In a move to tackle Australia’s housing challenges and accommodate the increased reliance on rental accommodation, the Federal Government has recently proposed a comprehensive set of new tax concessions and incentives.
The proposed tax concessions, revealed on 9 April 2024 through an exposure draft legislation released by the Treasury, aim to increase housing supply through incentivising domestic and foreign investment in the build-to-rent (BTR) sector, with the view of increasing affordable, long-term rental options for Australians.
Key tax concessions proposed
The draft legislation introduces two primary tax concessions targeted at increasing investment in BTR developments.
- Capital Works Deduction Increase: Under the proposed legislation, the capital works deduction rate will increase from 2.5% to 4% per year, allowing construction costs to be depreciated over 25 years instead of the previous 40 years.
- MIT Withholding Tax Reduction: A proposed reduction in the withholding tax rate on fund payments from managed investment trusts (MITs) investing in BTR – dropping to a concessional 15% withholding rate from the current 30% rate.
This reduction is aimed at making Australian BTR projects more appealing to foreign investors via MIT structures.
Eligibility criteria and observations
To qualify for these tax incentives, BTR developments must meet five key eligibility criteria:
- the BTR development commenced construction on or after 7:30pm AEST on May 9, 2023;
- the BTR development includes at least 50 dwellings that are made available to the general public for rent;2
- all dwellings in the BTR development are owned by a single entity at any given point in time, for a period of at least 15 years (we note that this does not prevent an owner from selling a development, provided it continues to be held by a single entity);
- dwellings in the BTR development must be offered for lease terms of at least 3 years (although tenants can request a shorter period); and
- at least 10% of dwellings in the BTR development must be made available as affordable housing, rented at 74.9% or less of market rent.3
Despite the promising incentives, observations on the draft legislation highlight certain concerns – primarily with respect to the lack of any safe harbour provisions or the ability to rectify temporary or inadvertent non-compliance with the BTR eligibility criteria, particularly related to affordable housing requirements.
To this extent, investors may face challenges in continually meeting the tenant income limits and ongoing market rent determinations, which we consider may pose as potential hurdles that require careful consideration.
Misuse tax integrity measures
Strict integrity measures, including the imposition of a “BTR misuse tax,” aim to deter abuse of the concessions. This tax serves to claw back/neutralise benefits obtained by an investor where a development ceases to maintain active BTR status throughout the required 15 years period.
In general terms, the misuse tax is equal to 1.5% of:
- the BTR capital works deductions, subject to an uplift factor of 8% for costs of the shortfall in tax;4 plus
- the MIT fund payments attributable to which withholding applies and which are attributable to a payment of income under the BTR development, increased by an uplift factor of 8%.
No tax deduction is available for any amount of BTR misuse tax paid.
Tax administration and transition
The legislation also outlines specific reporting and notification obligations to ensure the integrity of the concessions.
Owners and trustees of MITs are required to notify the ATO of relevant BTR developments, changes, or cessations within 28 days.
Additionally, MITs must also notify the ATO prior to making payment of any distributions to foreign investors that include concessional BTR rental income.
Commencement and transitional arrangements ensure that the concessions apply only to developments commencing construction after May 9, 2023, with provisions conditional on Royal Assent.
Final word
The proposed BTR tax measures will provide valuable concessions to the BTR sector, with the aim of alleviating housing supply pressures.
However, accessing the proposed concession requires careful planning and compliance with various ATO requirements.
Entities interested in the measures are urged to seek advice, to ensure they are best placed to take advantage of the concessions.
Our tax law experts have deep experience with Federal and State tax and tax planning for individuals, developers, and MITs. We can help evaluate the potential effects of the proposed BTR measures on your business and advise on appropriate structures to access the new BTR concessions.
Please contact us today if you would like assistance with these matters.
This article was written by Nima Sedaghat, Partner, Jessica Pengelly, Special Counsel and Anthony Centofanti, Solicitor.
1This is also applicable to attribution managed investment trusts.
2These dwellings may include existing developments or developments under construction to be repurposed for BTR purposes, mixed use developments to the extent that the minimum requirements are satisfied, multiple buildings to the extent that the BTR requirements are satisfied in aggregate, and extensions and modifications of existing BTR developments.
3At least one of each type of dwelling must be made available as affordable housing, and the tenants of these dwellings must meet maximum income thresholds.
4Trustees will pay misuse tax on excess deductions at a rate of 45% as opposed to the MIT withholding rate.
