Purpose of the Bills

The purpose of Treasury Laws Amendment (Build to Rent) Bill 2024 (BTR Bill) and the Capital Works (Build to Rent Misuse Tax) Bill 2024 (Imposition Bill) is to:

• increase Build to Rent (BTR) rental housing supply by using the tax system as a lever to incentivise long term investment in Australia’s BTR sector, and
• maintain the integrity of these tax incentives by imposing a misuse tax upon taxpayers who improperly claim these tax concessions.

History of the Bills

Before the Senate agreed to divide the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 (Omnibus Bill) into two Bills on 27 June 2024, both the Australian Greens and Coalition attempted to remove the former Schedule 1 (Build to rent developments) from the Omnibus Bill in the Lower House. Their proposed amendments were negatived by the Lower House (see details below):

• Mr Max Chandler-Mather’s proposed removal of Schedule 1 from the original Omnibus Bill was negatived on 26 June 2024.
• Mr Luke Howarth MP proposed removal of Schedule 1 from the original Omnibus Bill was negatived on 27 June 2024.

Pursuant to the order agreed to on 27 June 2024 in the Senate, the Omnibus Bill was divided by the Senate into two Bills with effect from 2 July 2024 being:

• Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 (the Omnibus Bill as divided by the Senate)
• Treasury Laws Amendment (Build to Rent) Bill 2024 (BTR Bill).

The BTR Bill contains the same amendments which were formerly in Schedule 1 of the Omnibus Bill.

Background

About ‘Build to Rent’

The defining feature of a Build to Rent (BTR) development – as identified by the Australian Housing and Urban Research Institute (AHURI) (2023) – is that after a multi-unit building is constructed, rather than selling individual units, the developer retains ownership of the building and the units are rented to tenants. Rents may be set at market rates or, in the case of affordable housing, may be discounted with appropriate government support.

While the BTR sector is well established overseas (for instance in the UK and in the US), modelling conducted in 2023 by Ernst & Young (EY) shows that Australia’s BTR sector is small compared to other countries. However, it appears to be growing. EY estimated the size of the sector as at February 2023 at $16.87 billion (just 0.2% of the total value of the residential housing sector). More recently, Franklin St. (an ‘an independent business providing specialist end-to-end build to rent advisory’ services) estimated that the value of Australia’s BTR pipeline (as at January 2024) is $39 billion.

Announcing ‘Build to Rent’

2023–24 Budget

Prime Minister, Anthony Albanese, announced his intention to offer tax incentives to increase the supply of housing on 28 April 2023.[1] Details of the measure were released in the May 2023 Budget Measures: Budget Paper No.2: 2023–2024 (pp. 19–20).

Accordingly, on 9 April 2024, Treasury circulated an exposure draft of the proposed Build to Rent provisions for public comment. At that time, Treasurer Dr Jim Chalmers and Minister for Housing and Homelessness Minister for Small Business Julie Collins issued a joint media release stating (pp. 1–2):

Attracting more investment into housing will support our ambitious national effort to build 1.2 million new, well-located homes over five years from 1 July 2024. Industry estimates that changes to promote build-to-rent investment will make an important contribution to achieving this national target and could see an extra 150,000 rental homes built over the next decade…

2024–25 Budget

In the May 2024 Budget Measures: Budget Paper No. 2: 2024–2025 (p. 74), the Government committed to provide additional funding to build more homes for Australians sooner. As part of its Housing Support measure, the Government stated that it would also provide (p. 75):

… support to increase available rental housing by allowing foreign investors to purchase established Build to Rent properties with a lower foreign investment fee, conditional on the property continuing to be operated as a build to rent development. [emphasis added]

Issues relating to foreign investment are discussed below under the heading ‘Withholding MITs for foreign residents’.

Rationale for the Bills

Assistant Treasurer Stephen Jones detailed the BTR tax incentives (pp. 10–11) as follows:

The government has made $32 billion in new commitments since coming to office, including $6.2 billion in the 2024-25 budget, to address historic underinvestment in the Australian housing system.

Incentivising construction of new build-to-rent developments will increase rental supply at scale at a time when there is acute shortage of new rental stock.

…Build to rent is still a nascent industry in Australia and to date has generally been more focused on luxury developments. Our changes are intended to increase rental housing supply more broadly, including in the area of affordable housing.

For eligible new build-to-rent developments, the final withholding tax rate on eligible fund payments from managed investment trust (MIT) investments will be reduced from 30 per cent to 15 per cent.

The depreciation rate for capital works in eligible build-to-rent developments will also be increased from 2.5 per cent to four per cent per annum. This will cut the depreciation period from 40 years to 25 years for eligible developments.

Build-to-rent developments will need to meet criteria to be eligible for the concessions. Key requirements include a minimum of 50 or more apartments or dwellings and minimum lease terms of three years must be offered for each dwelling.

Build-to-rent developments must be held under single ownership for a minimum of 15 years. At least 10 per cent of dwellings must be tenanted on an affordable basis, delivering more long-term affordable rental supply. [emphasis added]

Mr Jones further explained (p. 13):

The Capital Works (Build to Rent Misuse Tax) Bill 2024 imposes a tax rate of 1.5 per cent of the build-to-rent misuse amount for an income year. It is a key integrity feature of the build-to-rent scheme and is intended to neutralise tax benefits claimed where a build-to-rent development does not meet the minimum compliance period of 15 years.

About managed investment trusts

In Tax Summary 2023–24,[2] the Institute of Financial Professionals Australia explains that in a managed investment, many investors pool together monies to purchase investment assets. The investor receives an interest in the scheme, normally units in a unit trust. The number of units an investor receives is dependent on the amount invested in the scheme. Generally, a professional investment manager operates the scheme. Many investors are attracted to managed investments for professional management and diversification of investments.

The term managed investment trust (MIT) is defined in section 275-10 of Income Tax Assessment Act 1997 (ITAA1997)[3] and the MIT regime is found in division 275 of the ITAA1997. According to the Australian Taxation Office (ATO) (p. 3), an MIT is a type of trust in which members of the public collectively invest in passive income activities, such as shares, property or fixed interest assets.

The ATO outlines the eligibility criteria (p. 4) for a trust to qualify as an MIT, including:

• the trustee is an Australian resident, or the central management and control of the trust is in Australia
• the trust does not carry on or control an active trading business
• the trust is a managed investment scheme (p. 5)
• the trust meets the widely held requirement (p. 5)
• the trust meets the closely held restriction (p. 7)
• the trust is operated or managed by an appropriately regulated entity (p. 7).

The Tax Summary explains it in another way:[4]

An MIT is a widely held trust which is centrally controlled by a resident trustee and only permitted to invest in specific assets.

The impact of being an MIT is that:

• the trustee can make a choice to treat certain passive CGT assets (primarily shares, units and real property) of the trust as being subject to the CGT provisions. If the election is not made then those assets are treated as revenue assets, and
• the trustee of an MIT may have to withhold final PAYG withholding amounts on defined fund payments to non-resident entities (similar to withholding on dividends, interest and royalties).

Withholding MITs for foreign residents

According to the Australian Taxation Law[5] (p. 1440), a concessional withholding tax regime has applied to certain distributions made by Australian MITs to foreign resident investors since 1 July 2008. This withholding MIT (WMIT) regime is contained in subdivision 840M of ITAA1997 and subdivision 12-H of Schedule 1 to the Taxation Administration Act 1953 (TAA).

A ‘withholding MIT’ (WMIT) is defined in section 12-383 of Schedule 1 to the TAA. According to Income Taxation Commentary and Materials,[6] the definition of a WMIT requires both that the trust is an MIT and:

a substantial proportion of the investment management activities carried out in relation to the trust in respect of all of the following assets of the trust are carried out in Australia throughout the income year.[7]

Where this is the case, the ATO states (p. 75) that the withholding tax on MIT fund payments and dividend, interest or royalty payments (including deemed payments) received from Australian MITs is a final tax imposed on foreign residents.

What is a ‘fund payment’?

A fund payment is defined in section 12-405 of Schedule 1 to the TAA. For a WMIT, its fund payment is the basis for the concessional withholding tax rate available to a foreign investor who is from an information exchange country or jurisdiction (see further discussion below).

As explained by the ATO (p. 68):

For MITs, a fund payment broadly consists of the net income of the MIT from Australian sources.

Fund payment excluded amounts are:

• dividends, interest and royalties on the basis that they are subject to withholding tax under separate provisions
• capital gains or capital losses from CGT events that happen in relation to CGT assets that are not taxable Australian property.

In calculating a fund payment for a MIT, capital losses from CGT events that happen in relation to CGT assets that are not taxable Australian property are added back to the extent they are applied against capital gains from taxable Australian property.

MIT withholding tax rates for foreign investors

Under the WMIT regime, a foreign investor is eligible for a reduced rate of withholding tax on fund payments from MITs if the investor is a resident of a country or jurisdiction with which Australia has an effective exchange of information (EOI) treaty. The EOI is a key mechanism used to share taxpayer-related information between Australia and other jurisdictions in order to administer and enforce Australia’s tax laws.

Regulation 34 of the Taxation Administration Regulations 2017 lists the current 137 information exchange countries or jurisdictions (such as UK, US, Canada, China, HK, Singapore etc) for the purpose of WMIT income distributions under subsection 12-385(4) of Schedule 1 to the TAA.

Under subsection 12-385(3) of Schedule 1 to the TAA, and as explained in the Explanatory Memorandum (pp. 30–31, paragraph 1.89), if the investor is not from an information exchange country or jurisdiction, the MIT withholding tax rate is 30%. If the investor is a resident of an information exchange country or jurisdiction, the rate of MIT withholding tax can be:

• 15% in general
• 10% if the trust is a ‘clean building MIT’,[8] or
• 30% if the fund payment is attributable to non-concessional MIT income.

Currently, rental income from BTR developments is treated as non-concessional MIT income due to the operation of another tax provision under section 12-435 in Schedule 1 to the TAA.[9] Without the amendments from the BTR and Imposition Bills, foreign investors who are from information exchange countries or jurisdictions pay 30% on BTR rental income.

Reforms to Australia’s foreign investment framework

On 1 May 2024, Treasury announced reforms to Australia’s Foreign Investment Framework. Under the updated Foreign Investment Policy (p. 3), the Government will allow ‘foreign investors to buy established Build to Rent developments, and [apply] lower application fees to this type of investment’.

How much is the concessional WMITs regime currently costing the Government?

The WMIT regime for foreign investors has been in operation for some time. The concessional 10% or 15% (instead of the full 30%) withholding tax rates for certain distributions by MITs to foreign residents would involve the Australian Government foregoing tax revenue annually to support the regime. The tax regime costs the Australian Government about $800 million a year for the 2023–24 and 2024–25 income years. The graphic below is an excerpt from Treasury’s 2023–24 Tax Expenditures and Insights Statement (p. 120, measure B90):

Australia’s default withholding tax rate for distributions of Australian source net income (other than dividends, interest and royalties) by MITs to foreign residents is 30 per cent. However, since 1 July 2012, a concessional 15 per cent withholding tax rate has applied to MIT fund payments to foreign residents of countries with which Australia has an information exchange arrangement (contained in Regulation 34 of the Taxation Administration Regulations 2017). From 1 July 2019, the MIT withholding tax rate was increased to 30 per cent for income classified as non-concessional MIT income. The MIT withholding tax rate is a final withholding tax.

State and territory BTR concessions

According to the joint media release of 5 June 2024 by Dr Chalmers and Ms Collins, the BRT Bill ‘will operate separately from state and territory initiatives designed to support the build-to-rent sector’.

The Explanatory Memorandum (p. 135) states that nearly all states and territories (except for Tasmania and Northern Territory) have introduced tax concessions to support investment in BTR housing, for example, 50% land tax concession for New South Wales, Victoria, South Australia, Western Australia and Queensland. Some states, such as New South Wales and Queensland have also introduced concessions on foreign investor duties and surcharges. In Victoria, BTR developments are exempt from the absentee owner surcharge for up to 30 years. Queensland and the Australian Capital Territory’s BTR concessions require a portion of the BTR dwellings to be affordable or discounted housing.

Committee consideration

Senate Economics Legislation Committee

The BTR Bill and the Imposition Bill have been referred to the Senate Economics Legislation Committee for inquiry and report by 4 September 2024.[10] 16 submissions have been published online. Stakeholder comments about the Bills are canvassed below under the heading ‘Position of major interest groups’.

Senate Standing Committee for the Scrutiny of Bills

At the time of writing this Digest, the Senate Standing Committee for the Scrutiny of Bills has considered the Bills but made no specific comments on the Build to rent amendments (formerly set out in Schedule 1 of the Omnibus Bill) or the Imposition Bill.[11]

Policy position of non-government parties and independents

Coalition

Speaking on both the BTR amendments and the Imposition Bill in his Second Reading Speech, Luke Howarth MP stated that the Coalition would oppose the measure for 2 reasons. First, it was considered that the Government’s BTR policy ‘prioritised corporate home ownership over individual ownership’(p. 5) due to the generous incentives given to institutional investors under the policy, whereas the Coalition commits to be ‘the party of home ownership and first home buyers.’(p. 5) Second, it was argued (p. 5) that BTR would not address the immediate rental supply shortages when the BTR sector only accounts for 0.2% of the current housing market; the development of the BTR projects requires long lead time; and the majority of the proposed BTR units (55%) are planned to be in Melbourne.

Nationals MP, Sam Birrell, expressed concern that the build-to-rent misuse tax will create generous tax incentives for institutional investors to develop build-to-rent housing (p. 167).

Terry Young MP argued (p. 83) that the ‘greatest solution for rentals is to legislate and fund pathways for ownership, not rental schemes’. He considered that the Bills exacerbated the housing affordability problems by offering tax incentives to the vast majority of investors which were superannuation funds and foreign investors. This put the average Australian family at a disadvantage when they bid for land against deep pocket institutions or investors. Mr Young also reiterated the Coalition policy which was announced by the Leader of the Opposition during his 2024–25 Budget Reply Speech, by allowing Australians to access their super to buy their first home (p. 105).

During the Sky News Interview with Politics on 27 June 2024, Senator Andrew Bragg said:

I think our critique of Labor's housing plan is that it gives up on home ownership. They're not even trying.

Senator Bragg preferred the two announced Coalition policies (p. 4) as more effective policies – the policies are ‘one's to reduce foreign demand for Australian housing and migration changes, plus the super policy’. Senator Bragg also indicated that more Coalition housing policies would be announced in the future.

Australian Greens

Max Chandler-Mather MP argued (p. 154) that the proposed BTR measure would produce unaffordable housing outcomes. Mr Chandler-Mather further argued (p. 155) that the BTR measure would allow developers to ‘literally only rent out 50 [out of potentially 100 or 150 rentals] and then drip-feed the rest of the apartments onto the market depending on how much they can get for them’ while receiving public tax handouts.

Mr Chandler-Mather proposed (p. 155) that the best form of BTR is ‘government built housing where they build it themselves and rent it out at prices that people can actually afford’. He further proposed (p. 155) that the Government should introduce a freeze and cap on rent increases on the BTR apartments developed under this scheme and a nationwide freeze and cap on rent increases in coordination with National Cabinet. Mr Chandler-Mather argued that the Government should ‘phase out the tax handouts for property investors’ (p. 156) because these handouts put renters at a disadvantage at auctions where they couldn’t afford to compete with deep pocket property investors.

Teal independents

Kate Chaney MP acknowledged (p. 87) that BTR alone would not fix all the housing affordability and supply problems. However, Ms Chaney supported the BTR measure, particularly the requirement of 10% of dwellings in a BTR development to be affordable housing.

Allegra Spender MP cautiously supported the BTR measure (pp. 164–165). Ms Spender acknowledged the concerns of the Property Council and others that the BTR tax incentive measures might be undermined by the mandated provision of ‘affordable housing’ which lacked consistent definitions. However, she said (p. 164): “I am hesitant to vote against a bill that seeks to add to housing supply”. She also explained (p. 164) that a delicate balance was needed between the provision of affordable housing and investment attractiveness. She called on (p. 165) the Government to monitor the settings in these Bills and adjust accordingly if the desired outcomes would not be met.

Zali Steggall MP expressed her mixed views towards the BTR measure. Ms Steggall spoke of (p. 158) the importance of the BTR tax incentives. She also found (pp. 159–159) that certain aspects of the BTR measures encouraging (p. 158–159), such as the Government’s promise to build 1.2 million houses by the end of the decade, and the ‘stability and certainty to renters’ that were assured under the eligibility criteria for an active BTR development. Ms Steggall warned (p. 158) that Australia needed systematic housing reform or it would ‘get very much worse’. She also pointed out (p. 159) ‘compared to other countries [such as UK and US], we are just way behind [in terms of the current BTR market size]’. Finally, Ms Steggall called for (p. 159) the BTR developments to be climate resilient, and that a reality check to be performed down the track on how much would actually be delivered in terms of building projects and the supply.

Centre Alliance

Rebekha Sharkie MP supports the measure. She stated (p. 91):

Reducing the final withholding tax rate on eligible fund payments—rental income and capital gains from managed investment trust investments—from 30 per cent to 15 per cent is a welcome step, as is increasing the deduction rate for capital works in eligible developments from 2.5 to four per cent per annum. This should encourage investment in build-to-rent, which I support as a means to foster a global proven model to address housing affordability and availability. We need to have lots of different options out there to build our stock.

Position of major interest groups

In favour of the BTR measure

The Explanatory Memorandum (p. 156) states that interested stakeholders ‘were broadly supportive of the Government’s policy objective’.

Several stakeholders have asserted that BTR developments present multiple benefits for renters, and have the potential to contribute to both housing supply and the broader economy. For instance, the Property Council of Australia (PCA) (2023) asserts that the BTR sector benefits tenants by offering ‘longer term rental tenure, professional asset management, high-quality facilities, and a commitment to sustainability common to institutional capital’ (p. 39). More recently, the PCA announced its support for the BTR measures through its 27 June 2024 media release in which it urged (p. 1) ‘federal opposition parties and independents to help support the delivery of 160,000 new rental homes Australia desperately needs’.

AHURI (2019) argues that BTR may offer more professionally managed (and secure) tenancies than small-scale ‘mum and dad’ landlords; more generally, BTR has the potential to boost rental housing supply (particularly for international students).

PwC (2020) contends that BTR has broader job-creation potential than other apartment developments, as the day-to-day management relies on property managers, cleaning services, maintenance and landscaping.

The Association of Superannuation Funds of Australia (ASFA)[12] supports the objective of encouraging institutional investment into housing (including affordable housing), recognises the potential of the BTR sector to address Australia’s housing needs and that the Bills represent an improvement to the current tax treatment of BTR.

Concerns about the BTR measure

However, ASFA also points out that the withholding tax incentives for MITs are only relevant to overseas investors, not Australian domiciled investors and superannuation funds.[13]

ASFA made further 5 recommendations in its submission: [14]

AHURI (2023) also cautions that there are risks associated with encouraging BTR developments – risks that need to be minimised through regulation. AHURI states:

While BTR has great potential benefits, it does need to be regulated. For example, ownership of too many units in an area by one owner (thereby creating a monopoly) means there is a risk to tenants and the community if the business owner puts up rents excessively or evicts everyone at the same time in order to refurbish/redevelop buildings.

In addition, if governments and communities give tax or planning benefits to BTR projects to support affordable or social housing, those benefits need to be preserved legally into the future through the use of planning covenants, such as charges on titles.

Treasury conducted a public consultation in April 2024 on the following BTR draft legislation and explanatory materials:

• Exposure draft of the Treasury Laws Amendment Bill 2024: Build to Rent Developments
• Exposure draft of the Capital Works (Build to Rent Misuse Tax) Bill 2024
• Exposure draft explanatory materials: Capital Works (Build to Rent Misuse Tax) Bill 2024; Treasury Laws Amendment Bill 2024: Build to Rent Developments.

Treasury received 37 public submissions and published 33 non-confidential submissions.

The Explanatory Memorandum points out the following stakeholders’ concerns (p. 157):

The most common, and strongest, concern raised by stakeholders was that the concession applied in the legislation was not sufficient. Most stakeholders argued that it would not make BTR an attractive investment, relative to other property asset classes in Australia. Further, stakeholders were concerned that the benefits of the concession would be offset by the requirements to have 10 per cent of dwellings made available at an affordable rate.

Stakeholders suggested the following changes, to align the application of the MIT withholding concession with the treatment of other property asset classes.

1.2 the concessional 15% MIT withholding tax rate should extend to fund payments that include capital gains attributable to a BTR development (and not be limited to rental income);

1.3 the concessional 15% MIT withholding tax rate should apply beyond the first 15 years of a BTR development if the development remains compliant.

The Government agreed to adjust the draft legislation in line with these suggestions to ensure the final legislation achieved the policy objective of incentivising foreign investment in BTR, including through the supply of affordable housing.

A capital gains tax event can happen when investors sell their investment in a BTR projects when they exit the market, and the net capital gain is treated as a part of income in the tax laws. The adjustment to include capital gains in this concession is consistent with other MIT withholding tax rate concessions, including those applying to commercial buildings and affordable housing.

Stakeholders indicated they would be unable to make initial investment decisions without the clarity of the tax treatment to their ‘exit strategy’. The Treasury’s costing indicates the change will have negligible impact over the forward estimates. As a result, legislative changes were made to include capital gains in the withholding tax concessions.

Although this policy requires investors to operate the BTR projects for 15 years, stakeholders have indicated that a BTR project could continue operating for longer. To end the withholding tax concessions at the end of 15-year compliance period would force investors to exit the market, and potentially not invest in the first place. Extending the concession for as long as a BTR project complies with the eligibility criteria will help preserve the benefits of BTR over a longer period, without requiring investors to consider costly and complex decisions on managing or replacing their investments.

Financial implications

The Explanatory Memorandum (p. 2) states that former Schedule 1 (Build to rent developments) is estimated to decrease receipts by $30 million.

Table 1  Financial impact of Schedule 1 ($ million)

Source: Explanatory Memorandum, Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 and Capital Works (Build to Rent Misuse Tax) Bill 2024, 2.

Compliance cost impact

The Explanatory Memorandum (p. 2) states that the BTR measure is expected to result in a small overall compliance cost impact, comprising a small implementation impact and an increase in ongoing costs.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bills are compatible.[15]

Parliamentary Joint Committee on Human Rights

In its report of 24 July 2024, the Parliamentary Joint Committee on Human Rights stated that it had no comment to make on the Bills.

Key issues and provisions

The Government’s intention is to address Australia’s housing supply and affordability crisis. One way to do this is to increase the rental housing supply including in the area of affordable housing. The Government believes that the tax system can be used as a lever to incentivise construction of 150,000 new BTR rental homes within the next 10 years.

The BTR Bill introduces 2 BTR tax concessions whilst the Imposition Bill contains 1 integrity measure. Together they:

• increase the capital works deduction from 2.5% to 4%, and hence reduce the depreciation period from 40 to 25 years for eligible developments
• decrease the MIT withholding tax rates for non-resident investors from 30% to 15% and
• impose a BTR development misuse tax for the ATO to recover any tax concessions that are inappropriately claimed by non-compliant taxpayers during the 15-year compliance period.

Misuse tax is not deductible

Items 2 and 3 of the BTR Bill amend the ITAA 1997 to specify that the ‘build to rent development misuse tax’ is not deductible.

Capital works deductions at 4%

CCH iKnowConnect explains that Division 43 of ITAA 1997 contains rules on how to work out deductions for capital expenditure on the construction of capital works. Currently, the rate for income-producing buildings constructed after 27 February 1992 is 2.5%, other than short-term traveller accommodation and industrial buildings which are eligible for a 4% rate. Subdivision 43-D ensures that a deduction for capital expenditure on capital works is only available if the taxpayer uses the capital item for income-producing purposes.

Items 4 to 7 of the BTR Bill amend subdivision 43-D of ITAA 1997 to increase the capital works deduction rate from 2.5% to 4% for active BTR developments.

Item 10 inserts proposed section 43-237 into the ITAA 1997 to reduce the depreciation period from 40 to 25 years for eligible developments.

Active BTR developments

Item 9 specifies the eligibility criteria for an active BTR development before tax concessions can be claimed. (A breach of the eligibility criteria may attract the BTR development misuse tax within the 15-year compliance period.) The main criteria include:

• an active BTR development area comprises dwellings and any common areas for those dwellings: proposed subsection 43-151(1)
• 50 or more of the residential dwellings in an active BTR development are made available for rent to the general public: proposed subsection 43-152(2)
• tax benefit may only apply to BTR developments that remain continuously active for the 15-year compliance period – where an active BTR development is expanded to include new dwellings, there will be separate compliance periods for the existing and new dwellings: proposed subsections 43-152(3) and (5), see also Explanatory Memorandum (paragraph 1.105)
• tax benefit may not apply where a BTR development ceases to be active within the 15-year compliance period – that is, when the dwellings fail to satisfy one or more of the eligibility conditions set out in proposed subsection 43-153(1): proposed subsection 43-152(4).
• The eligibility conditions are:

• dwellings in the BTR development must be available for lease for at least 3 years (although a tenant can request a shorter period): proposed paragraph 43-153(1)(a)
• dwellings are Australian residential premises, not commercial residential premises: proposed paragraph 43-153(1)(b)
• all of the dwellings and common areas for the dwellings are owned by a single entity: proposed paragraph 43-153(1)(c)
• at least 10% of the dwellings are affordable dwellings: proposed paragraph 43‑153(1)(d)—being dwellings for which the rent is capped at 74.9% of its market value and additional requirements (if any) imposed by the Minister: proposed subsection 43-153(2)

• the owner of the dwellings must notify the ATO in an approved form when the owner chooses to form an active BTR development: proposed subsection 43-152(6)
• the choice is taken to be made either on the day after the nominated day if the owner nominates a day in the choice and the Commissioner receive the choice before that day. Otherwise the choice is taken to be made on the day after the Commissioner receives the choice: proposed subsection 43-153(7).

In addition, the taxpayer is required to notify the ATO in an approved form within 28 days when certain trigger events take place, such as the commencement, expansion or cessation of an active BTR development, or a change of ownership of the BTR development: proposed section 43-154.

The application provision in item 25 of the BTR Bill requires construction of the relevant development was commenced after 7:30PM (AEST) on 9 May 2023.

The Explanatory Memorandum (pp. 14–29, 34–35, 38–40 and 44) provides detailed explanations on these eligibility criteria for an active BTR new development to claim a higher capital works deduction rate at 4% within 25 years.

Imposing a new BTR development misuse tax

As explained in Thomson Reuters’ Westlaw Australia, if a BTR tax concession is claimed for a particular year and the development subsequently becomes ineligible (during the 15-year period), the tax benefit has effectively been unfairly obtained. For this reason, the legislation seeks to claw back the tax benefits in 2 ways.

First, if an active BTR development ceases to be an active BTR development during the compliance period, item 10 amends subdivision 43-G of ITAA 1997 to treat the development as having been subject to the 2.5% deduction rate for the time when it had been subject to a 4% deduction rate.[16] This is to ensure the BTR development is depreciated over 40 years instead of 25.

Second, the entity will be subject to the BTR development misuse tax, is imposed by proposed Div 44—Build to rent development misuse tax of the ITAA 1997 inserted by item 11 of the BTR Bill and section 4 of the Imposition Bill. The misuse tax will be calculated based on the BTR misuse amount. The BTR misuse amount is the sum of an entity's BTR capital works deduction amounts and 10 times the sum of the entity's BTR withholding amounts: proposed section 44-20. Section 5 of the Imposition Bill will allow the ATO to impose and collect the BTR misuse tax, which is calculated at 1.5% of the BTR misuse amount.

Item 13 of the BTR Bill amends the table in section 8AAB of the TAA to impose a general interest charge should the taxpayer fail to pay the misuse tax when it becomes due and payable.

Importantly, the misuse tax does not apply where a BTR development ceases to be an active BTR development after the 15-year compliance period. According to the Explanatory Memorandum, any non-compliance is dealt with through the amended assessment (paragraphs 1.112 and 1.132).

The Explanatory Memorandum (pp. 41–44) provides detailed explanations on the new misuse tax.

BTR withholding concession for managed investment trust

Items 14 to 18 of the BTR Bill amend subdivision 12-H of Schedule 1 to TAA to reduce the MIT withholding tax rate from 30% to 15% for eligible BTR rental income that is distributed to, or capital gains from, eligible BTR MIT investments that happen to, foreign investors from an information exchange country or jurisdiction.

The Explanatory Memorandum (pp. 133–135 and 149–155) provides detailed information on MITs and impacts on reducing the withholding tax rates on foreign investors in 2 scenarios.