The Australian Government’s Boost to Build-to-Rent (BTR) Developments: Income Tax Concessions

Build-to-rent Tax Concessions

Treasury has released for consultation the much-anticipated Exposure Draft of the Treasury Laws Amendment Bill 2024: Build to rent developments (BTR ED) and related Explanatory Materials (EM) outlining the BTR tax concessions that were first introduced as part of the 2023/24 Federal Budget.  The BTR tax concessions were introduced to encourage the construction of BTR developments by offering accelerated capital works deductions and benefits for managed investment trusts (MIT) with the intention that these measures would encourage stronger investment into accommodation to address Australia’s current housing shortage. The BTR tax concessions seek to address both the upfront capital expenditure and the ongoing income generated by BTR developments.

In addition, on 1 May 2024, the Treasurer announced broad policy reforms designed to strengthen and streamline Australia’s foreign investment framework. Relevantly, and to support the Government’s strategy of encouraging investment in new housing stock, Treasury has now lifted the prohibition on foreign investors acquiring established BTR properties. It is hoped that this change in policy, coupled with a reduction in FIRB application fees for such investments, will increase demand and incentivise the construction of new projects. Treasury is yet to release guidance as to what will be captured by the concept of an established BTR development.

Incentivising Construction: Accelerated Depreciation

The first BTR tax concession is the increased capital works tax deduction rate for qualifying new BTR projects (referred to as “active BTR developments”). This rate has been raised from 2.5% to 4% per annum for projects initiated after 9 May 2023. This translates to faster depreciation of construction costs, effectively reducing taxable income for investors during the relevant period. This mechanism shortens the depreciation timeline from 40 years to 25 years, enhancing the project’s early cash flow attractiveness.

Reduced Withholding Tax for MITs

The second BTR tax concession relates to active BTR developments held within MITs. For eligible rental income distributions to foreign investors from active BTR developments, the MIT withholding tax rate has been reduced from 30% to 15%, bringing the rate in line with the MIT withholding tax rate that applies to commercial property. This measure is intended to make BTR investments in Australia more appealing to foreign capital, potentially diversifying the investor pool and increasing overall investment in the sector.

Qualifying Requirements

To access the new BTR tax concessions, the following criteria will need to be satisfied:

  • construction of the BTR development must be commenced after 9 May 2023;
  • the BTR development must consist of 50 or more dwellings made available to rent to the general public;
  • all of the dwellings in the BTR development must continue to be directly owned together by a single entity for at least 15 years;
  • dwellings in the BTR development must be offered for lease for a term of at least 3 years during the 15 year period; and
  • at least 10% of the dwellings in the BTR development must be offered as affordable tenancies throughout the 15 year period.

Compliance Considerations

Importantly, the BTR tax concessions are accompanied by a clawback mechanism. A “misuse tax” will be imposed if a BTR development has claimed a BTR tax concession but subsequently ceases to qualify as an “active BTR development” within the 15 year compliance timeframe. The rate of the misuse tax is 1.5% which is applied to:

  1. the total accelerated depreciation claimed (multiplied by either the corporate tax rate (for a company) or 45% for any other entity), then increased by 8%; and
  2. the reduced MIT withholding benefits previously obtained, increased by 8%, multiplied by 10.

Additionally, entities participating in BTR schemes will be subject to specific reporting requirements to the ATO. Careful planning and adherence to these regulations is essential for investors to be able to claim the new BTR tax concessions.

Market Impact and the Road Ahead

The new BTR tax concessions and FIRB policy reforms are anticipated to incentivise investment in BTR developments, ultimately leading to an expansion of the rental housing supply. This increased supply has the potential to alleviate rental shortages and stabilise rental prices, offering long-term benefits to renters. However, given the strict criteria which must be satisfied to qualify as an active BTR development, together with the potentially punitive effect of the misuse tax, the full impact of these measures on the BTR market and rental affordability remains to be observed.

Investors considering BTR opportunities should carefully evaluate the eligibility criteria, compliance requirements, and potential tax benefits while seeking professional guidance to navigate these complexities.

For more information on the tax changes for BTR developments, please contact Seema Sandhu or Sarah Roettgers.

For more information on the FIRB policy reforms, you can access the article prepared by our colleague, Clementyne Rawlyk, here.