Australia’s rental market is the tightest it has ever been with the national vacancy rate plummeting to 1.07% in February and vacancy rates in Adelaide, Brisbane and Perth below 1%. 

Part of the Federal Government’s supply side response to the rental vacancy rate was to announce tax concessions for ‘build-to-rent’ (BTR) developments, but will these really impact supply?

It should also be noted that various states have provided concessional duty and land tax treatment with respect to BTR developments, and each has its own rules. These concessions add to the supposed attractiveness of the BTR model; however the devil is in the detail.housing crisis

What is BTR

BTR is a model that is more commonly found in Europe and the United States and in its simplest form is a development for the sole purpose of rental (as opposed to build-to-sell which is the predominant Australian model). The BTR model seeks to lock in long term tenancies and provide greater flexibility for renters to gain a secure property for the long term.

What are the tax concessions?

Treasury recently released exposure draft legislation and accompanying explanatory materials to give effect to measures announced by the Federal Government pursuant to the 2023-24 Federal Budget to encourage investment and construction in the BTR sector. Those measures, if enacted, will:housing vacancy

  • Increase tax deductions for capital works (i.e. the cost to build and improve the development) from the standard 2.5% to the 4% rate, which will align the tax treatment of capital works connected with eligible BTR projects to those connected with other classes of property such as hotels, other short-term accommodation, and certain industrial buildings; and
  • Reduce the withholding tax payable on certain payments to non-residents by Managed Investment Trusts (MIT) and Attributed Managed Investment Trusts (AMIT) that represent rental income from eligible BTR developments from the standard 30% to 15%, which will align to the treatment of payments attributable to rent sourced from ‘commercial residential premises’ and complement an existing concession for residential dwellings used to provide ‘affordable housing’ introduced in 2019[1].

The increase in the capital works deduction is a timing benefit which helps the cash flow proposition for all investors in BTR projects. The additional 1.5% deduction available on millions of dollars of construction expenses that would be incurred to create a BTR will have significant benefits to the project.

The withholding tax reduction however is solely for the benefit of non-resident investors. It is likely that this concession has been included by the Federal Government as a way of acknowledging that BTR is a more established model in overseas jurisdictions and to increase the in-flow of capital from overseas to assist with the supply of BTR projects.

What qualifies for the concessions?

To qualify for the concessions, the development must continuously satisfy the following rules for a period of 15 years from completion of construction:

  • The BTR development’s construction must have started after 7:30pm AEST on 9 May 2023new housing legislation
  • The development must result in the construction of at least 50 dwellings made available to rent to the general public;
  • All of the dwellings in the BTR development, plus common areas, must continue to be directly owned together, by a single entity, at any one time, for at least 15 years;
  • Dwellings in the BTR development must be offered for least terms of at least three years throughout the 15 year period, however tenants may request shorter terms; and
  • 10% of the total units must be allocated to ‘affordable housing’ and at least one of each ‘type’ of accommodation must be allocated to ‘affordable housing’.

In some good news, not all dwellings must be brand new developments. Old buildings can be re-purposed to create 50 dwellings and still qualify for the BTR concessions. This means, for example, that an old warehouse may be retrofitted to create apartment style accommodation and still qualify.

The BTR may also be a part of the overall construction. So, if there is a mixed-use apartment development, with commercial tenancies on the ground floor, the dwelling component of the development may still qualify for the increased rates of deduction and reduced withholding tax.

The single entity requirement does not need to be the same single entity throughout the 15 year compliance period[2]. A BTR development can be sold, however it must be purchased by another single entity in full, otherwise there will be a breach of the provisions.

What’s the catch?

One of the main issues that we see with the proposed legislation is the levels of additional administrative burden that the rules will impose in order to qualify for the tax concessions and to retain those concessions.housing

The first is the requirement around the provision of affordable housing for at least 10 percent of the dwellings, with at least one of each dwelling type constituting the BTR development being allocated to affordable housing where the rent can be no more than 74.9% of the rent charged on a similar unit of accommodation. Whilst estimable, this could encourage highly standardised dwellings to minimise the number of units that are required to be allocated to affordable housing.

Secondly, there are stringent obligations on the part of the BTR developer to confirm the income of proposed tenants and report this information to the ATO annually. For the tenant to take up the affordable housing, they must have income less than a prescribed income threshold, which is typically released in May and November of each year and varies depending on the household composition. This requires the BTR developer to obtain evidence of gross income for the previous 12 months and to obtain a tenant consent form upon entering into the tenancy agreement and upon each anniversary.

There may be a scenario in which a previously compliant tenant (who may just be under the threshold) changes jobs, or the household composition reduces from a couple to single, resulting in the tenant exceeding the income threshold. If these tenancies are required to be signed for three years at the date of entry, and they now exceed the income threshold, what rights does the BTR developer have to remove the discount on the rent or otherwise break the lease so as to re-comply with the 10% minimum affordable housing requirement? Noting that there may be inflexibility in providing an alternate dwelling for rent as affordable housing. We expect this anomaly to be resolved through the consultation that is underway, and for a model of upfront assessment similar to that employed by Singapore’s Housing Development Board to be reflected in the ultimate Bill.housing development

The impact of breaching the BTR requirements within the 15 years is not simply a loss of the tax concessions going forward, but the application of BTR Development Misuse Tax (Misuse Tax). 

The Misuse Tax essentially unwinds all of the tax benefits provided to the BTR development since the start of the project by imposing a tax broadly calculated with reference to both the additional capital works deductions claimed, and the reduced withholding tax imposed on payments to non-residents through MITs and AMITs multiplied by 1.08 to approximately account for interest. 

The Misuse Tax is not deductible to the entity. It therefore can have a punitive effect on incoming investors of a MIT who may then suffer the Misuse Tax on their investment. Compliance with the BTR provisions will become a major component of due diligence processes in respect of any investment into such a project, and it is also important to recognise the significant reporting obligations that are associated with the concessions.

Further, whilst the withholding tax concession is beneficial to encouraging foreign investment, the interplay with the new thin capitalisation rules may impact the gearing of Australian property developments and consequently counteract the macroeconomic benefits of the withholding tax concession.


If you would like to learn more about the topics discussed in this article, please contact your local RSM office.

[1] Per proposed subsection 12-450(5) of Schedule 1 to the Taxation Administration Act 1953, such concessional treatment will only be available for a period of 15 years from completion of the development.

[2] For the avoidance of doubt, multiple investors may own the BTR development through a single entity.