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New tax concessions for build-to-rent developments

Property & Development, Taxation
Modern highrise apartment buildings

On 1 January 2025, new income tax concessions in the “build to rent” (BTR) housing sector come into force, incentivising investment and construction in the BTR sector.

The updates include:

  • increasing the rate for the capital works tax deduction (depreciation) to 4% per year;
  • reducing the final withholding tax rate on eligible fund payments from managed investment trust (MIT) investments from 30% to 15%; and
  • introducing a new “misuse tax” as a claw-back mechanism where a BTR fails to comply with the requirements during the 15-year compliance period.

First announced as part of the 2023-24 Federal Budget, the final amending legislation received Royal Assent on 10 December 2024 after a comprehensive consultation process.  As set out in the explanatory materials, the policy intent of the new measures is to incentivise construction of new BTR developments in order to increase the supply of rentals and address an acute shortage of new rental stock in Australia.

Looking overseas, countries including the United States and the United Kingdom have well established BTR industries providing housing supply specifically to the rental market. In Australia, BTR is still a nascent industry, a situation the income tax concessions aim to address.

Many states and territories have been quicker to the mark to support BTR developments. Specifically, we have briefly summarised the land tax and duty incentives in NSW, QLD and VIC as well as some of the key eligibility criteria.

What’s on offer?

Income tax concessions

The new income tax concessions for eligible BTR developments consist of:

  • an increase in the capital works deduction rate from 2.5% to 4% for the life of the BTR development; and
  • a reduction in the final withholding tax rate on “fund payments” from eligible manage investment trusts (MITs) from 30% to 15% only for a 15-year “compliance period”.

In addition, the new measures introduce a claw-back mechanism by way of a non-deductible “misuse tax” where a BTR development fails to comply with the requirements during the compliance period.  Liability for misuse tax falls on the owner at the time the development ceases to be compliant, even if they were not the owner for the whole period.

Threshold steps

To access the incentives for an eligible BTR development (either new, or to expand an existing development):

  • the development must satisfy the eligibility requirements set out below; and
  • the owner must notify the ATO of their choice to “opt in” by lodging the approved form.

The capital works deduction is only available if construction has commenced after 7:30 pm (AEST) on 9 May 2023. By contrast, the MIT withholding tax reduction applies to all BTR developments, regardless of when construction commenced.

Eligibility requirements

To access either concession, the following requirements must be satisfied:

  • the BTR development must have 50 or more “dwellings” available for rent to the general public;
  • all of the dwellings (including common areas) must continue to be owned by a “single entity” for at least 15 years;
  • lease terms for the dwelling must be at least 5 years throughout the 15-year period unless a tenant requests a shorter lease term, and may be subject to additional requirements as determined by the Minister;
  • at least 10% of the dwellings (comprising a mixture of varying floor spaces and not the “lowest standard dwelling” in the development) must be offered as “affordable” tenancies throughout the 15-year period.  The definition of “affordable” will be determined by the Minister, but is expected to include requirements that the rent payable is not more than 74.9% of the market rent or 30% of income, whichever is lower.

Where the above requirements are satisfied, the development is referred to as an “active BTR development”.

Additional information

  • All of the “dwellings” must be residential premises, taxable Australian real property and not commercial residential premises (i.e. hostels, boarding houses, hotels etc).
  • Eligible BTR developments:
    • include brand new developments and the re-purposing of existing buildings into BTR (i.e. a warehouse conversion to apartments);
    • can form part of a building (i.e. if 90% of the floorspace is for the BTR development then 90% of the rental income is subject to the reduced MIT withholding rate); and
    • can consist of multiple buildings and new buildings can be added to the BTR development over time.
  • The “single entity” requirement does not prevent the original owning entity from disposing of the BTR development to a new third-party entity during the 15-year period (i.e. the original owning MIT can exit the investment so long as the acquiring entity is a “single entity”) and the 15-year period does not reset if the development is sold.
  • Prior to the making of MIT “fund payments”, the trustee must notify the Commissioner prior to making the distribution where all or part of the fund payment comprises rental income from the BTR development.

New “misuse tax” to claw-back for non-compliance

A new non-deductible “misuse tax” has been introduced as a claw-back mechanism designed to nullify the benefit of the tax concessions where a recipient BTR development becomes non-compliant during the 15-year compliance period - commencing when dwellings are first made available for rent.

A BTR development ceases to be compliant when any of the requirements above are not satisfied., i.e. the development ceases to be an “active BTR development”.

Misuse tax is calculated by reference to the amount of the deduction and/or withholding amounts claimed, with the idea that the tax will roughly equal the tax benefit obtained plus an 8% increase to reflect the interest and costs associated with the shortfall.

General interest charge (GIC) will accrue for any late payment of the misuse tax.

Misuse tax is not tax deductible. 

In some circumstances, the owner of a non-compliant BTR development can submit a private ruling to request the Commissioner exercise his discretion to reinstate incentives. 

Notification requirements

 Additional notification requirements now apply in respect of BTR developments, including:

  • where the BTR development commences, expands, is sold or acquired, or ceases to meet the eligibility criteria; and
  • if there is a change in direct ownership of the BTR development both the acquiring entity and the disposing entity must notify the Commissioner.

In both cases, the approved form (NAT 75663) must be lodged with the Commissioner within 28 days of the relevant event.

Land tax and duty

The BTR land tax and duty concessions vary between the states.  For brevity, we deal only with NSW, Victoria and Queensland here.  In those states, eligible BTR properties and developments can receive:

  1. a 50% reduction in the land value for the purposes of calculating land tax (reducing the overall land tax liability); and
  2. an exemption (or refund) for foreign purchaser duty and foreign land tax surcharges.

The national picture

There are nuances across each state, with each having slightly different eligibility requirements and timing considerations.

For example, a key difference in NSW is that the refund and exemption from foreign land tax and duty surcharges only apply to Australian-incorporated companies (i.e. the 50% land value for land tax purposes is available for all types of entities). This means that choice of entity type will be a relevant consideration for BTR concession purposes in NSW.

We note that Victoria and Queensland do not restrict the relevant exemptions to specific types of entities.

The table below presents a high-level summary.

NSW

Applies from 1 Jan 2021 (until 2040).

50% reduction in land value for eligible BTR properties is available until 2040.

Applies from when an occupation certificate is issued.

Foreign land tax surcharge exemption

(Australian-incorporated entities only)

An Australian-incorporated company may apply for a refund of surcharge land tax paid if:

  1. the company owned the land on 31 December 2020;
  2. a BTR development is constructed on the land by the company; and
  3. the company is entitled to the 50% reduction.

The refund is available once construction is completed for up to 10 years of past surcharge land tax.

A taxpayer can apply for standing approval for exemption in future years if they will satisfy the refund criteria.

Foreign duty surcharge

(Australian-incorporated entities only)

An Australian-incorporated company may apply for a refund of surcharge purchaser duty paid if:

  1. the transfer was entered into on or after 1 July 2020;
  2. a BTR building is constructed on the land by the company within 10 years; and
  3. the company is entitled to the 50% reduction.

A taxpayer can apply for standing approval for future exemptions if they will satisfy the refund criteria.

Eligibility requirements

As set out in the Treasurer”s Guidelines, eligibility requirements include:

  1. construction commenced after 1 July 2020;
  2. building/s provide at least 50 self-contained dwellings used specifically for BTR purposes;
  3. at least 10% of the construction labour force hours must involve work by certain classes of workers (see NSW Revenue Ruling G.014 here); and
  4. single management entity with on-site management access.

(view the Guidelines in full here).

Developers that subdivide within 15 years of receiving the concessions will be required to repay any benefits.

Only Australian-incorporated foreign companies are eligible for the surcharge duty and land tax exemptions (see Revenue Ruling G013 here).

VIC

Applies from 1 Jan 2022 (until 2032).

50% reduction in land value for eligible BTR properties and development for up to 30 years.

Foreign land tax surcharge exemption

Full exemption from Absentee Owner Surcharge (AOS) for land used and occupied as an eligible BTR development.

During the construction period, the general exemption may apply if the developer:

  1. is Australian-based (i.e. significant Australian operation/control);
  2. makes a significant contribution to the Victorian economy and community; and
  3. exhibits good corporate behaviour (see the Guidelines in full here).

Foreign duty surcharge

No specific BTR foreign duty surcharge exemption.

A general exemption from foreign surcharge purchaser duty (FPAD) may apply if the developer:

  1. is Australian-based (i.e. significant Australian operation/control);
  2. makes a significant contribution to the Victorian economy and community; and
  3. exhibits good corporate behaviour (see the Guidelines in full here).

Eligibility requirements

Eligibility requirements include: 

  1. building/s were newly constructed or renovated for the purpose of providing rental housing;
  2. building/s provide at least 50 self-contained dwelling with an occupancy date on or after 1 January 2021 and before 1 January 2032;
  3. development is owned collectively and held within a unified ownership structure, and managed by a single entity;
  4. dwellings must be made available for rent to the general public under residential rental agreements, and each tenant offered a lease term of at least 3 years.

Eligibility requirements must be satisfied for a continuous period of 15 years from the occupancy date to access the exemption for the full 30 years.

QLD

Applies from 1 Jul 2023 (until 1 Jul 2050).

50% reduction in value of land used solely or primarily for an eligible BTR development for up to 20 years.

Foreign land tax surcharge exemption

Full exemption available for land used and occupied as an eligible BTR development.

During the construction period, general ex gratia relief may be available if commercial activities make a significant contribution to the supply of housing stock in Queensland (see Qld Revenue Public Ruling DA000.15.4 here).

Foreign duty surcharge

Full exemption of Additional Foreign Acquirer Duty (AFAD) for:

  1. transactions entered into on or after 1 July 2023 to construct eligible BTR development before 30 Jun 2030; and
  2. acquisitions of land which is already being used for eligible BTR development (see Qld Revenue Ruling DA000.17 here)

Alternatively, if the full AFAD exemption does not apply, general ex gratia relief may be available if the developer is Australian-based and commercial activities involve a significant contribution to the supply of housing stock in Queensland (see Qld Revenue Public Ruling DA000.15.4 here).

Eligibility requirements

Eligibility requirements include:

  1. BTR development is suitable for occupation between 1 July 2023 and 30 June 2030;
  2. comprise at least 50 self-contained dwellings;
  3. used solely or primarily for residential purposes;
  4. at least 10% of the number of dwellings in the development are provided at discounted rent to eligible tenants.

(see Qld Revenue Public Ruling LTA000.5.1 here).

Eligibility requirements must be satisfied continuously through this period to access the exemption for the full 30 years.

Contact our tax team

Arnold Bloch Leibler is the tax controversy sector leader in end-to-end management of taxation disputes and litigation arising from ATO compliance activities and audits. If you have identified issues or would like assistance in reviewing risks or uncertainties, please contact one of our team members below.