A guide to build-to-rent tax incentives in Australia

In brief - A number of tax incentives have recently been introduced or proposed by the Australian Government and some of the State Governments which are intended to increase the supply of new housing for rent.

Background

Australia is experiencing a severe housing crisis and the construction of build-to-rent properties may be one of the solutions to ease the crisis.

A build-to-rent property is a purpose built and designed property for long-term residential rental accommodation where rent paid by residents is the primary source of income for the owner.

One of the barriers to investment in build-to-rent properties has been the unfavourable tax treatment as compared to other investments. This includes higher withholding tax rates payable by foreign investors in managed investment trusts, denial of input tax credits for
GST purposes which effectively adds 10% to acquisition, construction and operating costs of build-to-rent properties, and higher stamp duty and land tax costs for foreign investors.

 

Below we outline some key features of the build-to-rent tax incentives recently proposed by the Australian and State Governments  

The most recent announcement was made by the Australian Government on 28 April 2023, with further detail provided in the 2023-24 Federal Budget. 

It is proposed that:

• the withholding tax rate for eligible fund payments from managed investment trusts to foreign residents which are attributable to build-to-rent properties will be reduced from 30% to 15% from 1 July 2024
• the rate for the capital works deduction for eligible build-to-rent properties will increase from 2.5% to 4% per year.

These incentives will apply to build-to-rent properties that commence construction after 9 May 2023 that consist of at least 50 dwellings made available for rent to the general public. The dwellings must be retained under single ownership for at least 10 years and a lease term of at least 3 years for each dwelling must be offered.

The proposed incentives should improve the feasibility of build-to-rent properties. Many participants in the property sector have claimed that the current withholding tax rate of 30% is a substantial barrier to investment by foreign investors in build-to-rent properties.

No other details about the incentives are available at this time. There will be consultation on the details of the proposed reduction in the withholding tax rate, including any minimum proportion of dwellings that must be offered as affordable housing and the length of time dwellings must be retained under single ownership.

Build-to-rent properties in New South Wales may be eligible for:

• a 50% reduction in land tax until 2040
• surcharge purchaser duty and surcharge land tax exemptions and refunds.

The requirements for the 50% reduction in land tax include:

• construction must commence on or after 1 July 2020
• construction must be completed and an occupational certificate must be issued
• there must be at least 50 self-contained dwellings used specifically for build-to-rent purposes
• there must be compliance with the relevant affordable housing policies
• dwellings must be made available to the general public without restriction
• the property must be held in a unified ownership structure for 15 years
• dwellings must be managed by a single management entity which has management on site
• each tenancy must be subject to a residential tenancy agreement
• tenants must be provided with a range of lease term choices, including a fixed term of at least three years
• at least 10% of the construction labour force hours must involve work by certain classes of workers such as apprentices, long term unemployed workers, workers with barriers to employment and Aboriginal workers.

The land tax saving is clawed back with penalties and interest if the property is subdivided or the ownership of the land is otherwise divided within 15 years. Effectively this means that the property must be used for build-to-rent purposes for at least 15 years.

Companies incorporated in Australia under the Corporations Act 2001 which qualify for the reduction in land tax may also be eligible for the surcharge purchaser duty and surcharge land tax exemptions and refunds. It is not clear if the exemptions and refunds are available to companies that are trustees of trusts.

The surcharge purchaser duty refund is only available for transfers on or after 1 July 2020 where construction is completed within 10 years of acquisition.

The surcharge land tax refund is only available for land owned at 31 December 2020 up to 31 December 2039.

The refunds are only available if the build-to-rent property is constructed by the owner of the land or a related body corporate.

Exemptions from the surcharges may be granted if the Chief Commissioner considers that the company is likely to become entitled to a full refund of the relevant surcharge.

The surcharge land tax exemptions and refunds are available until 2040.

The current rate of surcharge purchaser duty is 8% and the current rate of surcharge land tax is 4%.

These incentives have been legislated and are in effect.

Build-to-rent properties in Victoria may be eligible for:

• a 50% reduction in land tax
• exemptions from the absentee owner land tax surcharge of 2%, which will increase to 4% from the 2024 land tax year.

The requirements for these incentives include:

• the buildings must be new or substantially renovated
• the buildings must have been constructed or renovated for build-to-rent purposes
• there must be at least 50 self-contained dwellings
• the property must be owned collectively and held within a unified ownership structure
• the property must be managed by a single entity
• the occupancy permit for the dwellings must be issued on or after 1 January 2021 and before 1 January 2032
• the dwellings must be available for rent to the general public without restriction under residential rental agreements
• a lease term of at least 3 years must be offered
• the owner must continuously use and occupy the land as an eligible build-to-rent property for at least 15 years and if it fails to do so it will be liable for a tax called the BTR special tax, which is intended to recoup the financial advantage provided by the incentives.

The incentives are available for up to 30 years.

The incentives have been legislated and are in effect.

An exemption from the absentee owner land tax surcharge may be available for Australian based entities during the construction period if the build-to-rent property is considered to make a significant contribution to the Victorian economy and community and the entity exhibits good corporate behaviour.

A similar exemption may be available for Australian based entities from the foreign purchaser additional duty of 8% if the build-to-rent property is considered to significantly add to the supply of housing stock in Victoria.

The incentives apply to build-to-rent properties in Queensland that contain at least 10% of rental dwellings as affordable housing.

The incentives comprise:

• a 50% reduction in land tax for up to 20 years
• an exemption from the foreign investor land tax surcharge of 2% for up to 20 years
• an exemption from additional foreign acquirer duty of 7% for the transfer of an existing build-to-rent property, or the transfer of a property on which a build-to-rent development will be completed by 30 June 2030.

The commencement date for the incentives is 1 July 2023.

The other requirements for the incentives include:

• there are at least 50 self-contained dwellings that are used solely or primarily for build-to-rent purposes
• the dwellings must have a unified ownership structure and must be managed by a single entity
• the certificate of occupancy for the build-to-rent property is obtained between 1 July 2023 and 30 June 2030
• the dwellings are available to the general public
• the tenants in the affordable housing dwellings must be Australian citizens or permanent residents and meet income and asset tests
• the tenants in the affordable housing dwellings must be offered a fixed term lease of 3 years

The incentives have been legislated and are in effect.

Ex gratia relief in respect of the foreign investor land tax surcharge may be available for Australian based entities if the build-to-rent project is considered to make a significant contribution to the Queensland economy and community.

Ex gratia relief may also be available in respect of the additional foreign acquirer duty for Australian based entities if the build-to-rent project is considered to be a significant development or the entity is a significant developer.

Legislation has been introduced to the South Australian Parliament which contains a 50% reduction in land tax for build-to-rent properties where construction commenced on or after 1 July 2023. 

The land tax reduction will be available for the 2023-24 financial year up to the 2039-40 financial year.

The build-to-rent property must comply with all requirements applicable under the Planning, Development and Infrastructure Act 2016 and each tenant must be offered a lease of a term of at least 3 years.

Regulations that are not yet available will contain further conditions for the land tax reduction.

Ex gratia relief in respect of the foreign ownership surcharge of 7% may be available if the build-to-rent property is considered to be a significant development of new residential homes or the owner of the property is a significant developer. 

Legislation has been introduced in the Western Australian Parliament to introduce a 50% exemption from land tax for build-to-rent properties for up to 20 years, commencing on 1 July 2023.

The requirements for the exemption include:

• the land must be owned by 1 owner or joint owners
• there are at least 40 self-contained dwellings for lease under residential tenancy agreements
• the buildings must be new or substantially renovated
• the dwellings were able to be legally occupied as dwellings on or after 12 May 2022 and before 1 July 2032, and within a 5 year period
• a lease term of at least 3 years must be offered
• the dwellings are available to the general public
• there is a single management entity for the whole of the build-to-rent property

If a build-to-rent property ceases to qualify for the exemption within the first 15 years, the owner is required to pay the land tax that was not assessed for the years that the exemption applied.

Build-to-rent properties in Western Australia may be eligible for a refund of foreign transfer duty if the property consists of at least 10 dwellings. The current rate of foreign transfer duty is 7%.