Chapter 1Introduction
1.1On 27 June 2024, the Senate agreed to refer the Treasury Laws Amendment (Build to Rent) Bill 2024 (the BTR bill) and the provisions of the Capital Works (Build to Rent Misuse Tax) Bill 2024 (the imposition bill) to the committee for inquiry and report by 4 September 2024.
Purpose of the bills
1.2The BTR bill would amend the Income Tax Assessment Act 1936, Income Tax Assessment Act 1997 and Taxation Administration Act 1953 to provide incentives for investors to support the construction of new build to rent (BTR) developments by increasing the capital works deduction rate to four per cent per year and reducing the final withholding tax rate on eligible fund payments from eligible managed investment trust investments (MIT) to 15 per cent.
1.3The imposition bill is an integrity measure of the BTR scheme designed to ensure that BTR developments are available for rent throughout the 15-year compliance period. It imposes a misuse tax of 1.5 per cent that allows for recovery of tax concessions claimed by entities where a BTR development fails to meet eligibility requirements by ceasing to be an active BTR development during the 15-year compliance period.
Build to rent developments
1.4The BTR bill aims to increase the supply of rental housing, including affordable tenancies, by providing tax and other incentives for institutional investors to support the construction of new BTR developments. The imposition bill would ensure the integrity of tax concessions for BTR developments in the BTR bill by imposing a financial penalty in cases of misuse.
1.5Australian Bureau of Statistics Census data indicates that there is a long-term trend increase of Australians renting and a decline in home ownership. Increasing the construction of new BTR developments has the potential to lower rental pressures by addressing an acute shortage in new rental stock.
1.6BTR developments are multi-unit buildings where the units are rented out through a single management entity, instead of being sold to individuals for the purposes of investment or home ownership. BTR is a relatively undeveloped industry in Australia, unlike in the United States and the United Kingdom, where BTR is considered an established practice.
1.7In his second reading speech, the Assistant Treasurer and Minister for Financial Services, the Hon Stephen Jones MP, stated that these measures would help increase housing supply to deliver more homes for renters. The Minister stated that these measures formed part of the government’s commitment to addressing historic underinvestment in the Australian housing system.The Assistant Treasurer expanded on this point in his second reading speech:
Build to rent developments are specifically designed to be rented out rather than sold to individual buyers. It’s a model that has been used successfully overseas to increase housing supply and is designed to supplement and not replace other forms of rental housing or home ownership. 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 affordable housing.
1.8The Assistant Treasurer concluded by stating that increasing the supply of housing is the only long-term solution to Australia’s housing challenge and that incentivising more BTR developments represents one element of the government's efforts to improve housing supply.
Background
1.9Recognising that all levels of government are facing housing challenges, National Cabinet agreed in April 2023 to a package of reforms supporting a national approach to increase housing supply.
1.10As part of the government’s Homes for Australia plan, the 2023-24 Budget included measures to encourage investment and construction in the BTR sector, including provision of affordable tenancies.
1.11The imposition bill and the BTR bill fully implement the ‘Housing (Build-To-Rent Developments) – accelerating tax deductions and reducing managed investment trust withholding tax rates’ measures in the 2023-24 Budget, with changes to some criteria reflecting the outcomes from the exposure draft and other consultations.
Provisions of the bills
Overview of the amendments
1.12The BTR bill would amend the Income Tax Assessment Act 1997, the Tax Administration Act 1953 (TAA), and the Income Tax Assessment Act 1936 to provide incentives for organisations and individuals to invest in new BTR developments.
Enhanced tax concessions for BTR developments
1.13Under these amendments, investment in new BTR developments would be incentivised by the following two changes to headline tax concessions:
increasing the capital works deduction rate from 2.5 per cent to 4 per cent per year; and
reducing the final withholding tax rate on eligible fund payments (distributions of rental income and capital gains) from eligible managed investment trust (MIT) investments from 30 per cent to 15 per cent starting from 1 July 2024.
1.14The BTR bill provides that BTR development investors seeking access to one or both of these tax concessions must satisfy the following eligibility criteria:
the development’s construction commenced after 7.30PM, by legal time in the Australian Capital Territory, on 9 May 2023;
the development consists of 50 or more residential dwellings made available for rent to the general public (dwellings cannot be student, retirement or commercial residential accommodation such as hostels, boarding houses, hotels, and motels);
all dwellings in the development (and common areas that are part of the BTR development) continue to be owned together by a single entity, at any one time, for at least 15 consecutive years (the BTR development can be sold to another single entity during the period and remain eligible for the concessions);
dwellings in the BTR development must be available for lease terms of at least three years (although a tenant can request a shorter period); and
at least 10 per cent of the dwellings are available as affordable tenancies.
1.15BTR developments will cease to be active BTR developments if they fail to meet any of the eligibility requirements during the 15-year BTR compliance period.Entities participating in BTR developments must notify the Commissioner of Taxation (the Commissioner) when their development ceases to be a BTR development for the purposes of the legislation. Where dwellings fail to satisfy select eligibility criteria for reasons outside of the entity’s control, the Commissioner retains the discretion to determine that the eligibility criteria in question are in fact satisfied for a defined period.
1.16The eligibility criteria outlined above provide that the tax concessions in the BTR bill only apply to BTR developments that remain continuously active throughout the 15-year compliance period. If a BTR investor claims a tax concession for a particular year and the development in question subsequently becomes ineligible during the 15-year compliance period, the tax concession is withdrawn and clawed back under the build to rent development misuse tax (misuse tax).
1.17The reduced 15 per cent MIT final withholding rate can continue to apply beyond the 15-year compliance period if the BTR development continues to satisfy the eligibility requirements.
Affordable tenancies
1.18Additional criteria apply in relation to the supply of affordable tenancies in an active BTR development. The BTR bill provides that at least 10 per cent of the dwellings in a BTR development must be affordable dwellings. BTR dwellings will be considered affordable if the rent payable under the lease is 74.9 per cent or less of the rent otherwise payable for that dwelling in an open market.
1.19BTR investors bear the burden of proving that the dwellings in question are affordable dwellings under the legislation. The determination of whether a dwelling is affordable as per the BTR bill should occur at the time the lease is entered into.The legislation also contains provisions to prevent a BTR investor from allocating only the lowest standard dwellings in a development as affordable dwellings.
1.20Further, the BTR bill provides the Minister with the ability to impose additional requirements for a dwelling to be considered an affordable dwelling for the purposes of the legislation. These requirements may only relate to the income of the tenant or the prospective tenant and can be made by way of a legislative instrument. This reflects the intention that access to affordable dwellings in a BTR development is intended to be determined by reference to the income of the prospective tenant.
Build to rent development misuse tax
1.21The build to rent development misuse tax, implemented by the BTR bill and the imposition bill, is designed to claw back tax concessions claimed by entities investing in BTR developments where the developments cease to be active developments under the legislation. The misuse tax is only payable in circumstances where the entity has a BTR misuse amount for a select income year. An entity will have a BTR misuse amount if the entity has been non-compliant with the eligibility criteria for an active BTR development.
1.22An entity’s BTR misuse amount for an income year is the sum of that entity’s BTR capital works deduction amounts and 10 times the sum of the entity’s BTR withholding amounts. The BTR misuse amount is subject to a tax rate of 1.5percent.
Consultation
1.23Treasury conducted targeted consultation with industry associations, developers, domestic and international investors, and community housing organisations in late 2023 to consider alternative policy options and inform the development of the exposure draft. It also held discussions with state and territory government officials regarding supports already in place for BTR developments.
1.24Treasury’s public consultation on exposure draft legislation for the bill and imposition bill occurred between 9 April and 22 April 2024. That consultation received 37 stakeholder submissions, including five confidential submissions.
1.25Stakeholders participating in the consultation process primarily argued that the proposed concession was inadequate to make BTR developments attractive investments compared to other property asset classes. Stakeholders also raised concerns that concession benefits would be negated by the proposed affordable dwelling requirements. The draft legislation was adjusted as a result of this consultation to ensure the government’s policy objective of incentivising foreign investment in BTR, including affordable housing supply, is achieved.
1.26Treasury also considered comments on affordable dwellings, application to existing BTR developments, the single ownership retention period and the misuse tax.
Commencement
1.27The imposition bill commences on the first 1 January, 1 April, 1 July or 1October following Royal Assent.
1.28The BTR bill will commence at the same time as the Capital Works (Build to Rent Misuse Tax) Act 2024 commences. However, the provisions do not commence at all if that Act does not commence.
Financial impact
1.29The provisions of the bill are expected to decrease receipts by $30 million by 2026–27, with a $10 million decrease in 2025-26 and $20 million in 2026–27.
1.30The Explanatory Memorandum notes the measure is expected to result in a small overall compliance cost impact, comprising a small implementation impact and a small increase in ongoing costs.
Legislative scrutiny
1.31In its Scrutiny Digest 7 of 2024, the Senate Standing Committee for the Scrutiny of Bills (the Scrutiny Committee) did not raise any concerns with the provisions of the bill.
1.32The Scrutiny Committee made no comment on the imposition bill.
Human rights implications
1.33As discussed in the Explanatory Memorandum, the Statement of Compatibility with Human Rights argues that the bill is compatible with human rights and freedoms recognised in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. The bill is compatible with human rights as they support the right to an adequate standard of living, and the right to health. The bill does not raise any other human rights concerns.
1.34The Explanatory Memorandum notes the imposition bill does not engage any of the applicable rights or freedoms.
Regulatory impact
1.35The Explanatory Memorandum to the bill includes a comprehensive Impact Analysis addressing the intent of the measures, policy options available, a cost benefit analysis, a summary of the consultation process undertaken as well as preferred options for implementation.
Conduct of the inquiry
1.36The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by 25July2024.
1.37The committee received 18 submissions, two supplementary submissions, as well as additional information and answers to questions on notice, which are listed in Appendix 1.
1.38The committee held one public hearing for the inquiry on 7 August 2024. The names of witnesses who appeared at the hearing can be found at Appendix2.
Acknowledgements
1.39The committee thanks all individuals and organisations who assisted with the inquiry, especially those who made written submissions and participated in the public hearing.