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.

Federal Government

The most recent announcement was made by the Australian Government on 28 April 2023. 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 dwelling 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 reduction in the withholding tax rate is a very welcome measure. Many participants in the property sector have claimed that the current withholding tax rate of 30% is a substantial barrier to investment in build-to-rent properties.

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

New South Wales

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

• a 50% reduction in land tax until 2040
• a 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
• dwelling must be made available to the general public without restriction
• the property must be held in unified ownership structure for 15 ears
• dwelling must be managed by a single management entity
• 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 3 year
• at least 10% of the construction labour force must involve work by certain classes of workers such as apprentices, long term unemployed workers, workers with barriers to employment and Aboriginal workers.