Revised Australian Build-to-Rent Tax Concessions

Introduction

On 5 June 2024, the Australian Government introduced the revised version of the tax concessions for BTR developments into the Australian Parliament. These concessions comprise:

• reducing the final withholding tax from 30% to 15% for distributions to foreign investors by managed investment trusts (MITs) for active BTR developments; and
• increasing the capital works tax deduction (eg capital expenditure on construction costs) from 2.5% to 4% for active BTR developments.

These new tax concessions were announced in last year’s Federal Budget (2023-24) and apply to active BTR developments where construction commenced on or after 9 May 2023. The revised rules included in two Bills follow public consultation on the initial exposure draft legislation that was released earlier in April this year.

Overview

Some key highlights of the updated version of the legislation include:

• The 15% MIT withholding tax will now apply to both distributions of net rental income and capital gains from the disposal of certain direct or indirect interests in BTR projects by Australian MITs. The inclusion of capital gains is a welcome expansion of the withholding tax concessions.
• There have been no material changes to the requirements for an active BTR development, which remain as follows:

• The BTR development’s construction commenced on or after 9 May 2023.
• The BTR development consists of 50 or more dwellings made available for rent to the general public.
• All of the dwellings in the BTR development (including common areas) continue to be directly owned by a single entity for at least 15 years (but not necessarily the same single entity; ie the BTR development can be sold to another single entity).
• Dwellings must be offered for lease terms of at least 3 years throughout the 15-year period (unless the tenant requests a shorter period); and
• At least 10% of the dwellings in the BTR development are offered as ‘affordable tenancies’ throughout the 15-year period.

• A clawback tax (the “BTR development misuse tax”) will apply where an eligible BTR development ceases to be eligible during the relevant 15-year period, although the Commissioner’s discretion to waive the clawback tax in certain circumstances has now been included (for example, where non-compliance with eligibility criteria is outside an entity’s control). The clawback tax effectively negates the benefit of all the tax concessions obtained up to the cessation time.
• Further, the MIT withholding tax concession will continue to be available beyond the original 15-year compliance period, provided that all the BTR eligibility conditions (including the affordable tenancies requirement) continue to be satisfied. In contrast, for the capital works deduction concession, only the single entity holding requirement needs to be satisfied beyond the 15-year period.
• There are extensive reporting requirements for entities participating in BTR developments including related to notifying the Commissioner of Taxation regarding the following events; the commencement of an active BTR development, the expansion including conversion of an existing building into BTR dwellings, the change of ownership interest or ceasing to be an active BTR development.
• Further, it is important to note that the following properties cannot be an active BTR development ie hostels, boarding houses, hotels, motels and inns.
• The concessions will apply from 1 July 2024, as previously announced.

Our initial observations are that the proposed concessions are a welcome improvement to encourage foreign investment in the emerging Australian BTR sector. However, there is some uncertainty in the practical application of the concessions as to whether the strict requirements for eligible/active BTR developments (including holding MIT structures as referred to in Example 1.6 in the Explanatory Memorandum accompanying the main Bill) may potentially limit the amount of projects that could ultimately qualify for these concessions.

The Bills have been referred to the Senate Economics Legislation Committee for review and recommendations.