Build to rent development tax incentives

Overview

The build to rent (BTR) development tax incentives give owners and investors in eligible BTR developments access to:

• an accelerated deduction of 4% for capital works relating to BTR developments
• a concessional final withholding tax rate of 15% on eligible fund payments (amounts referrable to rental income and capital gains from the BTR development).

To access these incentives, the owner must first notify their choice to opt in by lodging the Build to rent development – notice of events (NAT 75663) approved form.

If a BTR development fails to meet the eligibility criteria in the 15-year period after making the choice, the misuse tax may apply.

Capital works accelerated deduction

The owner of a BTR development can claim a 4% deduction for capital expenditure incurred in constructing the development. This includes buildings, structural improvements and alterations.

To claim the capital works deduction, the activity must have a construction expenditure in that income year. The accelerated deduction is generally allowed once construction is complete and the owner notifies us of their choice to commence an active BTR development.

There are exceptions that allow eligibility to continue in some circumstances where a dwelling is not tenanted due to the construction of an extension, or an alteration or improvement to a dwelling or building.

Concessional withholding rate

A reduced withholding tax rate of 15% will apply to eligible fund payments made to a foreign resident of an information exchange country, from a managed investment trust (MIT).

A fund payment will not be MIT residential housing income (subject to a withholding tax rate of 30%) and can access the reduced withholding tax rate of 15% to the extent it is referrable to any of the following amounts:

• A payment of rental income under a lease of the dwelling within the build to rent development (dwelling).
• The amount is attributable to a capital gain from a CGT event in relation to the dwelling.
• The amount is attributable to or part of a capital gain from a CGT event in relation to a membership interest in the owner of the BTR development.

Accessing the incentives

To access the BTR development tax incentives:

• a BTR development must meet all the eligibility criteria below
• the owner must notify their choice for the development to be an active BTR development.

To access the accelerated deduction of 4%, construction of the BTR development must have commenced after 7:30 pm AEDT on 9 May 2023.

A MIT that owns an active BTR development can access the 15% concessional withholding rate, irrespective of when the development was constructed.

Eligibility criteria

• The BTR development consists of 50 or more residential dwellings made available for rent to the general public.
• The dwellings are residential premises, taxable Australian real property, and not commercial residential premises.
• The dwellings in the BTR development (and common areas that are part of the BTR development) continue to be owned by a single entity, for at least 15 years.
  • The BTR development can be sold during this period to another single entity and remain eligible for the incentives.
• Dwellings are tenanted or made available to the public to be tenanted by way of lease for a period of 5 years or more in accordance with any relevant legislative instrument.
• At least 10% of the dwellings are available as affordable dwellings.
• The number of comparable non-affordable dwellings is greater than or equal to the number of comparable affordable dwellings.

If a BTR development fails to meet any of these criteria in the 15-year compliance period, after making the choice, the misuse tax may apply.

15-year compliance period

The BTR compliance period starts from when a development commences to be an active BTR development and ends 15 years later.

If dwellings are added to a BTR development as part of an expansion, the 15-year compliance period starts when those dwellings are added.

Affordable dwelling

A dwelling will be an affordable dwelling if it satisfies the initial requirements determined by the Minister in the legislative instrumentExternal Link.

• The Government has announcedExternal Link these are initial standards and that it will work closely with stakeholders on the next tranche of affordability standards, including:
  • requiring community housing organisations to be involved in managing affordable dwellings
  • ensuring a proportion of affordable dwellings are reserved for lower income earners based on their household income.

Rules and legislative instruments

The Australian Government has announced that build to rent rulesExternal Link will be made, including to prevent no fault evictions and a second trancheExternal Link of affordability standards. More details will be provided once available.

Notify us of BTR development events

The owner or purchaser (depending on the event) of a BTR development must use the Build to rent development – notice of events (NAT 75663) approved form to notify us if the development:

• commences to be an active BTR development
• expands
• is sold
• is acquired
• ceases to be an active BTR development.

The form must be lodged with us on or before 28 days after the event.

Commencing an active BTR development

To access the incentives for an eligible BTR development, the owner must first notify their choice to opt in by lodging the Build to rent development – notice of events (NAT 75663) approved form. If a commencement day is specified, the form must be provided to us before that date. Otherwise, the choice will be taken to have been made on the day we receive the form.

Expanding a development

An owner of an active BTR development may choose to expand by adding new eligible dwellings later. Those new dwellings, together with the existing dwellings, need to satisfy the eligibility criteria. Another notice needs to be lodged regarding the expansion.

Ceasing an active BTR development

If an active BTR development fails any eligibility criteria, the development will cease to be an active BTR development and loses access to the incentives.

The BTR owner can request the exercise of the Commissioner's discretion to reinstate access to the incentives where certain criteria are failed. To do this the owner will need to submit a private ruling request.

Misuse tax

The BTR owner is liable to pay the misuse tax where an active BTR development it owns ceases to be an active BTR development during the 15-year compliance period. The misuse tax aims to recover tax incentives claimed during that period.

The misuse tax is the total of the capital works deduction and BTR withholding amounts.

Where there has been more than one owner, the owner who causes the cessation event is liable for the misuse tax for the whole of the 15-year compliance period up to the cessation event.

A BTR owner cannot claim a deduction for misuse tax paid.

Capital works deduction amount

The capital works deduction amount of the misuse tax is the accelerated capital works deduction claimed for the BTR development up to the cessation event, plus 8% of that amount.

The capital works deduction is calculated by:

• identifying the years the development was an active BTR development
• identifying the construction expenditure area for the BTR development for each of those years – to do this
  • identify the portion of the construction expenditure attributable to the BTR development
  • determine the days used in the 4% manner
  • multiply the portion of the construction expenditure and days used, then divide by 365
• reducing the amount previously calculated by the extent to which the active BTR part was used only partly for the purpose of producing assessable income
• adding up the amounts for each year for each construction expenditure area
• adding up the amounts calculated in the prior step for each year
• multiplying the last step by the applicable tax rate, then multiply that amount by 1.08.

BTR withholding amount

The BTR withholding amount for the misuse tax is:

• the total fund payments made by all owners of the BTR development up until the cessation event, that are referrable to rental income from the leases of dwellings in the BTR development
• any capital gains from a CGT event in relation to a dwelling in a BTR development.

The BTR withholding amount is calculated by:

• identifying each income year the development was an active BTR development
• for each of those identified years, identifying each fund payment (or part of) that the owner of the BTR development makes that is referrable to
  • payment of rental income under a lease of a dwelling that is part of an active BTR development
  • a capital gain from a CGT event in relation to a dwelling of the active BTR development
• adding up the amounts identified above then multiply these amounts by 1.08.

Commissioner's discretion

A BTR owner may apply for the Commissioner to exercise their discretion to determine that dwellings of a BTR development satisfy the criteria, where a BTR development fails any of the following criteria:

• Offering a lease to the public or tenanting the dwelling for a period of at least 5 years.
• Requirement that at least 10% of dwellings in the BTR development are affordable dwellings.
• The comparable dwellings requirement.

The BTR owner can request the Commissioner to exercise their discretion to reinstate access to the incentives, by submitting a private ruling request.

The Commissioner may exercise their discretion if they are satisfied that:

• the dwelling did not satisfy the eligibility criteria at all times during the particular period due to events outside the BTR owner's control
• the BTR owner took all reasonable steps to satisfy the eligibility criteria as soon as practicable
• at the time a determination is sought, the dwellings satisfy the eligibility criteria
• the BTR owner intends that the BTR development will satisfy the eligibility criteria for the remainder of the 15-year compliance period.

Cessation after the 15-year compliance period

The misuse tax doesn't apply if the BTR development ceases to be an active BTR development after the 15-year compliance period.

If a development ceases to be an active BTR development after the 15-year period, any non-compliance is addressed through amended assessments. For example, if the tax incentives are claimed after the cessation event, recoupment of these tax incentives is by way of amended assessment.

Further information

For further information on the BTR development tax incentives, email PGBuildtoRent@ato.gov.au with the subject line Further information BTR developments.