Income tax concessions for build-to-rent developments

Measures announced in the 2023–24 Federal Budget to encourage investment and construction in the build-to-rent (BTR) sector are now law.

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.

Under the amendments, BTR developments that commenced construction after 9 May 2023 will now 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 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 5 years
• • at least 10% of the dwellings are available as affordable tenancies, and
• • all of the dwellings must be residential premises (s 995-1 ITAA 1997), taxable Australian real property and not be commercial residential premises.

Managed investment trusts

Australian tax residents have the option to invest directly in a BTR development 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 in any way you wish and still get access to the increased deduction. However, please note that eligibility criteria do apply, meaning that only bona fide BTR developments will get the additional deduction.

Foreign investors in a managed investment trust that choose to commence a BTR development will also benefit from a reduction in withholding tax after 1 July 2024, from 30% to 15%. This concessional withholding tax rate applies for rental income and capital gains attributable to eligible BTR developments.

Active BTR and 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.