cash flow of
While this could be addressed through early refund mechanisms, as
suggested in APC, such mechanisms would necessitate identification of
people eligible for early refunds and increase complexity and
administrative costs in making regular refunds to taxpayers. There may
also be additional compliance costs for investors and for property trusts.
Further, the proposed flow-through taxation of property trusts is crucial
from an equity standpoint as it would align more closely the tax
treatment of investors in these funds and individual investors making
equivalent direct (that is, non-intermediated) investments in commercial
property. Both ordinary Australians and the wealthy should enjoy the
same tax rights. There can be no assumption that investors will continue
to invest in property trusts once the tax mix of direct vs. indirect
investment in property is altered.
It would be inequitable, on the basis of competitive neutrality, to treat
property trusts differently from other collective investment vehicles, such
as equity trusts, bond trusts and cash management trusts.
Furthermore, international competitiveness necessitates the flow-through
taxation treatment of property trusts as property trusts are taxed on a
flow-through basis in most other countries.
If Australia were to move to an entity basis of taxation for property trusts,
it would have a major negative impact on the availability of foreign
capital for future property investment in Australia. Depending on the
model of entity taxation adopted, foreign investors would either bear
substantially more tax than currently (under the deferred company tax
option) or would suffer negative cash flow consequences and an increase
in compliance costs.
If property trusts were not taxed on a flow-through basis, property trusts
may well change their distribution policies so as to maintain the power of
unit holders to build wealth through interests in property. In particular,
if entity tax applied, property trusts would be forced to consider retaining
earnings rather than distributing most of their income to unitholders.
The reduced distribution of income by property trusts to unitholders
would harm the millions of Australian small investors who enjoy a stake
in property trusts, either directly or through their superannuation fund.
Many of these investors are retirees who rely on regular distributions
from property trusts to maintain the self-sufficiency they deserve. It
would also potentially reduce the revenue raised from these entities.
3.3 Defining the “widely held rule”
The Property Council submits that the “widely held rule”, which is
critical to the definition of CIV, should be modeled on the existing
principles underlying the definition of a “public trading trust”, in
Division 6C of the Income Tax Assessment Act 1936 (“ITAA36”).
Property trusts already comply with these rules.
For example, a CIV could be defined as any trust where:
(1) any of the units are listed for quotation on a stock exchange;
(2) any of the units were offered to the public;
(3) the units are held by 50 or more persons; or
(4) tax exempt entities, and/or a complying superannuation, ADF, PST
fund, a life insurance company and/or a CIV holding a beneficial
interest, directly or indirectly, cumulatively hold 75 per cent or more
of the property or income of the trust.
Further, a tracing rule should be incorporated in the widely held
definition to include sub-trusts in the CIV regime where they are widely
held or indirectly widely held. The tracing rule would be applied at each
level of the property trust ownership structure. An indirectly widely
held sub-trust could be defined to include any sub-trust that, with
tracing, satisfies the widely held rule outlined above.
This approach would be consistent with the objective of the widely held
rule of ensuring that the relevant trust is not controlling or manipulating
the property. If a sub-trust were ultimately widely held upstream, then
the direct investors in the sub-trust would not be in a position to control
A property trust can be a CIV or a stand-alone trust or a sub-trust.
Sub-trusts are used extensively in the property trust sector because they
allow a broad range of interests to hold a property and facilitate the
dissection of interests in properties. These sub-trusts are generally not
widely held entities in their own right, but they are indirectly widely
held. Overleaf is an example of a typical property trust structure,
involving a sub-trust.
Listed Property Listed Property
Trust A Trust B
50% 50% Trustee
Development Fee Sub-Trust
External Ownership Rental Income External
Develops Property Manages
In the diagram above, listed property trusts A and B are widely held, and
each owns 50 per cent of the sub-trust, which owns the property. It is
submitted that this type of sub-trust is indirectly widely held, as it is
ultimately owned by widely held entities.
Similarly, property trusts may be collectively owned by a group of
institutions (usually 20 or less), that invest wholesale funds in property
trusts on behalf of thousands of beneficiaries or investors.
The Property Council considers that these sub-trusts should also be
included in the definition of a CIV, as they are indirectly widely held.
Accordingly, the Property Council suggests that any “widely held” rule
incorporate a tracing element, as outlined earlier, allowing tracing
through sub-trusts to ultimate holding trusts and other entities. This
would ensure flow-through taxation of sub-trusts, and avoid
discrimination against dual level investments as compared to single level
Further, the treatment of sub-trusts as indirectly widely held trusts with
flow through taxation treatment would recognise the high degree of
transparency of these arrangements.
In this regard, property assets are getting so large and expensive that it is
increasingly becoming less viable for one trust to own 100 per cent of a
property, such as a shopping centre. As a result, there is a trend to
diversification – with property trusts typically owning a joint or minority
interest in a number of shopping centres (through sub-trusts), rather than
full ownership of any one property.
3.5 Flow-through of Tax Preferences
The Property Council considers that distributions of tax preferred income
by property trusts should continue to flow-through to property trust
investors as non-assessable income. This treatment would:
ensure competitive neutrality between wealthy individual investors
and smaller investors;
avert a shift from the Australian property trust sector by investors,
making it difficult for the sector to finance capital requirements;
be consistent with international practice and maintain the
international competitiveness of the property trust industry;
avoid a reduction in the income distributions of property trusts,
which would affect the incomes of many small investors; and
avoid further increasing the complexity associated with the business
income tax system.
If the flow-through of tax preferences were not allowed, property trusts
may well change their distribution policy so as to maintain the power of
unitholders to build wealth through interests in property. The result
would be that there would be little addition to taxation revenue if the tax
preferences were neutralised on distribution.
3.5.1 Competitive neutrality
In Australia, property trusts operate purely as collective investment
vehicles, through which small investors may achieve a pooling of risk for
investing into particularly large commercial properties. Accordingly, it
would be inequitable, on the basis of competitive neutrality, to treat these
arrangements differently from direct investments by individuals in
The collective nature of property trusts is reflected in the structuring of
their property holdings. Property trust investments are structured so
that the ownership of the property is separated from the management
and development of the property. This separation of functions is
outlined in the diagram overleaf and following. However, it should be
noted that this is a generalisation of how property trust arrangements
operate, and in practice more complex holding structures may be used.
Nevertheless, the broad principles remain consistent.
Development Fee Management Fee
Ownership Rental Income
In above diagram, the property is owned by the listed property trust.
However, the trustee of the property trust has contracted out the
management and development of the property to external property
management and development companies.
The external management company manages the property. This
involves letting the property, collecting rents, paying expenses, etc. The
management company may also employ an investment manager to
manage the funds of the trust. The management company is paid a
management fee by the trustee based on a percentage of the gross rental
revenue. The management company is subject to company tax on the
The external development company is responsible for the development of
the property (e.g. the original construction, extensions, and renovations).
The development company is paid a development fee by the trustee,
which is subject to company tax.
The trustee has an organisational role, which involves outsourcing, for
example, the decisions on which properties to invest in and the associated
business risk analysis, and acts in a fiduciary role to ensure that the
interests of the beneficiaries are protected.
The relevant comparison for competitive neutrality purposes is between
property holdings held through property trusts and property held
directly by individuals, rather than between property trusts and
In this context, the flow-through of tax-preferred income to property trust
investors would ensure equal treatment of those wealthy individual
investors that can afford to invest directly in commercial property
producing tax-preferred income (who will continue to get tax
preferences) and smaller investors that do not have the financial capacity
to buy a commercial property by themselves and invest through a
property trust. Both ordinary Australians and the wealthy should enjoy
the same tax rights. Moreover, if these small investors are disadvantaged,
Australia‟s national savings may be adversely affected.
In fact, competitive neutrality is particularly relevant with respect to
property trusts because it is difficult if not impossible for individual
investors to invest in commercial property on a small scale, unlike
investment in residential property.
If property trusts were disadvantaged then, over time, alternative, more
tax competitive structures would be likely to be developed to meet the
market demand from small investors for collective investment vehicles.
For example, property investment vehicles could be structured as joint
ventures or partnerships, rather than trusts. However, this would
involve enormous restructuring costs for the industry for no benefit to the
For example, property trusts are increasingly acquiring property from
Australia‟s major industrial companies seeking to free up their balance
sheets and achieve a greater focus on their more productive assets. If
property trusts were disadvantaged, this trend would most likely be
reversed, with adverse effects for the efficient allocation of resources in
the economy. This example clearly shows how a failure to provide a
flow-through of tax preferred income would be to the immediate
detriment of large parts of the Australian economy and the national
Furthermore, unlike cash management trusts, which could easily be
restructured, property trusts lack the flexibility to restructure due to
stamp duty considerations. This should be taken into account in any
3.5.2 Capital requirements
The property industry is very capital intensive, creating a constant
demand for new capital inflows into the sector. In recent years, this
thirst for capital has become more pronounced as large Australian
institutions have been reducing their allocation of funds to property.
Accordingly, the capital required for the ongoing expansion of the
property trust sector is increasingly being sourced from foreign
In this context, the removal of flow-through of tax-preferred income
through property trusts would result in a shift from the Australian
property trust sector by these investors, as large segments of foreign
investors tend to have a low tax rate. For example, Dutch and US
pension funds, a major source of foreign capital, are exempt from tax. In
fact, pension funds in most other countries are exempt from domestic
Uncertainty about the future tax status of property trust investors is
already affecting foreign investment in the property market, with effects
on investment, growth, and employment. This was clearly
demonstrated in the week before the release of APC, when the property
trust index of the Australian Stock Exchange declined by 7 per cent.
Chart 1.1 represents the price of Australian Listed Property Trusts (LPT‟s)
over the last three months. The decrease in unit price of LPT‟s was
initially attributed to a rise in 10 year bond yields. However, bond yields
have since fallen while the value of LPT‟s has remained suppressed. The
Property Council believes the suppression of LPT prices has been due to
investor concerns over the full flow through of tax preferences.
The removal of flow-through of tax-preferred income through property
trusts may also disadvantage superannuation funds (another major
source of capital for the property trust sector) investing in property trusts.
This is because of the bring forward of tax liabilities on the earnings of
property trusts. This negative timing effect on the cash flow of
superannuation funds may act as a disincentive for investment by
superannuation funds in property trusts, as opposed to direct property
investment. Small superannuation funds that invest in property directly,
to avoid this distortion, would be burdened with less liquid property
investments and lower returns.
LPT Price Index
19 -9 9
29 -9 9
Source: Warburg Dillon Read
Chart 1.1 Movements in Property Trust Prices
Jan 1999 – April 1999
3.5.3 International Competitiveness
The flow through of tax preferred income through property trusts is
essential if Australia is to remain internationally competitive in the
property investment area. Funds for such investments are globally
mobile and the flow to Australian investments will be seriously curtailed
if the tax treatment of international investors is unfavourable. It is
common international practice to allow flow through of tax preferences
for property trusts.
For example, notwithstanding tax reform processes, the United States has
recognised the special nature of property trusts and allows flow through
of tax preferred income through Real Estate Investment Trusts (“REITs”).
The flow through of tax preferred income through property trusts is also
allowed in Canada.
3.5.4 Distribution policy
If the flow-through of tax-preferred income through property trusts were
removed and tax-preferred income were taxed in the hands of
unitholders, property trusts may opt to distribute only their assessable
income and retain their tax-preferred income. This would allow
property trust unitholders to defer the payment of tax on the
tax-preferred income and maximise the benefit of the relatively
concessional taxation of capital gains. This greater retention of earnings
would be likely to have a negative effect on revenue.
Further, any tax driven incentive to distribute a lower proportion of
property trust earnings to unitholders would create tensions between the
demands of unitholders and the incentives faced by property trusts. The
full distribution of earnings to unitholders is a key characteristic of
property trusts. Investments in property trusts are made on the basis
that they will return a yield that represents virtually all of the earnings of
The greater retention of earnings by property trusts would result in
increases in the capital value of property trust units over time. However,
unitholders may be forced to sell a proportion of their holdings to
maintain their lifestyle. This may be difficult in practice, for the typical
small investor, due to the high transaction costs that would be incurred in
selling small parcels of units.
If the flow-through of tax-preferred income through property trusts were
removed, the complexity associated with the business income tax system
would be substantially increased due to the need for early refund
mechanisms to address the resulting significant negative timing impact
on the cash flow of unitholders.
As mentioned earlier, any early refund mechanisms would necessitate
identification of people eligible for early refunds and increase complexity
and administrative costs in making regular refunds to taxpayers. There
may also be additional compliance costs for investors and for property
Moreover, retirees and other small investors in property trusts would be
required to include tax-preferred income in their annual income tax
returns. This would force these investors to learn about the imputation
system, grossing up, tax credits and rebates, as well as fill in more forms –
the last thing retirees want is more hassle and more worries.
4.0 Building Depreciation
Division 43 of the Income Tax Assessment Act 1997 (“ITAA97”) allows a
taxpayer to claim income tax deductions based on the original cost of
construction of new non- residential buildings and structural
improvements, which are used for the purpose of producing assessable
Division 43 was introduced, originally as Division 10D of the ITAA36 in
1983 in recognition that infrastructure is a wasting asset. In recognising
this, Division 10D ensured that structures and particularly buildings
were given their proper recognition for tax purposes, a position which
was needed to improve national productivity and international
4.1 Include Buildings and Structural Improvements in a
The Property Council is strongly of the view that buildings and structural
improvements should be incorporated into the general depreciation
regime applying to plant and equipment, as proposed in APC, Chapter 1,
paras 1.56-1.59 (i.e. Option 2). This would allow economic life
depreciation of buildings and structural improvements based on the full
purchase price of buildings, rather than construction cost.
An economic life approach recognises the physical deterioration of
buildings as well as the fact that obsolescence of buildings is a result of
exogenous change and is not easily controlled by the owner of a building.
It is, therefore, a more complete representation of commercial investment
realities and the true costs borne by building owners to earn income.
Further, there is a strong argument that the taxation consequences of
owning a building should be consistent with the taxation consequences
of owning plant and equipment. In both cases:
a taxpayer is making an investment in a capital item for the purpose
of producing assessable income;
the underlying asset is a wasting asset, such that eventually
replacement of the asset will be required (refer to section 4.3.3
both Division 43 and the general depreciation provisions were
introduced in order to encourage taxpayers to invest in assets and
However, building owners are currently at a disadvantage to owners of
plant and equipment in a number of ways.
Buildings are subject to statutory restrictions such that they can only
be amortised over a set period of 25 or 40 years from the construction
date, regardless of their actual useful life. The useful life of plant
and equipment, on the other hand, can be self-assessed by the owner.
Owners of plant and equipment can have a cost base for the asset
that is higher than the original cost of the asset when first installed
for use. This will occur whenever the asset is sold to another user
for a price in excess of the original cost.
A subsequent owner of a building has no choice in respect of the
economic life of the building or the amount upon which deductions
are available. The subsequent owner is locked in by the prior
owner‟s fact pattern, subject to any additional capital expenditure,
which they may incur and wish to amortise.
4.2 Advantages of Including Buildings and Structural
Improvements in a Consistent Regime
Given the above disadvantages for building owners, the inclusion of
buildings and structural improvements within the general depreciation
regime applying to plant and equipment would offer a number of
benefits. In particular, it would ensure consistency in terms of the tax
treatment of buildings and plant and equipment.
Owners of buildings would be able to self assess the economic life of a
building using their knowledge of the factors affecting its life. This
would provide for a better allocation of the cost of the building over its
useful life as owners are in the best position to estimate the economic life
of the building, rather than being limited to an inconsistent and rigid
In determining the economic life of a building, building owners would be
able to consider the relevant factors, such as the intensity of use in the
business, the wear and tear on the building, the intended expenditures on
repairs and maintenance of the building, and the durability of the
materials used in its construction.
Further, owners of buildings would have a cost base equal to the
economic cost of the building, regardless of whether this is greater or less
than the original cost of the assets when it was first installed for use. In
addition, the full 100 per cent depreciation allowance will be available
over the economic life of the asset, regardless of whether the original
vendor held the building for longer than 40 years.
4.3 Implementation Issues
4.3.1 Separate valuation of buildings, plant and equipment and land
In some instances, the proposed approach would require the separate
valuation of buildings or structures and the land they are situated upon
at the time of sale.
We do not consider this to be a major impediment as buildings and
structures can be distinguished from land and from plant and equipment
Accordingly, it would not be a difficult task for professional valuers to
calculate the separate components for tax depreciation purposes.
As acknowledged in APC, it is common practice in many other major
countries to base building depreciation on purchase price and not on
original cost. This has not given rise to insurmountable valuation
problems in these countries and would be unlikely to create significant
problems in Australia.
The split between plant and equipment and buildings is negotiated at
arm‟s length between purchasers and vendors. Moreover, in some
cases, separate valuation is already required under the current tax
system. For example, where a building and the land it is situated upon
are sold, the land may be a pre-CGT asset and the building a post-CGT
4.3.2 Buildings are wasting assets
In Chapter 1, paras 1.59 of APC, it is suggested that the proposed
“imply not taxing the seller on the indexation component of any
capital gain on the asset and allowing the purchaser to depreciate from
the full purchase price including the indexation component.
Consequently, over the life of the building the total deductions allowed
may exceed the original cost of the building. However, this is already
theoretically possible under the current arrangements for depreciation
of plant and equipment, but does not arise in many cases as capital
gains are rarely realised on plant and equipment.”
The Property Council notes that the above argument would not be
relevant if the indexation provisions are removed. Further, even if the
indexation provisions are not removed, the above argument has equal
application to buildings, as capital gains are rarely realised on buildings.
From an economic perspective, buildings have a finite life and do
depreciate in value.
Where a combined land and building package has appreciated in value, it
is usually a result of an increase in the value of the land. The value of
the building is likely to have depreciated in value due to physical decay
over time, as well as the process whereby economic or technological
obsolescence erodes the building‟s capacity to fulfil a useful function.
Physical decay will usually be a gradual process, and is capable of being
controlled by annual maintenance. However, obsolescence may occur
suddenly due to technological or market change. In this regard, the rate
of obsolescence of buildings has increased as the rate of technological
change has accelerated.
A building may become obsolete for a variety of reasons, including the
Functional Obsolescence occurs where technological advancement
results in a building reaching a point where it is no longer capable of
offering modern facilities or services;
Economic Obsolescence occurs when the return from a building
becomes so unfavourable, when compared to the return from a new
building, that replacement becomes financially attractive;
Legal Obsolescence occurs when new legislation is introduced that
renders the structure or individual plant obsolete (for example,
changes to disability legislation);
Aesthetic Obsolescence occurs when a building no longer meets the
image requirements of potential occupiers;
Environmental Obsolescence occurs due to changes in the
characteristics of a location; and
Social Obsolescence occurs when social trends result in a shift in
The depreciation of buildings is clearly shown by the necessity for
periodic refurbishment of buildings. The Property Council undertook
two research projects in the past decade that proved buildings wear out
in the course of producing assessable income. The research showed that
office buildings have an economic lifespan of 22 years, shopping centres
18 years, and hotels 15 years.
Due to the changes in technology and obsolescence over the last decade,
the economic life of buildings is declining at a faster pace. Consequently,
the Property Council has now commissioned a new piece of independent
research in order to review its earlier conclusions.
In the past, few buildings were demolished at the end of their economic
life; instead they were totally recapitalised. However, technological
change and the increased expectations of business tenants means that,
increasingly, the only competitive solution for owners is to write off the
entire building structure (demolish).
Some recent examples include:
State Office Block in Sydney. This property was completely
demolished after 30 years.
101 Collins Street Melbourne. This building was demolished after
25 years and replaced with a new structure.
Government Offices at Chifley Square was built in the early 1960‟s
and demolished in 1987 - an economic life of approximately 25
years. The building was completely replaced.
The Property Council looks forward to sharing the completed results of
this new report and its conclusions with the Government within the near
As a further example, shopping centres generally require major
refurbishments approximately once every 10 years. Only some of these
refurbishment costs are deductible. Some recent examples of major
refurbishment programs are outlined below:
Burwood Shopping Centre was built in 1967 and refurbished twice in
1972 and 1978. This building was ultimately demolished in 1999
demonstrating that not only must buildings be refurbished to be
economically productive but that they also depreciate to the point
where the only viable option is to demolish them.
Woden Plaza was built in 1972 and purchased by its current owners
in February 1986 for $74.8m. To date the total cost has amounted to
$133.7m. This includes a major refurbishment in response to the
economic environment and market research undertaken by its owner.
The cost of the refurbishment between 1998 – October 1999 is
budgeted at $10.6m.
Appendix 1 provides some examples of buildings in Sydney and
Melbourne that have either been demolished or undergone extensive
4.3.3 Blackhole Expenditure
Currently, a significant proportion of the costs of constructing buildings
and structural improvements are blackhole expenditures. For instance,
around 2 per cent of the costs of constructing a shopping centre are
typically blackhole expenditures. Some examples of these blackhole
expenditures include legal fees and regulatory fees.
The Property Council supports the proposal in Chapter 1 of APC to
remove blackhole expenditures by, depending on their nature, making
them deductible using immediate write-off or adding them to the cost of
assets of the expenditure for depreciation purposes.
4.3.4 Transitional provisions
If buildings and structural improvements were included in the general
depreciation regime for plant and equipment, transitional provisions
would be required.
The Property Council considers that the new arrangements should apply
to all buildings and structural improvements acquired, or for which
construction contracts have been entered into, after the commencement of
the new measures.
This option should minimise tax-induced distortions to investment
decisions and the market prices of buildings and structural
improvements, and facilitate the expeditious integration of building and
structural improvements into the general depreciation regime, with the
advantages outlined above.
4.4 Reject Reduction in Depreciation Rate for Buildings
We note that any moves to reduce the depreciation rate for buildings and
structural improvements, as proposed in APC, Chapter 1, para 1.6
(i.e. Option 3), would have a disastrous impact on investment and
growth in the property industry by:
reducing the capital competitiveness of property as an asset class.
As the building depreciation regime moves further away from the
economic life basis, investors will increasingly prefer other asset
classes such as equities;
impacting the rents charged by building owners. Rents may rise so
that building owners continue to receive the same net after-tax
consideration. If rents were not to rise sufficiently to compensate
building owners for the loss of building depreciation, building prices
would fall as a result of tax induced lower rates of return on
creating a distinct sub-asset class driven by tax policy. Property
developed between 1980 and the introduction of the new measures
would be preferred over property developed after the introduction
of the new measures; and
promoting an obsolete infrastructure. As discussed earlier,
buildings do depreciate. Owners would be encouraged to hold on
to buildings for longer periods for three reasons: first, because they
can not afford to re-invest net after tax proceeds; secondly, to utilise
the income tax deductions available under Division 43; and finally,
to ensure that a capital gain will not be realised on the sale of the
detracting from Australia‟s status as a world class infrastructure and
business location. If there is no recognition of the nature of
buildings as a wasting asset, there will be no incentive to construct
world class infrastructure. The effect of this on Australian
businesses involved in supporting the infrastructure industries
would lead to detrimental economic effects, with a corresponding
effect on employment and the nation as a whole. The continued
construction of world class infrastructure is therefore one of the
aspects which underpins Australia‟s productive capacity.
As outlined above, the Property Council‟s primary submission is that
buildings should be included in the economic life regime for depreciation
purposes. However, in order to avoid the consequences outlined above,
the Property Council also submits that a “safe harbour” position should
be implemented. Under this “safe harbour”, a minimum available rate
of depreciation or amortisation on building structures should be set
which ensures building owners are no worse off than under existing
Division 43. In this regard, we endorse the BCTR‟s submission on
including a “safe harbour” or minimum depreciation rate cap on
5.0 Accelerated Depreciation/ Company Tax
In Chapter 2 of APC, it is proposed that accelerated depreciation be
removed or modified as a trade-off for a lower company tax rate.
The Property Council recognises the need for revenue neutrality and the
benefits of a lower general company tax rate for overall economic growth,
employment and welfare. However, it should also be recognised that for
industries that are very capital-intensive in nature, the accelerated
depreciation provisions are very important and critical to international
competitiveness. In this regard, the property industry would suffer a net
disadvantage if accelerated depreciation were removed and replaced with
a lower company tax rate, as it is very capital-intensive in nature.
Nevertheless, the Property Council would support the replacement of the
accelerated depreciation provisions with an economic life regime,
the rate of company tax is reduced to 30 per cent;
the depreciation of buildings and structural improvements is moved
to an economic life basis, in line with plant & equipment
tax-preferred income of property trusts is allowed to flow through to
property trusts investors; and,
government considers offering accelerated depreciation for
supporting public policy objectives, such as encouraging
conservation of heritage buildings or reducing greenhouse gas
It should be recognised that while it is difficult to match the actual
depreciation of buildings and structural improvements with the
depreciation of buildings and structural improvements for tax purposes,
any differences would only be of a timing nature.
It is inevitable that there will be winners and losers in any trade-off
between the removal or modification of accelerated depreciation and a
lower company tax rate. However, in our view, the benefits of a neutral
depreciation regime and a lower company tax rate suggest that this
approach would reflect a sensible compromise between the interests of
capital intensive industries, such as the property sector, and the wider
6.0 Capital Gains Taxation
The current system of CGT in Australia is inefficient and imposes
substantial deadweight costs on the economy. It encourages short-term
consumption at the expense of saving and investment (and, therefore,
future economic growth), and introduces distortions (non-neutralities).
One of the adverse efficiency effects of the CGT is the well-known
“lock-in effect”, which causes inefficiencies by penalising capital
mobility. This distortion is attributable to the fact that CGT is
determined on a realisation basis, so that investors with accumulated
capital gains may not realise those gains in order to avoid the CGT. To
the extent that this is the case, investors may hold on to assets that yield a
lower rate of return than could be available if the portfolio were
reallocated. This effect increases with the size of the unrealised capital
gains associated with the asset and the rate of tax that would be payable.
In such cases, the commercial decision is outweighed by the tax decision,
and the investment portfolio is rendered inefficient.
The lock-in effect has lead to suggestions that capital gains taxation
should be lower on longer-held assets. The US and UK have adopted a
stepped rate approach by allowing lower effective CGT rates on gains
from an asset in proportion to the length of time the asset is held. For
example, the US has a stepped rate CGT system, which currently
incorporates significantly lower CGT rates for assets held for more than
18 months (moving to 12 months from 1 December 2000). This approach
penalises speculative traders, without creating a lock-in effect.
Furthermore, the taxation of capital gains in Australia is relatively severe
compared with many other countries, particularly with low inflation
when the indexation adjustment has little benefit. An internationally
high rate of CGT means Australian investors demand more equity for a
given cash outlay in an Australian enterprise, and a higher pre-tax rate of
return, than do foreign investors. Since countries compete for mobile
international capital, a relatively high CGT rate has adverse consequences
for our international competitiveness.
A lower effective rate of CGT would increase the after-tax return to
investors, lower the cost of equity capital and increase investment in
assets providing returns in the form of capital gains. Enterprises could
grow faster, invest more and employ more people.
In this regard, both the USA and the UK have recently reduced their
effective rates of CGT. Under the UK capital gains tax regime,
non-resident investors are excluded and CGT taper relief is available,
whereby a proportion of the gross capital gain is not included as
assessable income. This encourages a higher proportion of “patient”
capital, which assists business investment. The widely held view is that
the reductions in the effective rates of CGT in the US and the UK will be
beneficial for investment and business development.
Accordingly, the Property Council supports:
a tapered system of CGT, incorporating steps whereby a reducing
proportion of realised capital gains are taxable over time; and
the removal of the CGT indexation provisions and the modification
of the averaging provisions, provided a tapered system of CGT is
6.1 Taper System
It is submitted that a tapered system should be adopted in Australia,
incorporating steps based on the proportion of the capital gains that are
taxable, rather than on the rate of CGT. This system should be extended
to superannuation funds, pooled superannuation trusts (PSTs) and life
companies, as well as individuals.
As mentioned earlier, this approach has been adopted in the UK. A
tapered CGT system would minimise any lock-in effect and avoid the
need to change the CGT rate every time personal marginal tax rates are
changed. It would also reduce the effective rate of CGT to a more
internationally competitive level. Capital losses should also be
incorporated on a proportional basis depending on how long they had
been held, to ensure symmetrical treatment of capital gains and losses.
In order to minimise the potential for a lock-in effect, the steps should
reflect a short holding period, so the proportion of capital gains subject to
CGT drops substantially after a relatively short period. For example, 70
per cent of the capital gain could be taxable after 2 years, 50 per cent of
the capital gain could be taxable after 3 years and 20 per cent after 5 years.
This approach represents an effective compromise as it would penalise
speculators and reduce the efficiency and revenue costs associated with
investors holding assets for too long due to the lock-in effect. The
concessional treatment could readily be funded by tightening up on
averaging and by removing indexation.
The Property Council supports the removal of indexation, to simplify the
CGT system, provided a tapered system of CGT is adopted as outlined
above. Australia is one of the few countries that indexes capital gains.
Removing indexation would simplify the law and reduce compliance
If indexation were removed, transitional issues would be important. A
possible approach would be to enable all assets to retain the indexation
benefits up to the date of removal. This would imply that the assets
would enter the new arrangements at their indexed cost base. Capital
losses realised after the date of implementation would continue to be
calculated by reference to the original cost of the asset (because they are
calculated from the non-indexed cost base) or the reduced cost base.
Further, whether it is better to retain the current system or remove
indexation ultimately depends upon future levels of inflation.
Indexation currently provides substantial protection for long term
investors against the possibility that inflation may increase in the future.
Clearly, the possibility of this happening increases with the length of time
an asset is held. In fact, this provides a sound basis for reducing the
taxation of capital gains based on the length of time that an asset is held.
It also raises the question of whether the proportion of capital gains
subject to tax would be reviewed if inflation did increase. In the opinion
of the Property Council, this issue should be kept under consideration if
indexation is removed.
The Property Council supports the modification of the CGT averaging
provisions, to remove the scope for abuse and simplify the CGT system,
provided the rate of CGT is reduced to 30 per cent for entities and
The Property Council recognises that taxpayers that have variable income
from non-capital gains can take advantage of averaging to realise assets
selectively to reduce their effective tax burden. Averaging thus creates
the potential for additional and significant taxation benefits for strategic
taxpayers. The issue is particularly noticeable where taxpayers use the
averaging provisions to duplicate the benefit of the tax-free threshold.
While there are strong equity grounds for retaining averaging, some
reform would be acceptable based on reducing the time over which
averaging was permitted and limiting access to the tax free threshold for
the purposes of averaging.
7.0 Other Issues
7.1 Partnerships and CGT
Property Council members are involved in a number of joint ventures.
In particular, it is becoming increasingly common for shopping centres to
be owned by a joint venture comprising two or more property trusts.
The proposals in Chapter 14 of APC would have ramifications for these
The Property Council supports the entity approach to the taxation of
partnership capital gains (i.e. Option 2), discussed at p. 336 of APC.
Under this approach, the partnership would be regarded as the notional
owner of all the partnership assets, as is currently the case for
depreciation purposes. The partners‟ ownership interest would be in the
partnership as a whole. The situation would be analogous to a
shareholder that holds shares in a company, that have been purchased at
different times and at different prices.
This approach would avoid taxing the partner or partners not selling their
interests on unrealised capital gains. Taxing unrealised capital gains
would cause cash flow problems. Further, it would be inequitable to tax
partners on unrealised capital gains when other owners of assets are not
taxed until realisation.
The entity approach would:
allow a consistent taxation approach to be applied to partnership
assets, for both depreciation and capital gains tax purposes;
avoid the complexities involved in applying the fractional interest
approach. The fractional interest approach has been subject to
criticism because of its complexity and compliance costs. It requires
each partner to keep separate records of their respective interests in
partnership asset. In the case of depreciable assets, it largely
negates the advantage to partnerships of being allowed to prepare a
single depreciation schedule;
minimise compliance and administration costs; and
avoid the need for balancing adjustment rollover relief.
While there would be record keeping costs associated with different cost
bases for different parts of the partners‟ interests in the partnership, they
appear to be manageable in the case of share ownership and could be
readily adapted to partnership interests.
The Property Council considers that the RBT has overstated the benefits
of consolidation. For example, there are major unresolved problems
with the treatment of the movement of entities with losses into a
consolidated group and deconsolidations. No view on consolidation can
be formed until its scope and details are known.
The Property Council stresses that the introduction of a new
consolidation regime should not be seen as time critical to the overall
reform of business taxation. Specifically, consideration should be given
to the deferred introduction of a consolidation regime. A significant
amount of time will be required for taxpayers to adjust to the business
reform measures. In addition, it must be ensured that consistency is
achieved between relevant tax laws which may allow for a consolidation
regime (for example, that trusts and companies are dealt with under the
same consolidation rules for income taxes and GST).
The Property Council considers that any the consolidation regime should
be as wide as possible, and apply to resident wholly owned property
trust groups, including sub-trusts, that do not qualify as CIVs.
In addition, any consolidation regime should allow access to group-wide
losses. Provided adequate stamp duty exemptions are introduced, this
would facilitate and encourage the restructuring of property trust
arrangements, such as the transfer of property between group trusts and
the liquidation of unwanted trusts. Consolidation of property trust
groups would also offer substantial compliance savings.
7.3 Scrip-for-scrip Rollover Relief
The life cycle of a typical business is characterised by frequent changes in
the structure of the entity for commercial or legislative reasons, as it
moves from one stage to another. For example, the business may need to
be transferred to another company or entity, to meet the requirements of
an expanded investor base. These transitions are generally treated for
tax purposes as capital gain realisations, giving rise to tax-driven
For example, currently, a “scrip-for-scrip” merger or takeover of a
company or CIV triggers the CGT provisions, because the taxpayer has
disposed of one asset for another, even though there has been no
realisation of cash. If a liability is instead deferred – for example, if
rollover relief is available – the effective rate of CGT (in present value
terms) is reduced.
Accordingly, it is not just the „headline‟ rate of CGT that is important, but
also whether or not a transaction triggers a CGT liability. The current
CGT rollover relief provisions are not sufficient and “lock-in” inefficient
forms of business organisation. Rollover relief can improve economic
efficiency by reducing the “lock-in” effect of CGT and encouraging the
re-organisation and continued development of enterprises.
Australia‟s current CGT provisions are a significant barrier to takeovers
based wholly on scrip-for-scrip and the allowance of rollover relief in
such circumstances may facilitate the development of a more efficient
business sector in Australia through having a more efficiently functioning
domestic capital market.
Moreover, many countries provide broader rollover relief than is
available in Australia. In particular, some countries allow rollover relief
when a business disposes of one asset and purchases another of a similar
There are also strong practical reasons for rollover relief, for example
when there is no cash from a transaction (such as a scrip-for-scrip swap)
to pay a tax liability. Further where a scrip-for-scrip merger or takeover
occurs the cost base has not changed and the shareholder has a
continuing interest in the same assets together with those combined
through the merger. If the transaction is wealth generating the tax
ultimately collected is greater since the original cost base is retained.
For these reasons, the Property Council considers that rollover relief
should be as broad as possible, covering mergers of non-listed widely
held property trusts and superannuation funds. Further, the proposed
CGT rollover relief should be extended to foreign investments that are
subject to the controlled foreign company provisions.
As property trusts are primarily publicly listed, and entry and exit prices
are determined on a daily basis, valuation issues would not arise.
Further, there are strong equity reasons for extending rollover relief to
these trusts, in strictly defined circumstances.
Moreover, in practice, the provision of rollover relief in these
circumstances would not result in a loss of revenue, as this activity is not
currently occurring, due to the tax impediments outlined above.
7.4 Quarantining of Capital Losses
The quarantining of capital losses, so that they may only be offset against
capital gains, is regarded by many taxpayers as unduly harsh. It is a
barrier to risk taking and speculation, and can impact unfairly on some
taxpayers that are unable to utilise capital losses quickly or at all.
Currently, the quarantining of losses can disadvantage those undertaking
risky projects. A misallocation of resources and lower economic growth is
likely to result from this non-neutrality. If the CGT system was risk
neutral (a key policy design principle proposed by the RBT), with
consistent and symmetrical treatment of gains and losses, it would no
longer discourage risk taking.
The Property Council supports reforms to the capital loss provisions to
carry-forward of capital losses at an appropriate interest rate; and
carry-back of capital losses to offset against earlier capital gains.
However, the Property Council does not support the option of retaining
quarantining of capital losses for shares and units in trusts assessable on a
realisation basis, regardless of the type of taxpayer and circumstances for
holding the asset. This proposal would be inequitable and would divert
investments away from these investment vehicles.
7.5 Abolition of Stamp Duty on Transfers or Conveyances of
In A New Tax System (“ANTS”), circulated by the Treasurer, the Hon Peter
Costello, MP, in August 1998, the Federal Government outlined
arrangements to replace state and territory stamp duties on transfers or
conveyances of business property and various other state imposts, with a
Goods and Services Tax (“GST”).
The Property Council supports the abolition of stamp duty on transfers or
conveyances of business property as soon as possible, for a number of
reasons, including the following:
Stamp duty on real property in the States and Territories in Australia
is “discriminatory” in the sense that as a class of assets, real property
bears a significantly higher rate of duty compared to other types of
assets, particularly shares. Thus stamp duty lacks the critical
characteristics of tax neutrality. The long term result is that the lack
of tax neutrality will distort decision making and investment capital
flows to the real property market;
Stamp duty is a transaction tax that creates market place
inefficiencies by distorting the behaviour patterns of property
owners by the so-called “lock-in” effect. That is, the amount of
stamp duty payable is a significant factor in the decisions of the
owners of real property to acquire or dispose of an existing property;
Stamp duty in Australia is imposed at significantly higher levels and
in a vastly more complex manner than in comparable jurisdictions;
The lack of harmony existing in relation to the various stamp duty
regimes has lead to distortions between the respective States and
Territories in Australia which can (and do) impede capital
movements. This imposes significant compliance costs, particularly
for those businesses that operate in more than one jurisdiction.
These differences also create opportunities to avoid taxes,
encouraging taxpayers and businesses to locate themselves, or
conduct their activities, in States with lower stamp duties; and
The commencement of the Managed Investments Act will, in the
absence of adequate stamp duty rollovers, impose an additional
unfair burden on the property industry.
7.5.1 Timing Issues
It is important that the proposed removal of stamp duty from transfers or
conveyances of business property and shares be simultaneous.
Otherwise, arbitrage opportunities and distortions will arise. For
example, if stamp duty were removed from shares, before being removed
from real property, there would be a further disincentive for investments
in business property, compared to shares.
Timing considerations will also play a part with the introduction of the
GST. The GST will increase construction costs, which are not currently
exposed to sales tax. Increased construction costs, in turn, will
necessarily lead to increased payments of stamp duty, which will create
even greater distortion in the investment mix. Therefore, it is critical
that stamp duties be removed and that they are done so simultaneously
with the introduction of the GST.
Further, the Property Council considers that stamp duty exemptions
must be introduced to assist with any corporate restructuring that is a
direct or indirect result of the implementation of the proposed tax
7.6 Fringe Benefits Tax on Car Parking
Car parking provided on-premises by an employer can be a taxable
fringe benefit if commercial alternatives are available nearby. The
Property Council has made extensive submissions on this issue in the
past. The Property Council considers that car parking provided
on-premises should not be subject to Fringe Benefits Tax where it is a
bona fide and legitimate business expense.
8.0 Revenue Implications
The Property Council contends that the above proposals would be
broadly revenue neutral in the context of the tax reform measures
announced in ANTS.
The Property Council has not developed revenue estimates for the
flow-through taxation of property trusts due to the Treasurer‟s
announcement that property trusts will be excluded from the proposed
entity tax regime, and subjected to flow-through taxation.
The Property Council considers that there is no revenue rationale for the
removal of the flow-through of tax-preferred income through property
trusts. As mentioned earlier, if the flow-through of tax-preferred income
through property trusts were removed and tax-preferred income were
taxed in the hands of unitholders, property trust distributions of
tax-preferred income to unitholders could be expected to fall. This
greater retention of earnings would be likely to have a negative effect on
The Property Council expects that the revenue implications of moving the
depreciation of buildings and structural improvements to an economic
life basis, in line with plant & equipment, would not be significantly
different from the revenue cost of the current system of depreciation of
buildings and structural improvements.
The introduction of a tapered CGT system, as outlined above, would
result in a substantial reduction in revenue. However, the increased
revenue collected through the removal of indexation and the removal or
modification of the averaging provisions would offset this loss of
Moreover, the long-term effects of the above proposals, due to the
improved incentives for building construction, will result in further
activity and growth in the construction and property sector, as well as
other sectors of the economy. The flow-on effects, in terms of higher
investment, employment and international competitiveness, should result
in higher revenue recovery in the medium term.
In conclusion, the Property Council notes that the property industry is a
very capital intensive industry, and given the nature of property trust
structures, one in which investors are normally subject to individual not
corporate income tax. In this respect, the Property Council‟s support for
the removal of accelerated depreciation in place of a reduction of
corporate tax represents a significant concession by the industry.
A reduction in corporate tax rates will have no immediate impact on the
property trust industry, and therefore the removal of accelerated
depreciation is a real and immediate cost. However, the Property
Council and its members recognise that other sectors of the Australian
economy, and as a result the interests of the nation as a whole, are better
served through this trade off. Accordingly, the Property Council
considers that agreement to this trade off, whilst directly against the
industries own best interest, is the better position to adopt for the sake of
the national economy.
Market Name Address NLA Demolished / Date Built Date Life
(sq.m.) Refurbished Demolished/ Span
Sydney CBD Legal & General House 8-18 Bent Street 25,000 Demolished 1975 1991 16
Sydney CBD State Office Block 74-90 Phillip Street 19,739 Demolished 1967 1997 30
Sydney CBD Lend Lease House 47-53 Macquarie Street 9,760 Demolished 1961 1995 34
Sydney CBD London Assurance House 16-20 Bridge Street 9,100 Demolished 1959 1998 39
Sydney CBD Orient Overseas Building 32-34 Bridge Street 6,205 Demolished 1960 1998 38
Sydney CBD The Sun Alliance Building 22-30 Bridge Street 5,950 Demolished 1965 1998 33
Sydney CBD LPGA House 56-58 Young Street 4,140 Demolished 1973 1992 19
Sydney CBD Gulf House 44-46 Young Street 4,000 Demolished 1970 1992 22
Sydney CBD Pacific Power Building 201-217 Elizabeth Street 46,870 Refurbished 1978 1992 14
Sydney CBD McKell Building 2-24 Rawson Place 25,348 Refurbished 1979 1993 14
Sydney CBD Royal Exchange Building 56 Pitt Street 23,700 Refurbished 1967 1998 31
Sydney CBD Prudential Building 37-51 Martin Place 20,730 Refurbished 1972 1998 26
Sydney CBD 54-62 Carrington Street 19,330 Refurbished 1971 1996 25
Sydney CBD 55-67 Clarence Street 15,252 Refurbished 1975 1998 23
Sydney CBD 17 Castlereagh 4,557 Refurbished 1973 1999 26
Sydney CBD Esso Building 127-153 Kent Street 17,000 Converted 1971 1993 22
Market Name Address NLA Demolished / Date Built Date Life
(sq.m.) Refurbished Demolished/ Span
Melbourne CBD Princes Gate West Tower 171 Flinders Street 15,019 Demolished 1967 1997 30
Melbourne CBD Birkdale House 233-239 William Street 3,580 Demolished 1963 1993 30
Melbourne CBD 140 William Street 42,467 Refurbished 1972 1993 21
Melbourne CBD Port Phillip Tower 120 Spencer Street 33,258 Refurbished 1973 1998 25
Melbourne CBD Celsius House 150-162 Lonsdale Street 28,541 Refurbished 1975 1997 22
Melbourne CBD 191 Queen Street 12,714 Converted 1976 1996 20