In the 2023-24 Federal Budget, the government proposed income tax concessions to encourage investment in the “build-to-rent” (BTR) housing sector: by increasing the rate for the capital works tax deduction (depreciation) to 4 per cent per year; and reducing the final withholding tax rate on eligible fund payments from managed investment trust (MIT) investments from 30 per cent to 15 per cent.
On 9 April 2024, Treasury released exposure draft legislation to implement these proposed concessions. The explanatory material states the policy goals of the measures are to incentivise construction of new BTR developments in order to increase the supply of rentals and address an acute shortage of new rental stock in Australia.
Looking overseas, countries including the United States and the United Kingdom have well established BTR industries providing housing supply specifically to the rental market. In Australia, BTR is still a nascent industry, a situation the income tax concessions aim to address.
Many states and territories have been quicker to the mark to support BTR developments. Specifically, we have briefly summarised the land tax and duty incentives in NSW, QLD and VIC as well as some of the key eligibility criteria. The criteria from a state tax and duty perspective is not necessarily in line with the requirements from a federal income tax perspective such that entities looking to invest in the BTR industry will need to carefully consider each requirement and weigh-up which concessions are the most desirable as it may not be possible to access all of income tax and state tax/duty concessions for a particular development.
What’s on offer?
Income tax concessions
The proposed income tax concessions for ‘active BTR developments’ are:
- an increase in the capital works deduction rate from 2.5% to 4% for the life of the BTR development; and
- reducing the final withholding tax rate on ‘fund payments’ from eligible manage investment trusts (MITs) from 30% to 15% only for a 15-year period. Previously, MIT distributions of residential rental income were treated as ‘non-concessional MIT income’ and subject to 30% withholding tax when fund payments were made to foreign investors.
Eligibility
A development will be an ‘active BTR development’ where all of the following conditions are satisfied:
- construction commences after 7:30pm (AEST) on 9 May 2023;
- must have 50 or more ‘dwellings’ available for rent to the general public;
- all of the dwellings (including common areas) must continue to be owned by a ‘single entity’ for at least 15 years (see point below in relation to exits);
- lease terms for the dwelling must be at least 3 years throughout the 15-year period unless a tenant requests a shorter lease term;
- at least 10% of the dwellings (must be a mixture of varying floor spaces and not the ‘lowest standard dwelling’ in the development) must be offered as affordable tenancies (i.e. rent at 74.9% or less of comparable market rents) throughout the 15-year period.
Where any of the above requirements are not satisfied during the 15-year period the development will cease to be an ‘active BTR development’ and the tax concessions will be ‘nullified’ by the imposition of a ‘BTR development misuse tax’ which involves the calculation of the deduction and withholding amounts increased by certain factors. The idea is that the tax will roughly equal the tax benefit obtained increased by 8% to reflect interests and costs associated with the tax shortfall. The ‘BTR development misuse tax’ is not tax deductible.
A couple of further points:
- ‘Active BTR developments’:
- include brand new developments and the re-purposing of existing buildings into BTR (i.e. a warehouse conversion to apartments);
- can form part of a building (i.e. if 90% of the floorspace is for the BTR development then 90% of the rental income is subject to the reduced MIT withholding rate); and
- can consist of multiple buildings and new buildings can be added to the BTR development over time.
- The ‘single entity’ requirement does not prevent the original owning entity from disposing of the BTR development to a new third-party entity during the 15 year period (i.e. the original owning MIT can exit the investment so long as the acquiring entity is a ‘single entity’) and the 15 year period does not reset if the development is sold.
- The 15 year period commences when dwellings are first made available for rent.
- All of the ‘dwellings’ must be residential premises, taxable Australian real property and not commercial residential premises (i.e. hostels, boarding houses, hotels etc).
- There are additional notification requirements in certain circumstances that owners of BTR developments must comply with (i.e. the Commissioner must be notified when the BTR development commences, if there is a change in direct ownership of the BTR development etc).
- Prior to the making of MIT ‘fund payments’, the trustee must notify the Commissioner prior to making the distribution where all or part of the fund payment comprises rental income from the BTR development.
Land tax and duty concessions
The BTR land tax and duty concessions vary between the states. For brevity, we deal only with NSW, Victoria and Queensland here. In those states, eligible BTR properties and developments can receive:
- a 50% reduction in the land value for the purposes of calculating land tax (reducing the overall land tax liability); and
- an exemption (or refund) for foreign purchaser duty and foreign land tax surcharges.
The national picture
There are nuances across each state, with each having slightly different eligibility requirements and timing considerations.
For example, a key difference in NSW is that the refund and exemption from foreign land tax and duty surcharges only apply to Australian-incorporated companies (i.e. the 50% land value for land tax purposes is available for all types of entities). This means that choice of entity type will be a relevant consideration for BTR concession purposes in NSW.
We note that Victoria and Queensland do not restrict the relevant exemptions to specific types of entities.
See below a high-level summary.
NSW
Applies from 1 Jan 2021 (until 2040).
50% reduction in land value for eligible BTR properties is available until 2040. Applies from when an occupation certificate is issued.
Foreign land tax surcharge exemption
Full exemption from the date the occupancy certificate is issued, if Australian-incorporated company:
- commenced construction after 30 June 2020; and
- is also eligible for the 50% reduction.
Exemption not available during construction phase, but a refund is available once construction is completed for up to 10 years of past surcharge land tax.
Foreign duty surcharge
An Australian-incorporated company may apply for a refund of surcharge purchaser duty paid if:
- the transfer was entered into on or after 1 July 2020; and
- BTR building is constructed on the land within 10 years.
Eligibility requirements
As set out in the Treasurer’s Guidelines, eligibility requirements include:
- construction commenced after 1 July 2020;
- building/s provide at least 50 self-contained dwellings used specifically for BTR purposes;
- at least 10% of the construction labour force hours must involve work by certain classes of workers (see NSW Revenue Ruling G.104 here); and
- single management entity with on-site management access.
(view the Guidelines in full here).
Developers that subdivide within 15 years of receiving the concessions will be required to repay any benefits.
VIC
Applies from 1 Jan 2022 (until 2023).
50% reduction in land value for eligible BTR properties and development for up to 30 years.
Foreign land tax surcharge exemption
Full exemption from Absentee Owner Surcharge (AOS) for land used and occupied as an eligible BTR development.
During construction period, more general exemption if the developer:
- is Australian-based (i.e. significant Australian operation/control);
- makes a significant contribution to the Victorian economy and community; and
- exhibits good corporate behaviour (see the Guidelines in full here).
Foreign duty surcharge
No specific BTR foreign duty surcharge exemption.
As with AOS, a general exemption from foreign surcharge purchaser duty may apply if the developer:
- is Australian-based;
- makes a significant contribution to the Victorian economy and community; and
- exhibits good corporate behavior (see the Guidelines in full here).
Eligibility requirements
Eligibility requirements include:
- building/s were newly constructed or renovated for the purpose of providing rental housing;
- building/s provide at least 50 self-contained dwelling with an occupancy date on or after 1 January 2021 and before 1 January 2032;
- development is owned collectively and held within a unified ownership structure, and managed by a single entity;
- dwellings must be made available for rent to the general public under residential rental agreements, and each tenant offered a lease term of at least 3 years.
Eligibility requirements must be satisfied for a continuous period of 15 years from the occupancy date to access the exemption for the full 30 years.
QLD
Applies from 1 Jul 2023 (until 1 Jul 2050).
50% reduction in value of land used solely or primarily for an eligible BTR development for up to 20 years.
Foreign land tax surcharge exemption
Full exemption available for land used and occupied as an eligible BTR development.
During construction period, general ex gratia relief may be available if commercial activities make a significant contribution to the supply of housing stock in Queensland (see Qld Revenue Public Ruling DA000.15.4 here).
Foreign duty surcharge
Full exemption of Additional Foreign Acquirer Duty (AFAD) for:
- transactions entered into on or after 1 July 2023 to construct eligible BTR development before 30 Jun 2030; and
- acquisitions of land which is already being used for eligible BTR development.
General ex gratia relief may be available if the developer is Australian-based and commercial activities involve a significant contribution to the supply of housing stock in Queensland (see Qld Revenue Public Ruling DA000.15.4 here).
Eligibility requirements
Eligibility requirements include:
- BTR development is suitable for occupation between 1 July 2023 and 30 June 2030;
- Comprise at least 50 dwellings that are self-contained;
- Used solely or primarily for residential purposes;
- at least 10% of the number of dwellings in the development are provided at discounted rent to eligible tenants.
(see Qld Revenue Public Ruling LTA000.5.1 here).
Eligibility requirements must be satisfied continuously through this period to access the exemption for the full 30 years.
Contact our tax team
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