Tax Concessions for Build to Rent – Draft Legislation Released

On April 9, 2024, the Treasury published preliminary laws regarding tax benefits for investors involved in build-to-rent (BTR) projects. These concessions, initially announced in the 2023/24 Federal Budget, aim to stimulate BTR construction by providing faster capital deductions and advantages for managed investments trusts (MIT). The goal is to bolster investments in accommodation and alleviate Australia’s housing shortage. Below are the key aspects of the proposed measures.

BTR Concession Exposure Drafts

The Treasury has published for review the Treasure Laws Amendment Bill 2024: Build to Rent developments (BTR Bill), along with the Explanatory Material (EM) and a Policy Fact Sheet outlining proposed incentives for eligible BTR projects, which include:

A decrease in the MIT withholding tax rate on the fund payment (such as rental income from an operational BTR development) from 30% to 25%.
An enhancement in the rate for capital works deduction from 2.5% to 4% annually.

Qualifying Requirements

The proposed criteria outlined in the BTR Bill for accessing the new BTR tax concessions include:

Commencement of BTR development construction after May 9, 2023.
The BTR development must comprise 50 or more dwellings available for public rental.
All dwellings in the BTR development (and associated common areas) must remain under the direct ownership of a single entity for a minimum of 15 years.
Dwellings in the BTR development must be leased for a period of at least 3 years within the 15-year timeframe.
At least 10% of the dwellings in the BTR development must be designated as affordable tenancies throughout the entire 15-years.

BTR Misuse Tax

The government has introduced the BTR misuse tax as a measure to ensure integrity, aimed at reclaiming any BTR tax concessions obtained by taxpayers for developments that become ineligible during the 15-year compliance period. This misuse tax comprises two components:

Recouping 15% of the MIT Withholding concession received, with an 8% gross-up to cover interest and other costs related to the shortfall in withholding tax paid.
Reclaiming 1.5% of the additional Division 43 deductions claimed, with an approximated 8% gross-up for interest and other associated costs of the tax shortfall. Trustees of trusts will be subject to a BTR misuse tax rate of 45% on excess Division 43 deductions, rather than the MIT withholding rate.

It’s important to note that no tax deduction will be permitted for any BTR misuse tax paid.

Specific Reporting

The BTR Bill introduces several notification requirements for both the BTR development owner and the MIT trustee making relevant fund payments subject to the reduced MIT withholding rate during the year. Notification obligations are activated in the follow situations:

When the BTR development becomes activate, ensuring the precise start date for the 15-year compliance period.
In case of expansion of an active BTR development during the minimum ownership / operation period, relevant for determining the start of the compliance period for dwellings within the expansion.
If there is a change in direct ownership interest in active BTR development, with notification triggered specifically by a change in direct ownership of the BTR asset, not upstream interest held by investors.
When an active BTR development ceases to be active.

In each of these instances, both the BTR development owner and the MIT trustee must notify the Commission within 28 days.

To learn more about BTR projects and potential concessions, please contact our people.

Ron Zucker 0410 590 111

Eollyn Cortes 0478 727 395

Sagang Chung 0431 435 333

Julia Zou 0426 670 202