Starr Partners CEO Douglas Driscoll looks at how the recent changes to a long-standing tax benefit will impact the Australian rental market.
Last month saw the introduction of a major tax reform that could have serious repercussions on Australia’s rental market. The reform is a major overhaul to the Living Away From Home Allowance (LAFHA), and will predominately impact the top-end of the market. Although there are no exact numbers available, it is estimated that these changes could affect up to 20 per cent of the metropolitan markets in both Sydney and Melbourne alone.
For fringe benefits tax purposes, LAFHA is an allowance that an employer pays to an employee to compensate for additional expenses incurred as a result of the employee living away from their usual place of residence. It includes Australian citizens who move overseas or interstate for their work, but mainly applies to overseas employees who come to Australia for their jobs and who hold a 457 temporary working visa (usually over a four year term). It effectively reduces the taxable salary of those eligible for it, and allows recipients to spend big on their accommodation.
For years, thousands of overseas temporary workers have been able to enjoy the trappings of a lavish lifestyle, subsidised by the Federal Government. Despite the recent austere economic climate, recipients of a LAFHA have still been living la dolce vita; often residing in Australia’s most salubrious suburbs. This benefit was seen as a rort by many observers, with the Federal Government effectively paying for up to 40 per cent of the employees rent. These handouts also meant that tenants from overseas had an unfair advantage over local tenants, often pricing them out of the market. It estimated that the changes could save the Australian economy up to $700million over the next four years.
As of October 1 2012, the Government’s crackdown came into effect, meaning the majority of these overseas workers are no longer eligible for the same lucrative tax breaks. The Government is restricting the LAFHA because it believes that a high proportion of overseas workers on the 457 working visa, postpone moving onto a permanent visa, in order to avoid paying full taxes and to continue claiming the allowance.
Although still relatively early days, the up-market rental sector is already feeling the effects of the change in legislation, with scores of tenants forced to downsize. If, as expected, this trend continues, it will inevitably have adverse consequences for some landlords as top-end rental prices will start to fall.
It is not all bad news though; as one man’s loss is another man’s gain. The ripple effect has already seen the middle sector of the market start to flourish as a result of the increased demand, with vacancy rates already dropping. There is also likely to be a geographical dispersion. The reform will see most overseas temporary workers adapt by simply moving to a more modest dwelling, however if there is a family involved then downsizing may not be an option. This could lead to family’s looking further afield with the rental markets in the capital cities environs likely to benefit most.
As more property leases expire, it will be interesting to observe the true effects of the reform. One thing is for sure though; there will definitely be a few less smug poms about!
Douglas Driscoll is considered one of the industry’s pre-eminent thought-leaders. Originally from the UK, he moved to Australia to join Starr Partners as their chief executive in 2010.