New Federal tax relief measures provide greater incentives for investment in Australian Build-To-Rent, but require careful consideration and planning for investors in the sector.

Introduction

In late November 2024, Parliament passed legislation approving new tax concessions for investors to invest in Build-To-Rent (BTR) developments in Australia.^[1] The tax concessions provide opportunities and incentives for investors to invest in the Australian BTR sector and are part of the Government’s response to housing supply challenges.

The concessions reduce the Managed Investment Trust (MIT) withholding rate and increase the rate for capital works deductions per year. However, investors and developers will need to closely consider the eligibility criteria to ensure that they can access the concessions.

This article outlines the key details of the changes and what they may mean for BTR developers and investors.

What are the new tax concessions?

The key changes apply to ‘active BTR developments’ and include:

• a reduction in the MIT withholding rate from 30% to 15% in respect of ‘fund payments’ made to foreign investors referable to BTR developments; and
• an increase in the capital works deductions rate from 2.5% per year to 4% per year.

Reduction in MIT withholding rate

Income earned by foreign residents from an Australian MIT is subject to a withholding income on Australian-sourced income, including from a fund payment (i.e. a distribution) from an MIT. The new concessionary tax rate of 15% for fund payment distributions will apply to the following sources of BTR income and will be a real tax saving in the hands of investors:

• rental income;
• capital gains; and
• capital gains derived from the disposal of ‘membership interests’ in which the value of that interest is referable to a BTR development.

The inclusion of existing active BTR developments and capital gains for concessionary MIT relief is a welcome change from the initial Exposure Draft following initial consultation with industry stakeholders.

Increase in capital works deduction rate

Capital works expenses are expenses used to produce income from the construction of buildings and structural improvements. The increased deduction rate of 4% will accelerate the deductions, allowing 100% of the capital works deductions to be claimed over 25 years rather than 40 years.

However, the increased deduction rate will only apply to capital works that commenced after 7:30pm on 9 May 2023.

What is an active BTR development?

A BTR development must be an ‘active BTR development’ to access the concessions. An active BTR development must meet all of the following criteria:

• 50 or more dwellings are included in the development and are made available for rent to the public;
• all of the dwellings and common area continue to be directly owned together by a ‘single entity’ at any one time for at least 15 years;
• the dwellings must be made available for rent on lease terms of at least 5 years throughout the 15 year period (although a tenant can subsequently request a shorter term), and may be subject to additional requirements as determined by the Minister by legislative instrument; and
• at least 10% of the dwellings are offered as affordable dwellings during the 15 year period.

What do I need to know?

• A ‘BTR development’ broadly encompasses new builds and renovated buildings.
• The capital works deductions and 15% MIT withholding rate can continue to apply after the end of the 15 year compliance period, which is a welcome change following consultation with industry stakeholders.
• If dwellings are not being used as rentals or made available for rent during the 15 year period due to further construction or renovations, damage, repairs, etc, the dwellings may still be deemed to be used as rentals and made available for rent.
• A BTR development can be sold during the 15 year period and still be classified as an active BTR development if the disposal is to a single entity.
• For a dwelling to be an ‘affordable dwelling’, the rent payable under the lease must be less than 74.9% of the market value of the right to occupy a comparable dwelling and must be tenanted, or made available to be tenanted, only to a tenant or prospective tenant that satisfies the applicable income threshold.^[2]

Reporting criteria

Specific reporting requirements have also been introduced for BTR developments seeking to access the concessions. Under the new reporting scheme, the ATO must be notified within 28 days:

• when the development commences;
• if the development is expanding;
• if the development ceases; or
• if ownership changes.

What happens if a BTR development no longer meets the criteria during the 15 year compliance period?

Any benefits already obtained will be clawed back by a separate non-deductible ‘BTR misuse tax’. The BTR misuse tax will work to nullify any tax concessions previously claimed, increased by 8% to account for interest and costs associated with the tax shortfall. The owner of the BTR development is liable for any BTR misuse tax at the time compliance lapses and it applies even if the owner was not the owner for the whole 15 year compliance period.

What does this mean for you?

The recently introduced BTR tax concessions offer new opportunities and incentives for investing in the growing Australian BTR sector.

With the changes now enacted into law, developers and investors seeking to take advantage of the concessions will need to closely consider the eligibility requirements. Careful planning will be essential to obtaining and maintaining eligibility for the BTR tax concessions and to navigate the complexities of the new rules. It’s highly recommended that interested parties should seek legal advice to ensure compliance and maximise the benefits of the concessions.

_{[1] The new legislation includes both the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Act 2024 (Cth) and the Capital Works (Build to Rent Misuse Tax) Act 2024 (Cth).}

_{[2] The applicable income tax threshold is set out in Income Tax Assessment (Build to Rent Developments) Determination 2024 (LI 2024/28).}