Tax concessions for build-to-rent developments – draft legislation released for consultation

Treasury released draft legislation in relation to build-to-rent (BTR) tax concessions for eligible investors on 9 April 2024. These measures were released with the objective of incentivising construction of BTR developments to increase supply of accommodation available for public rent at a time when there is an acute shortage of Australian residential rental accommodation. 

What you need to know

The federal government’s proposed build-to-rent tax concessions aim to provide incentives for investors to invest in new BTR developments by:

• Increasing the rate applicable to capital works deductions from 2.5% to 4%; and
• Reducing the final withholding rate on fund payments made by an eligible managed investment trust (MIT) or attribution managed investment trust (AMIT) that have invested in eligible BTR development from 30% to 15% during the 15-year compliance period.

The 15-year compliance period begins on the day on which the development qualifies as an active BTR development or the date in which a dwelling was incorporated into an active BTR development through expansion.

To which developments do the proposed BTR concessions apply?

To be an eligible BTR development, the following criteria must be satisfied:

• Construction must commence after 7:30pm (AEST) on 9 May 2023;
• The development consists of 50 or more residential dwellings made available for rent to the general public. The proposed new measures do provide some flexibility in allowing:
  • Existing developments or developments under construction to be repurposed for BTR purposes;
  • Mixed use developments so long as the minimum requirements are satisfied;
  • BTR developments to comprise of multiple buildings so long as the buildings, in aggregate satisfy the requirements; and
  • Extensions and modifications of existing BTR developments, provided that the minimum requirements continue to be satisfied.
• All dwellings in the development, including common areas must be owned by a single entity for at least 15 years. The proposed measures do not prevent a development owner from selling the development during the 15-year period so long as it continues to be held by a single entity;
• Dwellings in the development must be offered for a minimum lease term of 3 years. Although a minimum lease term of 3 years must be offered to tenants, tenants can request a shorter lease term if they wish; and
• At least 10% of the dwellings are available as affordable tenancies. An affordable tenancy for BTR purposes is available for rent at a rate of 74.9% or less of the market rental rate) and meets any requirements determined by the Minister throughout the 15-year period. There are also maximum income thresholds applicable to tenants of affordable BTR dwellings.

It should be noted that commercial residential premises such as hostels, boarding houses, hotels, motels, and inns do not qualify as eligible BTR developments.

BTR misuse tax

As part of the measures, the government has introduced BTR misuse tax, an integrity measure aiming to claw back the benefit of any BTR tax concessions received by a taxpayer in relation to a development that becomes ineligible during the 15-year compliance period. BTR misuse tax has two limbs:

• A clawback of MIT Withholding concessions received of 15% with a gross-up of 8% for interest and other costs of the shortfall in withholding tax paid; and
• A clawback of the additional Division 43 deductions claimed, being 1.5% with an approximate gross-up of 8% for interest and other costs of the shortfall in tax paid. Note that trustees of trusts will pay BTR misuse tax on excess Division 43 deductions at a rate of 45% as opposed to the MIT withholding rate.

No tax deduction will be available for any BTR misuse tax paid.

Specific reporting requirements

There will be additional reporting requirements for entities that are undertaking active BTR developments and MITs / AMITs that are making fund payments that consist wholly or partly of rental income under a lease of a dwelling that is part of an active BTR development during the 15-year compliance period.

BDO Comment

The measures clearly provide an incentive for foreign resident investors to invest in BTR projects in Australia. It remains to be seen as to the attractiveness of these measures, and whether the commercial reality of constructing and holding these developments is viable for developers and BTR operators. Restricting MIT withholding concessions to the initial 15-year compliance period is somewhat limiting and it will be interesting to see whether this reduces timelines for developers and operators when undertaking BTR projects.

To learn more about the build-to-rent (BTR) tax concessions and the advisory, tax and consulting services we provide Real Estate & Construction clients and investors, please reach out to one of our advisers.