Passing of Federal build-to-rent tax concessions

Late last month, the Federal Government passed legislation introducing tax concessions aimed at incentivising investment in new build-to-rent (BTR) developments, with a view to increasing housing supply.

The new measures (implemented under the Treasury Laws Amendment (Build to Rent) Act 2024 and the Capital Works (Build to Rent Misuse Tax) Act 2024) will commence on the first 1 January, 1 April, 1 July or 1 October to occur after the receipt of Royal Assent (e.g. 1 January 2025 if royal assent is received prior to 31 December 2024).

Key Changes

The key concessions granted under the new regime for ‘active BTR developments’ include:

• Increasing the capital works deduction rate from 2.5 percent to 4 percent.
• Reducing the final withholding tax rate on fund payments from an eligible MIT from 30 percent to 15 percent on:
  • rental income derived under a lease of a BTR dwelling;
  • capital gains derived from the disposal of a BTR dwelling; and
  • capital gains derived from the disposal of a membership interest the value of which is referable to a BTR dwelling. 

For a BTR development to be an ‘active BTR development’ (and therefore be eligible for these concessions), the following criteria must be met:

• construction of the development must have commenced after 7:30pm (AEST) on 9 May 2023;
• the development must consist of 50 or more residential dwellings, made available for rent to the general public; and
• for the duration of the 15-year compliance period:
  • all dwellings in the development (and common areas that are part of the development) must continue to be owned together by a single entity (though this entity may change during the compliance period);
  • dwellings  in the development must be offered for lease terms of at least 5 years; and
  • at least 10 percent of the dwellings must be made available as affordable tenancies (and managed by a community housing organisation). 

A BTR development will cease to be an active BTR development if it fails to meet one of these conditions during the 15-year BTR compliance period.  It is important to note that compliance with these criteria is strict, with no measures provided to address temporary or unintentional non-compliance.

If a BTR tax concession is claimed for a particular year and the development subsequently becomes ineligible (at any time during the 15-year compliance period), then the tax concessions will effectively be clawed back under associated integrity measures. 

The 15-year compliance period commences when all dwellings under the BTR development are first made available for rent.

Important Information on the Eligibility Criteria

Construction

This condition simply requires that construction of the BTR development must not have commenced prior to 7:30pm (AEST) on 9 May 2023 (being the time the Federal Budget announcing these concessions was released). 

Other tasks relating to the planning of the development may have occurred prior to this time.

Character of project and dwellings

Active BTR developments include new developments as well as alterations and structural improvements that re-purpose an existing building into BTR accommodation (e.g., conversion of a warehouse to BTR apartments). 

Where a development starts off as build-to-sell, but is converted to BTR during construction, it can qualify as an active BTR development for the purpose of these concessions. 

An active BTR development can be part of a larger building – in such a case, the percentage of the floorspace used as part of an eligible BTR development is used to calculate the equivalent percentage of the MIT withholding tax concession for income and capital gains derived from the BTR component of the development. 

Commercial residential premises will not qualify as an active BTR development.  This relevantly excludes:

• Hostels and boarding houses; and
• Hotels, motels and inns.

A single active BTR development can be made up of more than one building located on the same or adjacent land, provided that the buildings, in aggregate, satisfy the eligibility requirements.

If new dwellings are added to a building which is an active BTR development, and the combined development satisfies the requirements for an active BTR development, the existing BTR development will be expanded to comprise the dwellings of the existing development and the new dwellings.  In these circumstances, a fresh 15-year compliance period will commence for the new dwellings, but the existing dwellings will remain be subject to the original 15-year compliance period. 

The requirement that active BTR developments be made available for rent to the general public means that developments used for student accommodation and retirement villages will not qualify for the BTR concessions.

Single entity

All dwellings (and common areas for the dwellings) in an active BTR development must be owned by a single entity. 

Active BTR developments may be sold, provided that the sale includes the entire BTR development, including common areas.  A sale of an active BTR development will not cause a reset of the 15-year compliance period.  However, the new owner (and any subsequent owners) will need to ensure the eligibility criteria continue to be satisfied for the balance of the original owner’s 15-year compliance period to ensure ongoing availability of the concessions.  For completeness, we note that where a purchaser of an active BTR development fails to maintain compliance with the eligibility criteria, this will not trigger a claw back of tax concessions previously claimed by the vendor.

Lease term

Dwellings in an active BTR development must be made available to tenants for lease terms of at least 3 years.  This requirement will not be breached where:

• a tenant requests a shorter lease term; or
• a dwelling is temporarily unavailable for leasing due to repairs, construction of an extension, or an alteration or improvement to the dwelling or building.

Affordable dwellings

At least 10 percent of the dwellings in an active BTR development must be offered as affordable dwellings.  Dwellings will be considered affordable dwellings if they satisfy certain conditions stipulated by legislative instrument.  It is expected that this will include requirements relating to the rent payable under the lease not exceeding 74.9%of comparable market rents, the use of separate low and middle income thresholds to allow a portion of affordable dwellings to be reserved for those in greatest need, and the involvement of community housing providers in managing the affordable dwellings for the owner of the BTR development.

Where an active BTR development contains different types of dwellings with different sizes and amenities (e.g., number of bathrooms, bedrooms, etc.) at least one of each dwelling type within the BTR development must be made available as an affordable dwelling.

The McCullough Robertson tax team can assist with BTR matters, and provide advice in respect of tax, structuring and compliance across all Australian jurisdictions.  If you have any queries, please contact a member of our tax team below.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.