New measures in the 2023-24 Budget make build-to-rent projects more tax effective for MITs, and extend the ‘clean building MIT’ concessions to more kinds of green buildings.
Build to Rent: MIT concessional tax treatment
The changes halve the rate of withholding tax payable on distributions from MITs that invest in new build-to-rent residential real estate projects – from 30% to 15% – bringing its treatment in line with other classes of passive property assets including industrial, office, and commercial real estate. The rate of depreciation that can be claimed on capital works for eligible build-to-rent projects will also be increased to 4% (from 2.5%).
|MITs at a glance|
|Trusts that meet the MIT eligibility rules can access tax benefits for investors.|
|Foreign investors can generally access concessional tax treatment on income from MITs, with a withholding tax of 15% (or 10% in some circumstances) being payable on distributions rather than 30%.
Australian resident investors can access CGT concessions from deemed capital treatment of gains on eligible assets.
It has an Australian resident trustee (or its central management and control is in Australia) and investment management activities for Australian assets are carried out in Australia.
Financial services compliance
Investor spread tests
The tax concessions will apply from 1 July 2024 onwards on projects where construction commenced after 9 May 2023.
The change is significant because most build-to-rent real estate projects are funded by foreign institutional investors, who can access the concessional withholding tax rate. The 15% concessional tax rate will align the tax payable by these foreign institutions with that of domestic super funds.
Build-to-rent projects are attractive to institutional investors for their long term stable returns.
The move is expected to stimulate investment in these types of projects and increase the supply of housing, according to modelling prepared by EY for the Property Council of Australia.
The build-to-rent sector has experienced significant growth in the UK over the past 5 years and is an established feature of US property markets worth approximately US$3 trillion.
The differential tax treatment of build to rent projects, compared to other passive commercial real estate investments, has been a vexed issue since the exclusion of residential housing from the concessional MIT regime by the previous government in 2019.
To be an eligible build-to-rent project:
- The project must consist of at least 50 dwellings or apartments that are made available for rent to the general public. This aligns with the various state land tax concessions that apply to build-to-rent projects (see below).
- The dwellings must be retained under single ownership for 10 years before being sold.
- Each dwelling must be offered for lease for a term of at least 3 years.
Further consultation will take place on implementation details.
Clean building MIT withholding tax concession
The 2023-24 Budget also extends the clean building MIT withholding tax concession to more kinds of green buildings. Currently, MITs that invest in certain buildings that meet green building standards (clean building MITs) can access a concessional 10% withholding tax rate on fund payments to foreign investors. To be a clean building MIT, the trust must receive its income from office buildings, hotels, or shopping centres that meet the applicable green standard.
Going forward, warehouses and data centres that meet the applicable green standard will also be able to access the lower 10% concessional withholding tax rate. However, green building standards are being raised for existing and new buildings, with consultation on transitional arrangements planned.
|Current green building standard||New green building standard|
|Green Building Council of Australia||At least a 5 star rating||At least a 6 star rating|
|National Australian Built Environment Rating System (NABERS)||At least a 5.5 star rating||At least a 6 star rating|
These changes will apply from 1 July 2025.
State tax concessions for build-to-rent projects
Several states have implemented or announced additional tax concessions for build-to-rent properties, subject to meeting the relevant eligibility criteria:
|Victoria||50% reduction in land value for land tax purposes where the occupancy date is on or after 1 January 2021.
Exempt from Absentee Owner Surcharge and foreign purchaser additional duty surcharge for certain projects.
|NSW||50% reduction in land value for land tax purposes for developments started after 1 July 2020.
Exemption from foreign investor duty and land tax surcharges.
|Queensland||Proposed to commence from 1 July 2023 and subject to consultation:
|Western Australia||Proposed to commence from 1 July 2023, 50% land tax concession on eligible build to rent developments.|
|South Australia||50% reduction in land value for land tax purposes for eligible build to rent developments (will be available from the 2022-23 financial year).|
Our fund structuring and tax experts have significant experience in establishing managed investment trusts for fund managers across a range of asset classes.
For more information, please contact Seema Sandhu, Erik Setio and John Frangi.