On 28 April 2023, National Cabinet announced its A Better Future For the Federation platform
A key tenet of the platform is the commitment to ‘better planning for stronger growth’, which comprises various proposed reforms to support a national approach to the growth of Australia’s cities, towns and suburbs, focussed predominantly on sustainable infrastructure development and increasing the supply and affordability of housing in Australia.
One of the means by which National Cabinet proposes to increase the supply and affordability of housing in Australia is the provision of tax incentives to developers of eligible new build-to-rent projects. Specifically:
- Increasing the annual depreciation rate from 2.5% to 4% per year for eligible new build-to-rent projects where construction commences after 9 May 2023 (i.e., the date of the 2023 Federal Budget); and
- Reducing the withholding tax rate for eligible fund payments from managed investment trusts to foreign residents on income from newly constructed residential build-to-rent properties after 1 July 2024 from 30% to 15%, subject to further consultation on eligibility criteria.
Proposed Tax Incentives Summarised
These proposed tax incentives come after the announcement and introduction of state tax incentives for the build-to-rent sector, such as those that will come into effect in Queensland on 1 July 2023
The first proposed tax incentive concerns the annual rate at which tax deductions can be claimed for capital works (e.g., buildings and improvements thereto). Increasing the annual deduction rate from 2.5% to 4% will align the tax treatment of capital works connected with eligible build-to-rent projects with those connected with other classes of property such as hotels, other types of short-term accommodation for travellers, and certain industrial buildings.
The second proposed tax incentive will halve the amount of withholding tax suffered by many foreign investors in build-to-rent projects and complement an existing concession for dwellings used to provide ‘affordable housing’ that was introduced in 2019. Currently, fund payments referable to a build-to-rent project that are derived by a managed investment trust (MIT) are treated as non-concessional MIT income and subject to withholding tax at the rate of 30% when paid to a foreign resident, except where the aforementioned concession for ‘affordable housing’ applies, in which case, a concessional withholding tax rate of 15% applies.
Implications Of The Proposed Tax Incentives
It is expected that the proposed tax incentives will be welcomed by participants in Australia’s burgeoning build-to-rent sector, which is one of Australia’s fastest growing commercial real estate sectors and recognised as a credible model to improve housing affordability and facilitate both greater real security and conditions for tenants.
The proposed increase to the rate of capital works deductions should materially benefit eligible build-to-rent developers from a cash flow and net present value perspective. Additional benefits such as the extension of more favourable terms by third-party financers should also result.
The proposed reforms to the MIT withholding tax rules should benefit a large proportion of foreign investors in build-to-rent projects as concessional withholding tax of 15% currently only applies in limited circumstances when a dwelling is considered to be used for providing ‘affordable housing’ (i.e., when tenancy of the dwelling is exclusively managed by an ‘eligible community housing provider’). Extension of concessional withholding tax to fund payments sourced from eligible build-to-rent projects will be significant, given the large capital requirements of build-to-rent projects and the resultant necessity of attracting investment funds from both domestic and international sources.
While these proposed changes by the Federal Government and state land tax concessions may attract further investment in the build-to-rent sector, many ask whether the Federal Government could do more to address the current rental crisis. The build-to-rent sector still has several hurdles, one being that residential rent derived from a build-to-rent project is typically input taxed, often resulting in the developer's inability to claim GST on the acquisition and construction of the build-to-rent project. This inevitably impacts the financial viability of many build-to-rent projects. To attract further investment in the sector, perhaps the next logical step for the Federal Government would be to consider legislative amendments on the GST treatment of eligible build-to-rent projects, making residential rental on eligible build-to-rent projects GST-free rather than input taxed.
The announcement is expected to be articulated in more detail in the upcoming 2023 Federal Budget. RSM Australia’s Property and Construction and Tax experts will be following the 2023 Federal Budget with interest, particularly in relation to the definition of eligibility criteria for the proposed tax incentives.
RSM Australia’s Federal Budget 2023 report will be released on the morning of Wednesday, 10 May 2023. The report will be supplemented by a webinar at 10.30am AEST (8.30 AWST) on the same day featuring the following panelists:
- Effie Zahos – Editor-at-large, Canstar and Finance Commentor, The Today Show;
- David Pearce – Principal and Executive Director, The Centre for International Economics;
- Craig James – Chief Economist, CommSec;
- Liam Telford – National Tax Technical Director, RSM Australia; and
- Katie Timms – Director, RSM Australia.
To subscribe to receive our Federal Budget report, or to RSVP for our Federal Budget Webinar, please visit the following links:
Federal Budget Report
Federal Budget Webinar
For more information
For any queries in the meantime, please contact Adam Crowley (National Leader, Property and Construction).