New land tax concessions for Victorian build-to-rent developers
The Victorian Government recently released the Windfall Gains Tax and State Taxation and Other Acts Further Amendment Bill 2021 (Bill).
The Bill has now passed the Parliament and will go to the Governor for Royal Assent. Amongst other new amendments (including the highly publicised Windfall Gains Tax), the Bill provides for an exemption from absentee owner surcharge land tax and a 50% reduction of the taxable value of land used for an ‘eligible build-to-rent development’ for a period of 30 years. These changes are welcome and will incentivise developers to continue to build on the fast-growing momentum in this emerging sector.
The ‘eligible build-to-rent development’ must satisfy the eligibility requirements for a continuous 15-year period from the occupancy date of the development to access these concessions and if the eligibility requirements cease to be met, a new build-to-rent special land tax will be imposed.
What qualifies as an ‘eligible build-to-rent development’?
Broadly, an ‘eligible build-to-rent development’ is a development project where one or more buildings are constructed or substantially renovated for the purpose of providing at least 50 self-contained dwellings for lease under residential rental agreements where the dwellings are:
- all fixed on the same parcel of land. A parcel is defined as one or more titles that are contiguous or separated only by a road, railway or other similar areas across or around which movement is reasonably possible and can also include common areas if they are fixed on the same parcel
- owned by one owner or owned collectively, noting that changes of ownership are permissible during the 30-year term that the concessions are available
- managed by a single management entity, unless the dwellings are used to provide affordable housing or social housing. The single management entity can be a different entity to the landowner (i.e. the management services can be outsourced)
- suitable for occupancy on a date that is on or after 1 January 2021 and before 1 January 2032
- rented, or available for rent, under a residential rental agreement for a fixed term of not less than 3 years (or any other period as agreed between the owner of the dwelling and the renter) and subject only to such restrictions required to ensure public health and safety or to provide social or affordable housing.
The ‘eligible build-to-rent development’ must satisfy the above requirements for a continuous period of at least 15 years from the occupancy date (i.e. the date on which an occupancy permit has been issued in respect of each of the dwellings in the development).
Additional self-contained dwellings can be constructed and added to an existing build-to-rent development after the occupancy date of the existing development and will be taken to form part of the ‘eligible build-to-rent development’. The ‘occupancy date’ for those additional dwellings will be the date on which the occupancy permit for those dwellings is issued and they will need to satisfy the 15-year requirement from that date. This means that an ‘eligible build-to-rent development’ may have more than one occupancy date.
What are the concessions available?
Where a development is an ‘eligible build-to-rent development’, it will be exempt from absentee owner surcharge land tax (AOS) and will receive a 50% reduction in the taxable value of the land used for the development for primary land tax purposes. The concessions apply for a maximum period of 30 years from the date the concessions are first applied to the land.
The exemption from AOS is a welcome change given that, under the existing Treasurer’s guidelines, the AOS exemption for developers undertaking projects like build-to-rent only applied until the development project was completed and AOS would be payable from that point on the basis the developer would be a passive landlord or investor.
The AOS exemption and 50% reduction in the taxable value will result in reduced holding costs for owners of ‘eligible build-to-rent developments’ and increase the financial viability of developing a build-to-rent project.
Build-to-rent special land tax – clawback where eligibility requirements no longer satisfied
Where either of the concessions has been granted but the development project land ceases to comply with the 15-year eligibility requirement (referred to as a ‘change in circumstance’), a build-to-rent special land tax will be imposed.
The owner at the time the ‘change in circumstance’ occurred is liable for this special land tax. Previous owners of the land will not be liable.
The build-to-rent special land tax is effectively a clawback of the concessions previously granted. The rate of tax is 1.275% or 3.275% for absentee owners, and interest will also be imposed.
If the development project land is subdivided and a subdivided lot is sold prior to the 15-year eligibility requirement being satisfied, the build-to-rent special land tax will apply to that subdivided lot.
The land tax concessions in the Bill for build-to-rent developments show the Victorian Government’s continued commitment to establishing this sector in Victoria and making housing more affordable by increasing the supply of rental properties.
Whilst there are still many challenges facing build-to-rent developers in Victoria, the concessions should act as a lever to further incentivise developers to construct build-to-rent projects and build on the momentum that is already growing.
The concessions broadly align with the concessions already introduced in New South Wales (also a 50% reduction in land value for land tax purposes and an exemption from foreign surcharge land tax for eligible build-to-rent properties that contain at least 50 self-contained dwellings).
Developers will need to carefully monitor that they satisfy the eligibility requirements for a continuous period of at least 15 years otherwise they will be liable for the special land tax. Just one dwelling not satisfying the requirements means the whole project does not satisfy the requirements. Further, the land is no longer eligible for the build-to-rent concessions if the land has previously ceased being eligible for the concessions (i.e. if the requirements aren’t met, the land will not be able to apply the concessions again in the future if the requirements are later satisfied).
The concessions take effect once the Bill receives Royal Assent, which is expected to occur so that the concessions are available for the 2022 land tax year.
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