Opening address
Louise Clarke, Deputy Commissioner Private Wealth, welcomed members and shared the intentions and approach of the new Commissioner of Taxation, Rob Heferen. Louise emphasised the importance of the forum to share how the ATO is engaging with property and construction and to discuss the present and emerging risks in the sector.
Amy James-Velagic, Assistant Commissioner Private Wealth, was introduced to the members as the new chair for the forum.
Master Builders Australia economic forecast
Forecasts indicate that inflation is decelerating but not as quickly as expected. Economic growth is currently weak, although it is likely to strengthen over the medium term.
The expectation is that the Reserve Bank of Australia will start reducing interest rates in 2024. However, the labour market is still tight, inflation isn’t slowing as much as expected and there is a risk of the cost of oil surging. Any interest rate reductions in the next 12 months will not be to the levels seen during the COVID-19 pandemic.
Housing demand is strong but there are issues with supply, due in part to an increase in migration to Australia, labour shortages and cost of building supplies. It is expected that higher density housing construction levels will increase quicker than detached homes over the next 5 years.
Industrial building has performed well, but prospects for office buildings are poor, likely due to more flexible working from home arrangements. Civil, engineering and utilities construction activity is strong.
Property Council of Australia
An industry sentiment survey was conducted in March 2024. This showed significant concerns about labour shortages and the longevity of building companies. Growth is expected, primarily driven by the Housing Australia Future Fund. Housing capital growth remains strong as there is a lack of supply of new properties. However, it is expected that Australia will fall short of the national target of 1.2 million new homes over the next 5 years.
Demand for industrial and retail building is currently outstripping supply. Capital growth in retirement living is high due to the ageing population. Hotel capital growth is improving due to a lack of supply in many states and the forthcoming Brisbane Olympics in Queensland. Office capital growth is weak in all states and territories except for South Australia.
Some companies have experienced trouble raising funds domestically due to offshore investment opportunities that offer a higher return on investment compared to domestic property investments subject to surcharges, taxes and associated costs.
Australian Securities and Investments Commission insolvency update
The number of companies entering external administration in 2023–24 is likely to reach close to 11,000 external administrations (EXADs), a level not seen since 2012–13. Last financial year (2022–23) the level of failure equalled pre-covid levels and this year it has increased a further 40% over last financial year.
The increase in EXADs is consistent across the top 6 industries (construction, accommodation and food services, other services, manufacturing, retail trade and professional, scientific and technical services) when compared to 2022–23.
While the level of EXADs has increased materially this financial year it is important to note that when measured against the underlying population of companies, the ratio of companies entering external administration compared to the number of registered companies is still materially less than the peak of 2012–2013. This is because over the same time period the number of companies registered in Australia has increased from about 2 million to a current level of 3.4 million.
The number of small business restructuring appointments is exponentially increasing and there is a longer-term trend of director, rather than creditor initiated, insolvency appointments.
More information about the Australian Securities and Investments Commission (ASIC) is available at Insolvency StatisticsExternal Link.
Note: Following feedback from ASIC, the content for this item was revised on 16 July 2024, subsequent to the initial publication of the key messages on 25 June 2024.
Inbound related party financing website guidance
The ATO has identified some concerns in relation to cross-border related party financing arrangements in the property and construction industry.
A major concern is the lack of understanding of related party financing rules and requirements. We are seeking to address this by providing guidance on the expectations, important technical rules, required documentation and key risk factors using web content which will be accompanied by examples. The web content is not intended to replace Practical Compliance Guideline (PCG) 2017/4.
Draft examples will be sent to members via email for feedback after internal consultation. In addition, we will provide an update on the legislative changes to the thin capitalisation and debt deduction creation rules at the next meeting.
Behaviours of concern in tax and super in the property and construction industry
Despite the rising number of insolvencies in the property construction industry, indicators are not showing an increase in phoenix activity. Property and construction comprise 20% of the risk population and of that, 86% are found in New South Wales, Victoria, and Queensland.
Significant areas of concern involve builders not paying their subcontractors or suppliers, cycling through various companies, and not paying employee entitlements (superannuation and pay as you go withholding) correctly, or at all. Further activities may involve liquidation, asset stripping and the inappropriate transfer of assets. Some operators have received inappropriate or incorrect advice, others have behaved intentionally.
The implementation of Director IDs and single touch payroll are initiatives that are assisting in the detection of phoenix activity.
Property and construction capital versus revenue web guidance
The ATO is looking to provide guidance through updating web content on the topic of capital versus revenue. This entails publishing further examples demonstrating the application of the tax law to small-scale land subdivisions and developments. The topics may include acquiring property for multiple purposes, mere realisation of a capital asset and property flipping.
Feedback was obtained on the structure and nature of the examples proposed and the ATO will fully develop examples prior to the next meeting and send these out to members for feedback.
Forum future direction
Members raised issues regarding the delay in Private Binding Ruling (PBR) responses from the ATO, often due to a lack of information in applications. Suggestions included practitioners having access to a ‘good’ or model PBR application so they know what to include and this could be issued to practitioners as part of a training package.
Further suggestion included opening the forum to other taxpayers, firms and small businesses involved in the property and construction industry and ATO audit and communication teams to receive feedback on what processes and interactions are working well and what needs improvement.