Unlocking the potential of build to rent: Navigating Commonwealth tax concessions for investors

Co-authored by Nik Sachdev, Associate

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Unlocking the potential of build to rent: Navigating Commonwealth tax concessions for investors

Unlocking the potential of build to rent: Navigating Commonwealth tax concessions for investors

Co-authored by Nik Sachdev, Associate

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June 3, 2024

The Australian Government recently released for consultation the Treasury Laws Amendment Bill 2024: Build to rent developments. The proposed changes aim to stimulate Australia’s build-to-rent (BTR) sector and address housing supply challenges through the offering of tax concessions for construction and investment.

The move towards making BTR part of Australia’s national housing framework follows the lead of other jurisdictions such as the UK, which have successfully used this type of policy to boost housing supply.

New Commonwealth tax concessions

The two key proposals that are the subject of the consultation are:

Reducing the managed investment trust (MIT) withholding tax rate from 30% to 15% for eligible BTR projects starting from 1 July 2024, for a 15-year concession period (after which the rate will revert to 30%).
Increasing the capital work depreciation rate for eligible BTR developments from 2.5% to 4%.

To qualify for the tax incentives, a BTR project must be an ‘active BTR development’ by meeting the following conditions:


Issue	Conditions
Commencement of construction	Construction must have commenced on or after 7.30 p.m. (AEST) on 9 May 2023.
Number of dwellings	The development must include at least 50 dwellings available for rent to the general public.
Single entity rule	All dwellings must continue to be directly owned by a single entity, at any one time, for at least 15 years before being sold. A development can be sold to another single entity during the 15-year period and still be eligible for the concessions, provided the new owner retains ownership through the balance of the 15-year period.
Single entity	Dwellings must be offered on lease terms of at least three years throughout the 15-year period (though a tenant may request a shorter lease).
Affordable tenancies	At least 10% of the dwellings must be available as ‘affordable dwellings’ throughout the concession period. To meet this condition: (a) 10% of the dwellings must be offered for lease at no more than 74.9% of the market rate; and (b) At least one of each dwelling ‘type’ (i.e. size and amenities) must be offered as an affordable dwelling.

Compliance obligations and the ‘misuse tax’

To ensure access to the tax incentives, developers of BTR properties will need to ensure that they comply with reporting obligations – particularly in relation to the affordable housing requirements and single entity ownership rules.

The changes include a ‘misuse tax’ which will neutralise the benefits received by a taxpayer (and potentially impose penalties) associated with a BTR development in circumstances where the development ceases being eligible during the 15-year concession period. The misuse tax will not be tax deductible.

What’s next?

The Government has now entered the consultation stage of the process. The key issues on which further clarity is needed include:

(a) Whether the reduction in MIT withholding tax will be extended to capital gains on the sale of a development or disposal of interests by underlying investors; and

(b) GST treatment of BTR developments – in particular whether they should be classified as commercial residential premises to allow developers access to input tax credits.

State concessions for BTR development

The States have been offering concessions to attract BTR developments for several years. The tests are very different to the Commonwealth concessions and differ between the States. The land tax and stamp duty concessions in states or territories might apply differently to their BTR assets, which we have summarised below:


State	Land Tax Concessions	Duty Concessions
Victoria	Eligible BTR developments are entitled to a 50% reduction on the taxable value of the land used for the BTR development for up to 30 years. This concession applies to BTR developments which were/will be completed between January 1, 2021, and December 31, 2031. In addition, eligible BTR developments will be exempt from absentee owner surcharges in respect of the land during that time.	Foreign corporations or trusts may, in some circumstances, be eligible for an exemption from Foreign Purchasers Additional Duty. The exemption is discretionary, and a key factor considered is whether the activities ‘significantly add to the supply of housing stock in Victoria, either through new development or redevelopment’.
New South Wales	BTR developments which meet the eligibility requirements are entitled to a 50% reduction in land value for land tax calculation purposes. This exemption applies to BTR developments that commenced construction after July 1, 2020, and will apply until the 2040 land tax year. In addition, eligible BTR properties will be exempt from foreign land tax surcharges.	Eligible BTR properties may be exempt from foreign investor duty if an application for the refund is made within 12 months of entitlement to the reduction in value for land tax purposes. The application must be made within 10 years of the acquisition.
Queensland	BTR properties which meet the eligibility requirements are entitled to a 50% reduction in the taxable value of land for land tax purposes. This exemption will apply from the 2024-25 land tax year and will be available for a maximum of 20 years, or until 30 June 2050 (whichever comes first in relation to a specific development). Additionally, BTR developments meeting the relevant criteria will be exempt from Land Tax Foreign Surcharge.	BTR developments meeting the relevant criteria will be exempt from Additional Foreign Acquirer Duty. The eligibility criteria include requirements for the BTR development to be suitable for occupation between 1 July 2023 and 30 June 2030 and comprise at least 50 self-contained dwellings.
South Australia	Eligible BTR developments are entitled to a 50% reduction on the taxable value of the land until the 2039-40 financial year. The exemption will be available for BTR developments which commence construction on or after July 1, 2023.	The Treasurer has approved a discretionary relief scheme for the foreign purchaser surcharge where land is acquired for the purpose of undertaking significant developments of new residential homes.
Western Australia	Eligible BTR developments are entitled to a 50% reduction on the taxable value of the land for up to 20 years. The exemption will be available from the 2023-24 exemption year and will apply to all eligible developments that will be completed between May 12, 2022, and 1 July 2032.	Land acquired for residential developments by foreign persons will be exempt from foreign transfer duty if the acquirer or their associate develop the lot to produce 10 or more dwellings, or lots on which 10 or more dwellings can be constructed. An application for exemption must be made within five years of the completion of the transaction or 12 months from commencement of construction.
Tasmania	Developers may apply for a refund of the foreign investor land tax surcharge under certain conditions. These include a requirement for the developer or their business to have been issued with occupancy permits for at least 50 dwellings on land acquired in Tasmania after 1 July 2022.	N/A
Australian Capital Territory	There are currently no BTR incentives in place.	N/A
Northern Territory	There is no land tax in the Northern Territory. This includes in relation to BTR developments.	N/A

Our perspective for BtR investors

Whilst some further movement on capital gains and GST would be welcomed, we believe the proposed Commonwealth tax changes could benefit the BTR sector. However, a key concern is whether the MIT 15-year compliance period will limit the opportunities to benefit from the proposals given the timeline for many of these large scale projects.

BTR developers should consider the following:

The eligibility criteria for BTR developers and compliance requirements will be complex. Asset managers, investors and developers should seek expert tax advice to ensure access to the concessions.
The Commonwealth and State concessions do not necessarily overlap. It will be critical to assess the eligibility of your development in all relevant jurisdictions.

How we can help

We have a wide range of experience in relation to BTR projects and can assist on tax, corporate, planning, property and construction law issues.

In the tax space, we regularly advise on Commonwealth and State tax issues relating to property transactions and developments, including:

Identifying risks, liabilities and exposures of transactions, structures or activities.
Advising on structuring issues for property transactions, including for MIT’s.
Advising regarding eligibility for exemptions or concessions and preparing applications or ruling requests.
Managing engagements with revenue authorities, including audits, reviews, investigations, objections, and where appropriate, disputes.

Our real estate practice offers proactive and commercial solutions, leveraging specialist industry knowledge in the BtR sector across multiple jurisdictions. We advise a diverse client base, including funders, developers, investors, occupiers, operators, and insurers, operating globally.