Australia releases draft legislation implementing build-to-rent tax concessions

In this update we report on a new initiative that aims to stimulate Australia’s build-to-rent sector and address housing supply challenges through the offering of tax concessions for construction and investment.

On April 9, 2024, the Australian government released draft legislation and related explanatory materials dealing with two key tax concessions to encourage the construction of, and investment in, new build-to-rent (BTR) developments.

These new tax concessions were foreshadowed in the 2023-24 Australian Budget on May 9, 2023, and are now subject to a consultation process, with submissions due on or before April 22, 2024.

 

Build-to-rent tax concessions

The two key concessions to encourage investment in, and the construction of, BTR developments include:

• reducing the final withholding tax from 30% to 15% on eligible payments from managed investment trusts (MIT) for active BTR developments; and
• increasing the capital works tax deduction from 2.5% to 4% for active BTR developments.

The government’s priority is to incentivise the construction of new BTR developments to increase housing supply given the long-term trend of an increasing number of Australians renting rather than owning housing.

 

Active build-to-rent developments

The five key conditions to be eligible for the BTR concessions, and thus be regarded as an active BTR development, are as follows:

• the BTR development’s construction commenced on or after May 9, 2023;
• the BTR development consists of 50 or more dwellings made available for rent to the general public;
• all the dwellings in the BTR development continue to be directly owned by a single entity for at least 15 years;
• dwellings must be offered for lease terms of at least three years throughout the 15-year period; and
• at least 10% of the dwellings in the BTR development are offered as ‘affordable tenancies’ throughout the 15-year period.

 

Australian Treasury consultation

The government has commenced consultation, including with respect to the following two measures:

• the minimum proportion of dwellings offered as ‘affordable tenancies’; and
• the length of time dwellings must be retained under single ownership before being able to be sold (potentially 10 years).

 

Other issues

As expected, there are certain integrity-related provisions that will neutralise the relevant tax benefits where some of the qualifying conditions are not consistently met throughout the 15-year period, including the BTR development misuse tax.

Further reporting requirements are proposed related to tenancies; affordable tenancies; commencement, expansion, and change in direct ownership of BTR developments; and other related matters.

There does appear to be some flexibility with the single entity/single ownership retention condition(s), although these are subject to further consultation.

It is intended that the reduced MIT withholding tax concession will apply from July 1, 2024.