Tax concessions for Build-to-Rent (BTR) developments - Legislation passed

The new tax concessions for Build-to-Rent (BTR) developments aim to boost investment by offering better incentives for investors. Investors can benefit from accelerated capital expenditure deductions and reduced income tax on rental and capital gains income, with a new 15 per cent tax rate on capital gains and income.

These changes are designed to attract more foreign capital by improving investment returns, thus increasing private sector housing supply. However, the effectiveness of these measures in attracting investment and increasing housing supply remains to be seen, especially given the current slowdown in foreign residential real estate investment.

Tax concessions for build-to-rent developments: Key developments leading up to the legislation passing

  • Between 9 April 2024 and 22 April 2024, Treasury released draft legislation for consultation in relation to build-to-rent (BTR) tax concessions for eligible investors. The consultation process received 37 submissions.
  • Between April and May of 2024, Treasury implemented consultation feedback into the draft legislation. Key changes included:
    • Increasing the scope of Managed Investment Trust (MIT) income to include capital gains attributable to a BTR development.
    • The previous restriction which made sub-trust structures ineligible has been removed so the concession is now more accessible to funds with multi-trust structures
    • Allowing the withholding tax rate to apply beyond the 15-year period if the BTR development remains compliant with eligibility criteria
    • The requirement for construction to have commenced on or after 9 May 2023 for the MIT withholding change has been removed (so all projects that otherwise satisfy the requirements should now be eligible) MIT amendments apply to payments on or after 1 July 2024
    • The increased capital works deduction remains the same and applies only to capital works begun after 7:30 pm on 9 May 2023
    • The minimum lease term has been increased from three years to five years, unless the tenant requests a shorter term
    • Removal of the requirement that the affordable housing component must be operated by community housing providers
    • Providing the Commissioner of Taxation with discretion to treat the BTR development as compliant upon certain conditions (whereby the misuse tax would not apply)
  • In May 2024, the legislation was introduced into parliament.
  • The legislation passed both houses on 28 November 2024 and awaits Royal Assent.

What you need to know

The Federal Government’s BTR tax concessions aim to provide incentives for investors to fund new BTR developments by:

  • Increasing the rate applicable to capital works deductions from 2.5 per cent to 4 per cent for capital works that began after 7:30 pm on 9 May 2023
  • Reducing the final withholding rate on eligible fund payments (including capital gains) from MIT investments or Attribution Managed Investment Trust (AMIT) investments for eligible BTR development from 30 per cent to 15 per cent for foreign residents during the 15-year compliance period. The reduced 15 per cent tax rate for capital gains was not included in the exposure draft bill.

The 15-year compliance period begins on the day after the development qualifies as an active BTR development or the date on which a dwelling was incorporated into an active BTR development through expansion. The onus is on the owner to notify the ATO in an approved form when the owner chooses to form an active BTR development.

To which developments do the BTR concessions apply?

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

  • The development consists of 50 or more residential dwellings made available for rent to the public. The 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
    • Extensions and modifications of existing BTR developments, provided 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 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 five years. Although tenants must be offered a minimum lease term of five years, they can request a shorter lease term if they wish.
  • At least 10 per cent of the dwellings are available as affordable tenancies. Requirements for affordable tenancies are to be determined by the Minister by legislative instrument and can include requirements on the rent payable and income of the tenant. The Supplementary Explanatory Memorandum details that it is expected the legislative instrument will require rent to be no more than 74.9 per cent of market rent, the maximum income of tenants, and additional requirements, which will be added after further consultation. Indications of tenant income limits have not been released.
  • To be classified as a BTR development under the legislation, the dwellings form an ‘active’ BTR development on, and after, the first day on which the development satisfies the eligibility criteria. Furthermore, to form a BTR development, the ownership entity must make the choice in an approved form and provide it to the Commissioner of Taxation.

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

BTR misuse tax

A BTR misuse tax has been introduced to ensure concessions are fairly obtained and compliant during the concession period.

If an active BTR development ceases to comply during the 15-year compliance period, the BTR development misuse tax will be imposed and applied to the BTR development. The purpose of the BTR misuse tax is to claw back tax concessions that were obtained during the BTR development’s non-compliance. The BTR misuse tax for an income year applies a 1.5 per cent tax rate to the BTR misuse amount, which comprises:

  • The sum of an entity’s BTR capital works deduction amounts
  • The sum of the entity’s BTR withholding amounts, multiplied by ten

The total amount of tax is roughly equal to the tax benefit gained, increased by 8 per cent for interest and costs associated with the shortfall in tax paid.

No tax deduction will be available for any BTR misuse tax paid. Relief from the BTR development misuse tax can be obtained at the discretion of the Commissioner.

After the 15-year compliance period, an active BTR development will no longer be subject to the BTR misuse tax in the event of non-compliance. After the 15-year eligibility period, non-compliance is dealt with on a year-by-year basis.

All BTR development eligibility criteria must continue to be met to continue receiving the benefit from the MIT withholding tax concession and the accelerated capital works deduction after the 15-year compliance period.

Specific reporting requirements

There will be additional reporting requirements for entities that are undertaking active BTR developments.

Entities participating in BTR developments must notify the Commissioner of specific events such as the commencement, expansion or cessation of an active BTR development, or a change of the ownership interest.

In addition, a trustee of a MIT must notify the Commissioner prior to issuing a fund payment associated with income derived from an active BTR development.

BDO comment

The agreed legislation has been crafted to improve investor incentives and encourage investment in new BTR developments. This will increase housing supply by accelerating access to capital expenditure deductions and reducing the income tax payable on rental income and capital gains income.

The inclusion of capital gains for the reduced 15 per cent tax rate and expansion of the MIT change to no longer be limited to new developments is a welcome amendment from the proposal in the exposure draft Bill released in April this year. These incentives serve to uplift the commercial viability of foreign investment in BTR development through higher investment returns, ideally attracting greater foreign capital to the sector to provide additional private sector housing supply.

This legislation has passed at a pivotal time, as figures provided by the Foreign Investment Review Board indicate a slowdown in foreign residential real estate investment contributing to lower private-market residential supply.

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.

The requirement for 10 per cent affordable tenancies adds a level of complexity to operations. Whether the reduced rental receipts are outweighed by the improved post-tax position of the investor due to the MIT and capital works deduction rate will require careful consideration to determine the pre- and post-tax positions.

Whilst the initial requirement that affordable tenancies be managed by a community housing provider was removed from the legislation following consultation, the Minister must determine requirements relating to affordable dwellings via the legislative instrument. The details of these requirements are not yet known. Affordable rents at no more than 74.9 per cent of market rent is the stated position; it is foreshadowed that the Minister will also determine limits on affordable tenant incomes to be eligible and other potential requirements that are unknown. Investors will watch this closely to weigh the tax benefits against the reduced rental receipts for 10 per cent of the dwellings in a project.

The GST regime for development and operations remains unchanged. This means developers and operators cannot claim GST credits.

While the Federal concessions are welcomed, these new federal changes are an additional compliance overlay for BTR owners to consider, in addition to the individual state and territory BTR concessions. These include various concessions on land tax and foreign investor duties and surcharges, which all have their own eligibility requirements and are separate from the federal BTR tax amendments. This will place increased compliance obligations on BTR investors to manage these arrangements at a federal, state, and territory level.

Contact one of our advisers to learn more about the BTR tax concessions and the advisory, tax, and consulting services we provide to real estate and construction clients and investors.