The 2023 Federal Budget introduced measures to promote investment and construction in the build-to-rent (BTR) sector. According to the Treasury’s exposure draft legislation, BTR development projects with construction commencing after 7:30 PM (AEST) on May 9, 2023, will benefit from the following incentives:
Sed ut perspiciatis, unde omnis iste natus error sit voluptatem accusantium doloremque laudantium, totam rem aperiam eaque ipsa, quae ab illo inventore veritatis et quasi architecto beatae vitae dicta sunt, explicabo.
- Increased Capital Works Tax Deduction: The rate for capital works tax deduction will rise from 2.5% to 4% per year.
- Reduced Withholding Tax Rate: The final withholding tax rate on eligible fund payments from managed investment trust (MIT) investments will decrease from 30% to 15%.
Eligibility Criteria
To qualify for these concessions, BTR developments must meet the following criteria:
Size and Public Availability: The development must consist of 50 or more residential dwellings available for rent to the general public.
- Single Ownership: All dwellings and common areas in the development must remain under single ownership for at least 15 years. They may be sold to another single entity during this period while retaining eligibility.
- Lease Terms: Dwellings must be offered for lease terms of at least 3 years.
- Affordable Tenancies: At least 10% of the dwellings must be available as affordable tenancies.
- Residential Premises: All dwellings must be residential premises as defined in section 995-1 of ITAA 1997, classified as taxable Australian real property, and non-commercial residential premises.
Active BTR and Misuse Tax
A BTR development will be considered active if it meets all eligibility criteria. If a build-to-sell project is converted to BTR during construction, it can still be regarded as active BTR. However, if any dwellings fail to meet the eligibility criteria within the 15-year compliance period, the development will cease to be active, triggering BTR development misuse tax.
Misuse Tax: This tax neutralises the benefits of the reduced MIT withholding rates and accelerated capital works deduction. It is approximately equal to the accelerated depreciation and reduced MIT withholding rate benefits, increased by 8%. The misuse tax assessed by the Commissioner will not be deductible and will be subject to the general interest charge.
Changes for Foreign Investors
Foreign investors in MITs will benefit from a reduction in the withholding tax rate. Currently, a 30% withholding tax applies to distributions from the trust to foreign investors. For eligible fund payments from a newly constructed BTR project, the withholding tax rate will drop to 15%, effective from July 1, 2024.
Opportunities
The proposed legislation makes BTR investment more attractive by shortening the capital works write-off period from 40 years to 25 years. This applies to both direct investments by Australian residents and investments through MITs.
The legislation allows for the retrofitting of existing buildings to qualify for BTR concessions. For example, converting an old warehouse into 50 apartment-style dwellings would meet the eligibility criteria.
These changes aim to encourage the development of BTR projects, providing tax benefits and reducing barriers for investors in the sector.