Proposed income tax concessions for build-to-rent investments
Investors in build-to-rent developments now benefit from an increase to the capital works deduction, in an effort to encourage investment and development in the build-to-rent sector.
Announced in the 2023 Federal Budget were measures to encourage investment and construction in the build-to-rent (BTR) sector.
Currently, a tax deduction is available on the cost of constructing of a building (eg a rental property), once the building has begun to be used for a deductible purpose. One such method to get the tax deduction is to begin renting out the newly constructed dwelling.
For construction projects that are build-to-rent accommodation that commence after 9 May 2023, the owners of the accommodation will be entitled to a capital works deduction of 4% per annum.
This is an increase from the current 2.5% per annum that will continue to be available for other construction projects.
Eligibility Criteria
To access one or both the concessions, the BTR development must meet the following eligibility criteria:
the development consists of 50 or more residential dwellings made available for rent to the general public
all the dwellings (and common areas) in the BTR development are under a single ownership, for at least 15 years (may be sold to another single entity during this period and retain eligibility).
dwellings in the BTR development must be offered for lease terms of at least 3 years
at least 10 per cent of the dwellings are available as affordable tenancies
all of the dwellings must be residential premises (s 995-1 ITAA 1997), taxable Australian real property and non-commercial residential premises.
Managed Investment Trusts
Australian tax residents have the option to invest directly in a build-to-rent accommodation project, or indirectly through a managed investment trust.
The change in the capital works deduction will also apply to managed investment trusts, meaning that you have the option to invest whichever way you wish and still get access to the increased deduction. However, please note that eligibility criteria do apply, meaning that only bona fide build-to-rent accommodation projects will get the additional deduction.
Foreign investors in a managed investment trust that choose to commence a build-to-rent accommodation project will also benefit from a reduction in withholding tax after 1 July 2024, from 30% to 15%.
Active BTR and misuse tax
A BTR development will be active if it meets all the eligibility criteria, if a new building was initially commenced as a build-to-sell development and later converted to BTR during construction, it can still be regarded as an active BTR.
An active BTR development will cease to be active if any of the dwellings fail to meet an eligibility criterion during the compliance period of 15 years (beginning on the day when the development commenced being an active BTR).
Misuse tax
If an active BTR development ceases to be an active during the compliance period, BTR development misuse tax will be imposed to approximately neutralise the tax benefits obtained both through the reduced MIT withholding rates, and the accelerated capital works deduction.
The misuse tax is roughly equal to the accelerated depreciation and reduced MIT withholding rate benefits obtained, increased by 8%. Any misuse tax assessed by the Commissioner will not be deductible and will be subject to the general interest charge.
If you have any questions about this proposed change, and its progress through the parliamentary process, please contact our office.
BE THE FIRST TO KNOW
Subscribe to receive future reports.
Complete the form below to receive timely and insightful information directly to your inbox.
