Cheap rent tax break is pushing up house prices
SMALL investors are being encouraged to cash in on a Rudd Government scheme offering tax benefits of up to $8000 a year on investment properties, provided they are leased at 20 per cent below market rent.
But analysts warn that the scheme, intended to increase the supply of cheap rental accommodation, is contributing to a boom in house prices under $500,000, making home purchase more expensive.
Initially targeted at large institutional investors and superannuation funds willing to invest in no less than 20 properties each, the scheme is being used by smaller investors who are banding together to set up new entities to apply in bulk for the tax rebates, which are then distributed to individual investors.
A small West Australian-listed funds management company, Questus Limited, has already lodged a product disclosure statement with the Australian Securities Exchange touting this "new class of tax-effective bricks and mortar investment". One new Sydney group, Macquarie Bond, which has been approved for 20 properties, has also considered helping small investors get access the grants.
The executive chairman of Questus, David Somerville, told the Herald interest from investors had been "phenomenal", and that 95 of 176 approved properties had already sold. Investors will pay 5.5 per cent of their $8000 subsidy to Questus as a management fee each year.
The Federal Government's $623 million National Rental Affordability Scheme - an election promise - gives investors a tax break of $6000 a year, topped up with a $2000 payment from state governments, for 10 years.
Properties must be approved and leased out at 20 per cent below market rents to low-income earners. On a two-bedroom apartment with a market rent of $400 a week, the discount is $80 a week, or $4160 a year, still leaving investors ahead by $3840 a year.
"It's pretty big," the managing director of SQM Research, Louis Christopher, said. "The rebate that they're offering more than offsets that 20 per cent discount for properties under $400,000."
Some tax experts have suggested the $8000 would have been better paid directly to renters. If the incentives are granted on properties that would have been built anyway, they contribute to price inflation.
The Federal Government has so far approved 4000 properties for the incentives, which it has said could be used to fund up to 50,000 new rental homes.
Mr Christopher identified the scheme as one of the factors, along with the first-home buyers' grant, which was likely to keep upward pressure on house prices below the $500,000 mark.
The chief executive of the Housing Industry Association in NSW, Graham Wolfe, sounded a note of caution for would-be small investors. "It is a rather big commitment to invest a lot of money [and] to commit yourself to the conditions for 10 years."
- Jessica Irvine Economics Writer
- April 13, 2009
SMALL investors are being encouraged to cash in on a Rudd Government scheme offering tax benefits of up to $8000 a year on investment properties, provided they are leased at 20 per cent below market rent.
But analysts warn that the scheme, intended to increase the supply of cheap rental accommodation, is contributing to a boom in house prices under $500,000, making home purchase more expensive.
Initially targeted at large institutional investors and superannuation funds willing to invest in no less than 20 properties each, the scheme is being used by smaller investors who are banding together to set up new entities to apply in bulk for the tax rebates, which are then distributed to individual investors.
A small West Australian-listed funds management company, Questus Limited, has already lodged a product disclosure statement with the Australian Securities Exchange touting this "new class of tax-effective bricks and mortar investment". One new Sydney group, Macquarie Bond, which has been approved for 20 properties, has also considered helping small investors get access the grants.
The executive chairman of Questus, David Somerville, told the Herald interest from investors had been "phenomenal", and that 95 of 176 approved properties had already sold. Investors will pay 5.5 per cent of their $8000 subsidy to Questus as a management fee each year.
The Federal Government's $623 million National Rental Affordability Scheme - an election promise - gives investors a tax break of $6000 a year, topped up with a $2000 payment from state governments, for 10 years.
Properties must be approved and leased out at 20 per cent below market rents to low-income earners. On a two-bedroom apartment with a market rent of $400 a week, the discount is $80 a week, or $4160 a year, still leaving investors ahead by $3840 a year.
"It's pretty big," the managing director of SQM Research, Louis Christopher, said. "The rebate that they're offering more than offsets that 20 per cent discount for properties under $400,000."
Some tax experts have suggested the $8000 would have been better paid directly to renters. If the incentives are granted on properties that would have been built anyway, they contribute to price inflation.
The Federal Government has so far approved 4000 properties for the incentives, which it has said could be used to fund up to 50,000 new rental homes.
Mr Christopher identified the scheme as one of the factors, along with the first-home buyers' grant, which was likely to keep upward pressure on house prices below the $500,000 mark.
The chief executive of the Housing Industry Association in NSW, Graham Wolfe, sounded a note of caution for would-be small investors. "It is a rather big commitment to invest a lot of money [and] to commit yourself to the conditions for 10 years."
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