House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer and Minister for Financial Services, the Hon Stephen Jones MP)

Chapter 1: Build to rent developments

Outline of chapter

1.1 Schedule 1 to the Bill amends the ITAA 1997, TAA 1953, and ITAA 1936 to improve incentives for investors to invest in new BTR developments by:

•

increasing the capital works deduction rate from 2.5 per cent to 4 per cent per year; and

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reducing the final withholding tax rate on eligible fund payments (distributions of rental income and capital gains) from eligible MIT investments from 30 per cent to 15 per cent with application from 1 July 2024.

1.2 Schedule 1 to the Bill provides that to access one or both concessions the BTR development must meet the following eligibility criteria:

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the development's construction commenced after 7:30PM, by legal time in the Australian Capital Territory, on 9 May 2023;

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the development consists of 50 or more residential dwellings made available for rent to the general public;

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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 (although 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

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at least 10 per cent of the dwellings are available as affordable tenancies.

1.3 The Imposition Bill imposes a misuse tax when one or both tax concessions are claimed in circumstances where they are not available due to BTR development ineligibility.

Context of amendments

1.4 According to Australian Bureau of Statistics Census data for 2011, 2016 and 2021, there is a long-term trend increase of Australians renting and a decline in home ownership. Incentivising construction of new BTR developments has the potential to increase rental supply at scale at a time when there is an acute shortage of new rental stock.

1.5 BTR developments are multi-unit buildings where the units, instead of being sold, are typically rented out through a single management entity. BTR is an established practice in the United States of America and the United Kingdom. BTR is still a nascent industry in Australia, meaning there is significant scope for BTR developments to contribute to increasing rental housing supply.

Summary of new law

1.6 Schedule 1 to the Bill makes amendments to the ITAA 1936, ITAA 1997 and TAA 1953.

1.7 To encourage investment and construction in BTR developments, Schedule 1 to the Bill:

•

increases the rate of the capital works tax deduction from 2.5 per cent per year to 4 per cent per year for active BTR developments; and

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reduces the final withholding tax rate on eligible fund payments (distributions of rental income and capital gains) from eligible MITs for active BTR developments from 30 per cent to 15 per cent with application from 1 July 2024.

1.8 The creation of new BTR dwellings will expand Australia's rental housing supply.

1.9 These tax benefits only apply to BTR developments that remain continuously active for the 15-year compliance period. If a BTR tax concession is claimed for a particular year, and the development subsequently becomes ineligible (during the 15-year compliance period), then the tax benefit is clawed back. The 15 per cent reduced MIT final withholding tax rate can continue to apply beyond the 15-year compliance period as long as a BTR development meets the eligibility criteria.

1.10 Schedule 1 to the Bill introduces a specific reporting mechanism to enable the Commissioner to receive information from entities participating in active BTR developments.

Comparison of key features of new law and current law

Table 1.1 Comparison of new law and current law

Detailed explanation of new law

1.11 Schedule 1 to the Bill amends the ITAA 1936, ITAA 1997 and the TAA 1953 to implement improved incentives for investors to invest in new BTR developments. All references to Schedule 1 refer to Schedule 1 to the Bill.

1.12 The Imposition Bill implements the BTR development misuse tax to prevent abuse of the system.

Active build-to-rent developments

1.13 A BTR development will be an active BTR development if it fulfils the following conditions:

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the BTR development's construction commenced after 7:30PM, by legal time in the Australian Capital Territory, on 9 May 2023;

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the BTR development consists of 50 or more dwellings made available to the public to be tenanted by way of lease or made available to the public and tenanted as a result of being made available as such;

•

all of the dwellings in the BTR development (and common areas that are part of the development) 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 available for lease terms of at least three years (although the tenant can request a shorter term); and

•

at least 10 per cent of the dwellings in the BTR development must be affordable tenancies. [Schedule 1 to the Bill, items 9 and 25, sections 43-152 and 43-153 of the ITAA 1997]

1.14 There are additional criteria that relate to the supply of affordable tenancies in a BTR development. These are discussed at paragraphs 1.52 to 1.65 of this Explanatory Memorandum below.

1.15 A BTR development will cease to be an active BTR development if it fails to meet any of these criteria during the 15-year BTR compliance period, including the criteria that relate to affordable tenancies. As the concept of 'cease' is tied to the compliance period, an active BTR development does not cease to be an active BTR development after the compliance period. However, the ability to access the tax concessions may end in certain circumstances (see paragraphs 1.112 to 1.123 below). [Schedule 1 to the Bill, item 9, subsection 43-152(4) of the ITAA 1997]

Commencement of construction

1.16 For a BTR development to be an active BTR development and eligible for the concessional tax treatment, its construction must have commenced after 7:30 PM, by legal time in the Australian Capital Territory, on 9 May 2023. [Schedule 1 to the Bill, item 25]

Example 1.1 – Pre and post 9 May 2023 developments

An entity constructs a BTR development project in two stages, with each stage involving the construction of 50 dwellings in two separate buildings, and each building complex having common areas that can only be accessed and used for the benefit of their tenants.

Construction for the dwellings and common areas in the first building commenced before 9 May 2023, such that the 50 dwellings and the common areas in this building cannot be an active BTR development.

Construction for the 50 dwellings and common areas in the second building commenced on 1 June 2023. The commencement of construction eligibility requirement is satisfied as construction for the second building commenced after 7:30 PM, by legal time in the Australian Capital Territory, on 9 May 2023. The dwellings and common areas in the second building (BTR development) can form an active BTR development on and after the first day on which the BTR development satisfies the eligibility criteria to be an active BTR development.

Example 1.2 – Post 9 May 2023 development

An entity owns an empty warehouse and converts it into a BTR development with 100 dwellings. The refurbishments to convert the warehouse into the BTR development begin on 1 June 2024, satisfying the eligibility condition in relation to the commencement of construction. The dwellings in the BTR development can form an active BTR development on and after the first day on which the BTR development satisfies the eligibility criteria to be an active BTR development.

Commencement of being an active BTR development

1.17 The dwellings in a BTR development and common areas for those dwellings will commence to be an active BTR development on and after the first day on which the BTR development satisfies the eligibility criteria noted in paragraph 1.13 of this Explanatory Memorandum, and the single entity owner of the dwellings and common areas chooses to form a BTR development. [Schedule 1 to the Bill, item 9, subsection 43-152(1) of the ITAA 1997]

1.18 To make the choice to form a BTR development, the entity must make the choice in the approved form (the form approved in writing by the Commissioner) and provide it to the Commissioner. [Schedule 1 to the Bill, item 9, subsection 43-152(6) of the ITAA 1997]

1.19 The choice is taken to be made on the day nominated by the entity in the approved form provided to the Commissioner, subject the Commissioner receiving the approved form before the nominated day. Otherwise, the choice is taken to be made on the day the Commissioner receives the approved form. For example, if the entity does not nominate a day in the approved form or the entity nominates a day that is before the day the Commissioner receives the approved form, then the choice is treated as being made on the day the Commissioner received the approved form. [Schedule 1 to the Bill, item 9, subsection 43-152(7) of the ITAA 1997]

1.20 Where there is an active BTR development, and the entity has another 50 or more dwellings that satisfy the eligibility criteria noted in paragraph 1.13 of this Explanatory Memorandum, there are two options available to the entity: the entity could expand the existing active BTR development; or the entity could create a separate active BTR development in addition to the existing active BTR development.

1.21 For illustrative purposes, this could arise in the case where a building with 110 BTR dwellings is being constructed in multiple stages, with half of the dwellings made available in the first stage and the remaining being made available in the second stage.

1.22 Where the entity decides to create a separate active BTR development, the 50 or more dwellings (that will be within the new separate active BTR development) must satisfy the eligibility criteria noted in paragraph 1.13 of this Explanatory Memorandum, and the entity must choose to form a BTR development and provide this choice to the Commissioner in the approved form. [Schedule 1 to the Bill, item 9, subsection 43-152(2) of the ITAA 1997]

1.23 Where the entity decides to expand the existing BTR development, the 50 or more new dwellings (that will be added to the existing BTR development) must satisfy the eligibility criteria noted in paragraph 1.13 of this Explanatory Memorandum, and the entity must choose to form part of the existing active BTR development and provide this choice to the Commissioner in the approved form. [Schedule 1 to the Bill, item 9, subsection 43-152(3) of the ITAA 1997]

Active BTR development area

1.24 Active BTR developments include new developments as well as alterations and structural improvements that re-purpose an existing building into BTR (for example, the conversion of a warehouse to BTR apartments).

1.25 If a new building was initially commenced as a build-to-sell development but converted to a BTR development during construction, it can be an active BTR development.

1.26 An active BTR development area refers to the part of a building consisting of the dwellings in the active BTR development and the common areas for those dwellings. [Schedule 1 to the Bill, item 9, subsection 43-151(1) of the ITAA 1997]

1.27 An active BTR development is a BTR development that has commenced and not ceased. [Schedule 1 to the Bill, item 9, subsection 43-151(2) of the ITAA 1997]

1.28 The active BTR development area can be part of a building. For example, if the active BTR development area represents 90 per cent of a building's floorspace, the development proponent can claim the MIT withholding tax concession in respect of 90 per cent of the rental income attributable to that building's entire floor area. This 90 per cent of the entire rental income would represent the amount of rental income derived from BTR dwellings within the building and is therefore subject to the MIT withholding tax concession. [Schedule 1 to the Bill, item 9, section 43-153 of the ITAA 1997]

1.29 There can also be two or more active BTR developments that are part of a building. In the case of two active BTR developments being part of a building, there will be two active BTR development areas that correlate to each of the active BTR developments and the common areas for the relevant dwellings. Each active BTR development will be subject to its own compliance period and adherence to the eligibility criteria noted in paragraph 1.13 of this Explanatory Memorandum. [Schedule 1 to the Bill, item 9, subsection 43-153(1) of the ITAA 1997]

1.30 A BTR development can also consist of more than one building on the same or adjacent land. For example, if there are two towers on one plot of land, and both are BTR, the two towers combined would be considered a single BTR development. In this circumstance, eligibility for the tax concessions can be met if the structures meet the eligibility criteria in aggregate. In other words, one of the structures can satisfy more of the eligibility criteria allowing the other to meet less of the eligibility criteria. So long as between the structures the eligibility criteria are met, the BTR development is considered an active BTR development. [Schedule 1 to the Bill, item 9, section 43-154A of the ITAA 1997]

Number of dwellings

1.31 The BTR development must consist of at least 50 dwellings that are made available for rent to the public.

1.32 To avoid doubt, a dwelling in a BTR development cannot be a dwelling in a retirement village or student accommodation. This is because the dwellings must be made available for rent to the public and tenanted as a result of being made available to the public. Dwellings in a retirement village or student accommodation are only available to a limited subset of the public. [Schedule 1, item 9, paragraph 43-153(1)(a) of the ITAA 1997]

1.33 'Dwelling' has the same meaning as it has in section 118-115 of the ITAA 1997 which provides that a dwelling includes:

•

a unit of accommodation that:

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is a building or is contained in a building; and

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consists wholly or mainly of residential accommodation; and

•

a unit of accommodation that is a caravan, houseboat, or other mobile home; and

•

any land immediately under the unit of accommodation, however, does not include any land adjacent to a building.

1.34 Some scenarios may arise during the 15-year period where the BTR development does not meet this eligibility requirement (i.e., less than 50 dwellings either rented or available for rent). For instance, some dwellings may require renovation or repairs to be available for lease (for example, as a result of fire damage). Dwellings can continue to be considered as used as rentals or available for rent:

•

when dwellings are not being used as rentals or made available for rent because of the construction of an extension, alteration or improvement; or the making of a repair; and

•

it reasonable to expect the dwellings to be used as rentals for lease terms of at least three years or made available for rent for lease terms of at least three years once the construction or repairs are completed. [Schedule 1 to the Bill, item 9, subsection 43-153(6) of the ITAA 1997]

1.35 If new dwellings are added to a building which is an active BTR development, where the combined BTR development satisfies the requirements for an active BTR development, the existing active BTR development expands to comprise the dwellings of the existing development and the new dwellings. For the new dwellings to form part of the existing active BTR development, the entity must choose that the new dwellings form part of the existing active BTR development and provide this choice to the Commissioner in the approved form. The 15-year compliance period starts afresh for the new dwellings (commencing on the day on which the new dwellings are added to the existing active BTR development), but the existing dwellings in the BTR development are still subject to the original 15-year compliance period (which commenced on the day on which the development became an active BTR development). [Schedule 1 to the Bill, item 9, subsections 43-152(3), (5), (6) and (7) of the ITAA 1997]

1.36 There can be multiple construction expenditure areas (within the meaning of section 43-75 of the ITAA 1997) in the same active BTR development. Where the active BTR development expands (as described in the paragraph above), the active BTR development area also expands through the addition of the new dwellings. The expansion results in the entity having more than one construction expenditure area (within the meaning of section 43-75 of the ITAA 1997) as the existing dwellings and common areas consists of one construction expenditure area and the new dwellings consists of the other construction expenditure area. Both these construction expenditure areas form part of the active BTR development area. Any further expansion will result in additional separate construction expenditure areas.

Common area

1.37 A common area for dwellings of a BTR development is an area, facility or amenity intended for use either for the purposes of those dwellings or for the purpose of those dwellings and any other dwellings in the same building. [Schedule 1 to the Bill, item 9, subsection 43-151(3) of the ITAA 1997]

1.38 In other words, a common area could include an area, facility or amenity intended to be used by or for the benefit of tenants in dwellings of a BTR development. The common area does not need to be solely used by or for the benefit of tenants in dwellings in the BTR development (for example, tenants could bring guests to a common area, or a common area could be used for the purposes of the BTR dwellings and for the purposes of other dwellings in the same building).

1.39 Examples of a common area could include:

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an outdoor space (such as a rooftop garden) that is accessible to tenants of the dwellings in the BTR development and can be used by them;

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a shared laundry space that is accessible to tenants of the dwellings in the BTR development and can be used by them;

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an area related to the maintenance of the dwellings in the BTR development, which is located in a building (such as a mechanical service room for the air-conditioning of dwellings in the BTR development and other dwellings situated in the building);

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a shared gym or pool that is accessible to tenants of the dwellings in the BTR development and can be used by them;

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a thoroughfare that is accessible and used by tenants of the dwellings in the BTR development and that allows access to those dwellings (for example, delivery persons can make deliveries to a tenant through use of the thoroughfare); and

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a shared car park area that is accessible to tenants of the dwellings in the BTR development and can be used by them; and

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an area that is accessible by tenants of the dwellings in the BTR development (such as a seating area for tenants) and can be used by them but is also accessed by persons cleaning or making repairs to that area.

1.40 Examples of an area which is not a common area include:

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a restaurant located within the building that contains the BTR development where the restaurant is accessible by the general public; and

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a grocery store located within the building that contains the BTR development where the grocery store is accessible by the general public; and

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a gym or pool located within the building that contains the BTR development where the gym or pool is accessible by the general public.

1.41 To avoid doubt, an entity of two active BTR developments with common areas shared between both developments cannot deduct construction expenditure in relation to the common areas for both developments for the BTR capital works deduction. This is a result of the operation of section 43-15 of the ITAA 1997, which ensures that no more than 100 per cent of the entity's construction expenditure can be deducted. The entity can either deduct the construction expenditure in relation to one active BTR development or apportion the expenditure between the active BTR developments and deduct the apportioned amounts for each active BTR development.

1.42 In a mixed-use development, where there is an active BTR development as well as other dwellings (e.g., build-to-sell apartments, serviced apartments, hotel rooms, etc.) in the same building, the common area construction expenditure can be subject to the BTR accelerated capital works deduction. However, this only applies if the common area is an area, facility or amenity that is intended for use for the purposes the active BTR development, regardless of whether the common area is also intended for use for the purposes of any other dwellings in the same building.

Single entity

1.43 All dwellings (and common areas for the dwellings) in a BTR development must be directly owned by a single entity. The entity may sell to a new entity (or group of entities that invests directly via a single entity) and the development would still satisfy the single entity requirement. However, this only applies if the dwellings (and common areas for the dwellings) in the BTR development continue to be owned directly as a whole by a single entity. [Schedule 1 to the Bill, item 9, paragraph 43-153(1)(c) of the ITAA 1997]

1.44 If the original entity sells the entire BTR development to another entity during the 15-year period, all dwellings in the BTR development (and common areas that are part of the BTR development) must continue to be owned by a single entity for the balance of the 15 years. This requirement ensures that the entity has control over the BTR development and is responsible for maintaining its eligibility for the MIT withholding tax concession and the accelerated capital works deduction.

1.45 For an active BTR development that has not expanded, the 15-year period commences when all dwellings in the BTR development are first made available for rent. The 15-year period does not reset if the BTR development is sold by an entity to another entity.

1.46 For an active BTR development that has expanded, the 15-year period for the existing dwellings commenced when all the existing dwellings were first made available for rent, while the 15-year period for the new dwellings commences on the day on which the new dwellings are added to the existing active BTR development area. The two 15-year periods do not reset if the BTR development is sold by an entity to another entity. [Schedule 1 to the Bill, item 9, subsection 43-152(5) of the ITAA 1997]

1.47 Once the compliance period has completed, contravention of the single entity ownership requirement is the only non-compliance that will end access to the BTR accelerated capital works deduction. Contravention of the single entity ownership requirement will also end access to the concessional rate of withholding tax (however, non-compliance with any of the other eligibility criteria in subsection 45-153(1) of the ITAA 1997 will also end access). See paragraph 1.112 and 1.123 below for further details. [Schedule 1 to the Bill, items 7 and 18, subsection 43-145(2) of the ITAA 1997 and subsection 12-450(6) in Schedule 1 to the TAA 1953]

Minimum lease period

1.48 Dwellings in a BTR development must be either made available to the public to be tenanted for a lease term of at least three years or tenanted to tenants for lease terms of at least three years throughout the 15-year period. [Schedule 1 to the Bill, item 9, paragraph 43-153(1)(a) of the ITAA 1997]

1.49 This requirement does not apply where a tenant requests a shorter lease term. A tenanted dwelling in this circumstance remains a dwelling in a BTR development. Nor does the requirement apply where the dwelling is not available to be tenanted to tenants for lease terms of at least three years as a result of repairs, construction of an extension, alteration or improvement to the dwelling or the building (in which the dwelling is located). For example, if repairs are being made to a dwelling with fire or water damage. [Schedule 1 to the Bill, item 9, note to subsection 43-153(1) and subsection 43-153(6) of the ITAA 1997]

Dwelling type

1.50 All of the dwellings in a BTR development must:

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be residential premises (as defined in section 995-1 of the ITAA 1997); and

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be taxable Australian real property (as defined in section 855-20 of the ITAA 1997); and

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not be commercial residential premises (with commercial residential premises defined in section 995-1 of the ITAA 1997).

1.51 To avoid doubt, dwellings in a BTR development cannot be commercial residential premises. Examples of commercial residential premises include hostels, boarding houses, hotels, motels, and inns. [Schedule 1 to the Bill, item 9, subparagraph 43-153(1)(b)(iii) of the ITAA 1997]

Minimum affordable dwellings

1.52 At least 10 per cent of the dwellings in a BTR development must be affordable dwellings (where the 10 per cent figure results in a whole number). Where 10 per cent of the dwellings in a BTR development is not a whole number, the number must be rounded down to the nearest whole number to determine the minimum number of affordable dwellings that must be tenanted or available as affordable dwellings. This eligibility condition applies during the 15-year compliance period, and on an on-going basis in relation to eligibility for the MIT withholding tax concession. [Schedule 1 to the Bill, item 9, paragraph 43-153(1)(d) of the ITAA 1997]

1.53 For example, where a BTR development has 124 dwellings, the minimum number of affordable dwellings that must be tenanted or available as affordable dwellings in the BTR development are 12 affordable dwellings (rounded down from 12.4 affordable dwellings). Throughout the 15-year compliance period, at least 12 affordable dwellings must be either tenanted (after being made available for a lease of three or more years) or available for tenancy for a 3-year lease or more.

1.54 Dwellings will be considered affordable dwellings if the rent payable under the lease for the dwellings is 74.9 per cent or less of the market value of the right to occupy the dwelling under that lease, and if any requirements determined by the Minister by legislative instrument are met. [Schedule 1 to the Bill, item 9, subsections 43-153(2) and (3) of the ITAA 1997]

1.55 To be an affordable dwelling, the rent payable under the lease for the dwelling must be 74.9 per cent or less of the market value of the right to occupy the dwelling under that lease (i.e., the rent otherwise payable for that dwelling in an open market). Market value has its ordinary meaning when used in the ITAA 1997 (as affected by Subdivision 960-S where relevant).

1.56 For the purposes of determining 74.9 per cent or less of the market value of the right to occupy the dwelling under that lease, regard should be had to the rent payable for a comparable dwelling. A comparable dwelling should be comparable to the affordable dwelling in terms of:

•

general physical condition, including the number of rooms, floor area and the standard of the facilities available (for example, heating, cooling, cooking etc.);

•

the existence and condition of inclusions (such as carpets, drapes, blinds etc.); and

•

location and setting (for example, whether or not the dwelling is in an inner or outer suburb of a city or regional area, how far it is located from community amenities, whether it is affected by industrial noise and pollution etc).

1.57 Calculating the market value and determining whether a dwelling is an affordable dwelling should occur at the time a lease is entered into, and would generally not need to reoccur during the period of a lease except in exceptional circumstances, such as an unreasonable rent increase.

1.58 The entity bears the evidentiary burden of proving that the rent payable under the lease is 74.9 per cent or less of the market value of the right to occupy the dwelling under that lease. Determining whether a dwelling is an affordable dwelling for this purpose is expected to involve a valuation exercise similar to that undertaken by charitable social housing providers under Subdivision 38-G of the A New Tax System (Goods and Services Tax) Act 1999. For taxpayers wanting additional certainty as to whether a dwelling satisfies the definition of affordable dwelling can seek a private ruling from the Commissioner.

1.59 To avoid doubt, affordable dwellings must only be made available for rent to a segment of the public and tenanted by that segment only if the requirements determined by the Minister require that an affordable dwelling be tenanted, or be available to be tenanted, only to that segment of the public. [Schedule 1 to the Bill, item 9, subsection 43-153(4) of the ITAA 1997]

1.60 Made available to the public to be tenanted or being tenanted is intended to cover the situation where the affordable dwelling is actually leased by a tenant whose rent payable is 74.9 per cent or less of the market value of the right to occupy the dwelling under that lease. Made available to the public to be tenanted or being tenanted is not intended to cover a situation where the dwelling is listed as an affordable dwelling, with the rent payable under the lease being 74.9 per cent of the market value but, due to rent bidding or some other conduct, the rent payable is actually higher than 74.9 per cent of the market value when the dwelling is leased.

Comparable affordable dwellings and comparable non-affordable dwellings

1.61 In an active BTR development, there will likely be different types of dwellings with different total floor area and different numbers of bedrooms.

1.62 For each affordable dwelling (the test dwelling), the number of comparable non-affordable dwellings must be greater than or equal to the number of comparable affordable dwellings.

1.63 The number of comparable affordable dwellings refers to the number of affordable dwellings (including the test dwelling) that has the same number of bedrooms as the test dwelling and a floor area that is at least equal to the floor area of the test dwelling, but does not exceed 110 per cent of the floor area of the test dwelling.

1.64 The number of comparable non-affordable dwellings refers to the number of non-affordable dwellings that have the same number of bedrooms as the test dwelling and a floor area that is at least equal to the floor area of the test dwelling, but does not exceed 110 per cent of the floor area of the test dwelling.

1.65 This is to prevent a BTR entity from allocating only the lowest standard dwellings in a development as affordable dwellings (i.e., lowest total floor area, least number of bedrooms etc.). [Schedule 1 to the Bill, item 9, subsection 43-153(5) of the ITAA 1997]

Example 1.3 – Number of comparable dwellings

An entity of a BTR development has 100 apartments where there are 6 types of apartments (based on floor area and number of bedrooms). The entity must make available at least 10 per cent of the apartments as affordable dwellings (i.e., the entity must ensure at least 10 apartments are affordable dwellings). The 6 types of apartments are as follows:

•

comparable affordable dwelling type A (this is comparable to 'Comparable non-affordable dwelling type A') with the apartments having a floor area ranging between 90 and 99 square metres (inclusive) and 1 bedroom;

•

comparable non-affordable dwelling type A (this is comparable to 'Comparable affordable dwelling type A') with the apartments having a floor area ranging between 90 and 99 square metres (inclusive) and 1 bedroom;

•

comparable affordable dwelling type B (this is comparable to 'Comparable non-affordable dwelling type B') with the apartments having a floor area ranging between 180 and 198 square metres (inclusive) and 2 bedrooms;

•

comparable non-affordable dwelling type B (this is comparable to 'Comparable affordable dwelling type B') with the apartments having a floor area ranging between 180 and 198 square metres (inclusive) and 2 bedrooms;

•

comparable affordable dwelling type C (this is comparable to 'Comparable non-affordable dwelling type C') with the apartments having a floor area ranging between 270 and 297 square metres and 3 bedrooms; and

•

comparable non-affordable dwelling type C (this is comparable to 'Comparable affordable dwelling type C') with the apartment having a floor area of between 270 and 297 square metres and 3 bedrooms.

In this example, the test dwellings would be one of each of the comparable affordable dwelling types A, B and C with floor areas of 90, 180 and 270 square metres respectively. The entity decides to make available 20 type A, 20 Comparable non-affordable dwellings type A, 15 comparable affordable dwellings type B, 16 Comparable non-affordable dwellings type B, 12 comparable affordable dwellings type C and 17 Comparable non-affordable dwellings type C.

For the test dwelling for the comparable affordable dwelling type A, the number of Comparable non-affordable dwellings type A (20 dwellings) is equal to the number of comparable affordable dwellings type A (20 dwellings including the test dwelling) and satisfies the requirement in paragraph 1.63 of this Explanatory Memorandum.

Similarly, the requirement is satisfied for the test dwelling for the comparable affordable dwelling type B as the number of Comparable non-affordable dwellings type B (16 dwellings) is greater than the number of comparable affordable dwellings type B (15 dwellings including the test dwelling). The requirement is also satisfied for the test dwelling for the comparable affordable dwelling type C as the number of Comparable non-affordable dwellings type C (17 dwellings) exceeds the number of comparable affordable dwellings type C (12 dwellings including the test dwelling).

Minister's determination

1.66 As noted in paragraph 1.54 of this Explanatory Memorandum, any requirements determined by the Minister by way of legislative instrument must be satisfied for a dwelling to be considered an affordable dwelling. These requirements can only relate to the income of the tenant or prospective tenant. [Schedule 1 to the Bill, item 9, subsection 43-153(3) of the ITAA 1997]

1.67 This is because access to the affordable dwellings in a BTR development is intended to be subject to an eligibility criterion based on the income of the tenant or prospective tenant.

1.68 This delegation of legislative power is appropriate as the income requirements may need to be varied on a regular basis given that income levels generally change year-on-year depending on economic factors. Providing for the income requirements by way of legislative instrument will enable responsive management of income requirements, which adds to the integrity of the measure by ensuring that limited affordable dwellings are not provided to those with adequate means to access normal market tenancies. The legislative instrument would be subject to disallowance and sunset after no more than 10 years and will therefore be subject to appropriate parliamentary scrutiny.

Accelerated capital works deductions for active BTR developments

1.69 Division 43 of the ITAA 1997 allows an entity to claim a deduction for capital expenditure incurred in constructing capital works, including buildings and structural improvements. The Division sets the rules for working out those deductions.

1.70 Division 43 allows a deduction for construction expenditure for an income year. To be eligible for the deduction, the capital works must have a construction expenditure area for which there must be a pool of construction expenditure and the entity must use that area in a deductible way (section 43-10 of the ITAA 1997).

1.71 A deduction is not allowable until after construction of the capital works is completed (section 43-30 of the ITAA 1997).

1.72 A deduction for construction expenditure is allowed to the extent that the deduction does not exceed the amount of the undeducted construction expenditure for the construction expenditure area (section 43-15 of the ITAA 1997).

•

Calculation of the undeducted construction expenditure for an active BTR development that has ceased is provided for in section 43-237 of the ITAA 1997, which is a new provision inserted by Schedule 1 to the Bill. See paragraph 1.1111.111 of this Explanatory Memorandum for more information.

1.73 Section 43-140 of the ITAA 1997 provides that to work out if the entity's area is used in a deductible way during the income year, reference must be made to when the capital works started being constructed and the type of capital works.

1.74 Section 43-25 of the ITAA 1997 sets out the rate of deduction. Currently, the deduction is either 2.5 per cent or 4 per cent of the construction expenditure, depending on when construction started and how the area is used.

1.75 Post-26 February 1992 capital works (per subsection 43-25(1) of the ITAA 1997):

•

If capital works on which construction started after 26 February 1992 are used in a deductible way (by reference to the Table in section 43-140) during an income year, there is a basic entitlement to a capital works deduction rate of 2.5 per cent of the construction expenditure.

1.76 However, capital works on which construction started after 26 February 1992, which are used in a manner consistent with the Table in section 43-145, qualify for a capital works deduction rate of 4 per cent of the construction expenditure. This includes use of part of the area for the purposes of producing assessable income, and that part is:

•

wholly or mainly used for:

-

industrial activities (as defined in section 43-150),

-

the provision of employee amenities for workers (or their immediate supervisors) carrying out industrial activities, or

-

office accommodation for the immediate supervisors of those workers; or

•

used wholly or mainly to operate a hotel, motel, or guesthouse where the buildings have at least 10 bedrooms that are for use wholly to provide short-term traveller accommodation (i.e., hotel buildings), or

•

consists of at least 9 apartments, units or flats that are for use wholly to provide short-term traveller accommodation (i.e., apartment buildings). The 4 per cent rate is still available if the buildings also have facilities that are mainly for use in association with providing short-term traveller accommodation.

1.77 The amount of the deduction is calculated under section 43-210 or section 43-215 of the ITAA 1997 (depending on whether the capital works are pre-27 or post-26 February 1992 capital works).

1.78 The 4 per cent capital works deduction rates (as provided for in subsection 43-25(1) and section 43-145 of the ITAA 1997) now apply to active BTR developments. [Schedule 1 to the Bill, items 6 and 7, section 43-145 of the ITAA 1997]

1.79 The active BTR development area can be referred to as the eligible development.

1.80 The accelerated capital works concession applies during the compliance period, as well as after the compliance period has ended provided that:

•

no other entity (apart from entities providing management services) uses the eligible development (or any part of the eligible development) for the purpose of producing assessable income; and

•

at each earlier time (if any) at which the entity or another entity used the eligible development (or any part of the eligible development) for the purpose of producing assessable income while it was an active BTR development, no other entity (apart from entities providing management services) used the eligible development (or any part of the eligible development) for the purpose of producing assessable income. [Schedule 1 to the Bill, item 7, section 43-145 of the ITAA 1997]

Example 1.4 - Change of single entity owner before end of the compliance period

The compliance period has ended. Entity B acquired the eligible development at the start of year 10 of the compliance period. From that point in time, Entity B used and continues to use the eligible development for the purposes of producing assessable income. No other entity used the eligible development for the purposes of producing assessable income from that point in time. From the start of the compliance period to the end of year 9 of the compliance period, the previous owner, Entity A, used the eligible development for the purposes of producing assessable income. Between that period, no other entity used the eligible development for the purposes of producing assessable income. In this scenario, the concession continues to apply for Entity B after the end of the compliance period.

Example 1.5 – Single entity owner contracts another entity to provide management services

The compliance period has ended. Entity C uses the eligible development for the purposes of producing assessable income throughout the compliance period and beyond. Throughout this period, Entity C contracts an entity to provide management services (Entity D) in the form of leasing activities and facilities management with respect to the eligible development. This means that Entity D is also using the eligible development to produce assessable income while it is an active BTR development. Given Entity D is providing management services, the entity's use of the eligible development is to be disregarded and the concession continues to apply for Entity C after the end of the compliance period.

Reduced withholding rates for MITs and AMITs

1.81 A MIT is a type of trust in which members of the public collectively invest in passive income activities, including owning property.

1.82 An AMIT is a MIT that has elected to be subject to the AMIT regime.

1.83 Section 275-10 of the ITAA 1997 defines MIT by setting out the requirements for a trust to be a MIT for the purposes of Division 275 of the ITAA 1997 and Division 12 in Schedule 1 to the TAA 1953. The requirements are that:

•

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 (this means that the MIT's investments must all be 'eligible investment business' (see section 102M of ITAA 1936));

•

the trust is a managed investment scheme (within the meaning of section 9 of the Corporations Act 2001);

•

the trust meets the widely held requirements (see subsections 275-20(1) and 275-25(1) of the ITAA 1997);

•

the trust meets the closely held restrictions (see subsection 275-30(1) of the ITAA 1997); and

•

the trust is operated or managed by an appropriately regulated entity.

1.84 The first three requirements are general requirements that apply to all trusts in the same way. The last three requirements are specific requirements that apply in different ways to some trusts.

1.85 Section 840-805 of the ITAA 1997 provides that a foreign resident must pay income tax on certain amounts of Australian sourced net income – i.e., a 'fund payment' – of a 'withholding MIT' that the foreign resident is either paid or which they are presently entitled to. This tax is called a 'MIT withholding tax'.

1.86 A 'withholding MIT' is defined in section 12-383 in Schedule 1 to the TAA 1953. Broadly, a MIT or AMIT is a withholding MIT if it is a MIT in relation to the income year because of paragraph 275-10(1)(a) or subsection 274-10(2) of the ITAA 1997 and it carries out, in Australia, a substantial proportion of its investment management activities in relation to certain Australian assets, including assets situated in Australia and securities listed on an approved Australian stock exchange.

1.87 A 'fund payment' is a component of a payment made by the trustee of a MIT or AMIT that effectively represents a distribution of a MIT or AMIT's net income to the members of the MIT or AMIT. A fund payment specifically excludes certain types of income such as dividend, interest or royalty income, capital gain and losses from a CGT asset that is not taxable Australian property, income that is not from an Australian source, and deductions relating to these sources of income.

1.88 Section 3 of the MIT Tax Act imposes the MIT withholding tax on the fund payment part of income paid to a foreign resident member of a MIT or AMIT.

1.89 Section 4 of the MIT Tax Act sets out the rate of income tax imposed:

•

if the entity is a resident of an information exchange country, the rate is 15 per cent for fund payments except:

-

to the extent they are, or are attributable to, fund payments from a clean building MIT (and are not attributable to non-concessional MIT income) – in which case the rate of tax imposed is 10 per cent; or

-

to the extent they are attributable to non-concessional MIT income – in which case the rate of tax imposed is 30 per cent;

•

if the entity is not a resident of an information exchange country, the rate of tax imposed is 30 per cent.

1.90 Withholding obligations at these same rates are imposed by section 12-385 in Schedule 1 to the TAA 1953.

1.91 Currently, fund payments to a foreign resident that represent rental income from a BTR development is taxed at 30 per cent as it is treated as non-concessional MIT income due to the operation of section 12-435 in Schedule 1 to the TAA 1953, which includes MIT residential housing income as non-concessional MIT income.

1.92 The definition of MIT residential housing income in Schedule 1 to the TAA 1953 (which is incorporated into the ITAA 1997 and the MIT Tax Act) is therefore adjusted to exclude all amounts that:

•

are, or are referrable to, a payment of rental income under a lease of a dwelling that is part of an active BTR development; and

•

are, or are attributable to, a capital gain from a CGT event in relation to a dwelling that is part of an active BTR development; and

•

are, or are attributable to, a part of a capital gain from a CGT event in relation to a 'membership interest in an entity' (as defined in section 960-130 of the ITAA 1997) provided that:

-

all or part of the market value of the membership interest is referrable to a dwelling that is part of an active BTR development, immediately before the time of the CGT event; and

-

the apportionment methodology in paragraph 1.94 applies to part of the capital gain.

1.93 The first type of capital gains (the second bullet point in paragraph 1.92) covers capital gains from the disposal of BTR dwellings while the second type of capital gain (third bullet point in paragraph 1.92) covers capital gains from the disposal of membership interests in an entity to the extent that the market value of the interest is referrable to a dwelling in an active BTR development (for example, disposal of units in an intermediary trust in between the withholding MIT and the trust that directly owns the BTR development).

1.94 The apportionment methodology apportions the capital gain from the disposal of a membership interest in the entity on the basis of the value of the interest in the BTR dwelling as a proportion of the overall value of the membership interest. This methodology is worked out by dividing:

•

the product of the amount of the capital gain with the 'value of the interest in the dwelling' (which is the value of the membership interest as is referrable to the dwelling that is part of an active BTR development); by

•

the value of the membership interest (market value of the membership interest immediately before the time of the CGT event) in the entity.

1.95 The part of a fund payment to a foreign resident that is attributable to income noted in paragraph 1.92 above is then subject to the concessional 15 per cent rate of tax, provided the BTR development satisfies the BTR eligibility criteria over the 15-year compliance period. The misuse tax will apply where the BTR eligibility criteria over the 15-year compliance period has not been satisfied. [Schedule 1 to the Bill, item 18, subsections 12-450(5), (6) and (7) in Schedule 1 to the TAA 1953]

Example 1.6 – Capital gain on sale of membership interests attributable to residential dwelling assets that are part of BTR development

MIT Q is a withholding MIT and is the sole unit holder of MIT X. The unit holders (beneficiaries) of MIT Q include non-resident and residents (pool of unit holders).

The legal person who is the trustee of MIT Q is also the trustee of MIT X, MIT A and MIT B. MIT X is the sole unit holder of MIT A and MIT B.

MIT A's only assets are residential dwelling assets. The market value of MIT A's assets is $80 million. Of these assets, most are part of active BTR developments (market value of $70 million). The remaining assets are residential dwellings sold at market rate (market value of $10 million).

MIT B's only assets are commercial properties that are leased to a third party. The market value of MIT B's assets is $20 million.

As MIT X's interest in MIT A constitutes 80 per cent of MIT X's assets, MIT Q's interest in MIT X passes the modified principal asset test. This is because:

•

MIT X's interest in MIT A makes up more than 50 per cent of MIT X's assets; and

•

under the modified principal asset test, this interest is treated as having the same character as the underlying assets.

Passing the modified principal asset test in subsections 12-453(3) and (4) in Schedule 1 to the TAA 1953 means that MIT Q's entire interest in MIT X is treated as being an asset that is a residential dwelling asset.

When MIT Q disposes of its units in MIT X, the resulting capital gain is treated for the purposes of subsection 12-450(2) in Schedule 1 to the TAA 1953 as being wholly attributable to a residential dwelling asset (see subparagraph 12-453(2)(a)(ii) in Schedule 1 to the TAA 1953).

The amount of capital gain on MIT Q's disposal of the entire interest in MIT X is $10 million.

Applying the apportionment methodology, the relevant portion of the capital gain is worked out by dividing:

•

the product of the amount of the capital gain with the value of the interest in the dwelling (that is,$700 million, which is the product of $10 million and $70 million); by

•

the value of the membership interest ($100 million).

The resultant amount is $7 million.

This amount is a capital gain attributable to dwellings in an active BTR development. The amount is treated as a capital gain from a CGT event in relation to a dwelling in an active BTR development (in accordance with subsection 12-450(5) in Schedule 1 to the TAA 1953). Accordingly, it is not MIT residential housing income, and the concessional 15 per cent rate of tax applies to it.

1.96 However, the concessional 15 per cent rate of tax does not apply if:

•

The payment that an entity makes to a foreign resident is attributable to a payment the entity received from a withholding MIT that was referable to a dwelling that is part of an active BTR development. This includes circumstances where there is more than one withholding MIT in a chain of trusts and the second withholding MIT makes an on-payment to a foreign resident, or where a custodian or other entity makes an on-payment to a foreign resident.

•

Any other circumstance in which:

-

the trustee of the withholding MIT does not own the dwelling of the eligible development mentioned in subsection 12-450(5) of Schedule 1 to the TAA 1953; and

-

the fund payment is attributable to a payment from another entity (an intermediary), which can be the BTR development owner), that is referable to a dwelling that is part of an active BTR development (i.e. an amount to which subsection 12-450(5) of Schedule 1 of the TAA 1953 applies); and

-

the intermediary is (or any intermediaries are):

•

not a trust; or

•

the same person is not the trustee of both the intermediary trust/s and the withholding MIT

1.97 This carve-out from the concessional 15 per cent rate of tax is to support the administration of the tax concession, in particular the BTR misuse tax. [Schedule 1 to the Bill, items 14 and 15, subsections 12-385(6) and 12-390(8A) in Schedule 1 to the TAA 1953]

Specific reporting mechanism

1.98 Entities participating in BTR developments must notify the Commissioner of events and information when required. Events that trigger the requirement to notify the Commissioner are:

•

the BTR development commences to be an active BTR development (as this determines the start date of the minimum ownership/operational period and the scope of the BTR development is known with certainty);

•

expansion of an active BTR development during the minimum period of ownership/operation;

•

change of the ownership interest in an active BTR development;

•

a BTR development ceases to be an active BTR development. [Schedule 1 to the Bill, item 9, subsection 43-154(1) of the ITAA 1997]

1.99 The notification must be given within 28 days of the trigger event. This notification must occur by way of a form approved by the Commissioner. [Schedule 1 to the Bill, item 9, subsection 43-154(2) of the ITAA 1997]

1.100 The entities that must notify the Commissioner of these events are:

•

the owner of the development at the time immediately before the event happens; and

•

if for the income year in which the event happens, the entity is a trustee of a MIT and is required to notify the Commissioner of amounts as described in paragraph 1.101 below. [Schedule 1 to the Bill, item 9, subsection 43-154(3) of the ITAA 1997]

Specific reporting for MIT fund payments

1.101 Further, a trustee of a MIT must notify the Commissioner prior to making a fund payment where all or part of that fund payment consists of rental income under a lease of a dwelling that is part of an active BTR development. A trustee of a MIT is also required to notify the Commissioner prior to making a fund payment where all or part of that fund payment consists of capital gains obtained upon sale of the BTR development or capital gains from the disposal of a membership interest in an entity that is referable to a BTR dwelling. This supersedes existing reporting requirements under section 16-150 in Schedule 1 to the TAA 1953. [Schedule 1 to the Bill, items 19 and 20, subsections 16-150(1) and (4) in Schedule 1 to the TAA 1953]

1.102 This notice must be in the approved form and must be provided on or before the day provided in a determination made by the Commissioner. This determination would be made by legislative instrument. If no determination has been made, such notice must be provided on or before the day on which the amount is due to be paid. The legislative instrument would be subject to disallowance and sunset after no more than 10 years and will therefore be subject to appropriate parliamentary scrutiny. This delegation of legislative power is appropriate as it is of a minor administrative nature. [Schedule 1 to the Bill, item 20, subsection 16-150(4) in Schedule 1 to the TAA 1953]

Cessation of being an active BTR development

1.103 An active BTR development will cease to be an active BTR development if any of the dwellings 'cease' to meet an eligibility condition. Cessation can only occur during the 15year compliance period as the definition is linked to the compliance period. [Schedule 1 to the Bill, item 9, subsection 43-152(4) of the ITAA 1997]

Compliance period

1.104 The BTR compliance period for a dwelling of an active BTR development is 15 years beginning on:

•

in the case of a development that does not expand, the day on which the development commenced being an active BTR development.

•

in the case of a development that does expand:

-

for the dwellings that were made available as part of the initial construction of the BTR development (referred to as 'existing dwellings'), the day on which the development commenced being an active BTR development; and

-

for the dwellings incorporated into an active BTR development through expansion (referred to as 'new dwellings'), the date on which the expansion dwellings were incorporated into the BTR development. [Schedule 1 to the Bill, item 9, subsection 43-152(5) of the ITAA 1997 ]

1.105 In effect, if expansion does occur, there will be separate compliance periods for the existing dwellings and the new dwellings.

Consequences of ceasing to be an active BTR development during the compliance period

1.106 If an active BTR development ceases to be an active BTR development during the 15-year compliance period, the imposition and application of the BTR development misuse tax will apply to approximately claw back the tax benefits obtained both through the reduced MIT withholding rates and the accelerated capital works deduction.

1.107 As discussed at paragraph 1.98, the entity owning the BTR development must notify the Commissioner when the BTR development ceases to be an active BTR development so that the time period to which the BTR development misuse tax applies can be determined.

1.108 If a person claims BTR development tax benefits after the BTR development ceased to be an active BTR development, then the Commissioner may amend these assessments, regardless of the provisions of section 170 of the ITAA 1936 relating to limitations on time for amending assessments.

1.109 In other words, if there is a delay between when a BTR development ceases to be an active BTR development and notification of that cessation, the BTR misuse tax will apply to the tax benefits obtained from commencement of the active BTR development through to cessation of the active BTR development. For any period from cessation through to notification, tax benefits obtained will be dealt with by way of the ordinary income tax assessment process (including through amended assessments). [Schedule 1 to the Bill, items 1 and 11, subsection 170(10AA) of the ITAA 1936, sections 44-1, 44-5, 44-10, 44-20, 44-25 and 44-30 of the ITAA 1997]

Example 1.7 – Amended assessment to claw back tax benefit

An entity's BTR development commences being an active BTR development in 2026. The entity has claimed the accelerated capital works deduction from 2026 to 2035.

However, in 2033, the entity required that a tenant enter into a one-year lease, contrary to paragraph 43-153(1)(a) of the ITAA 1997. As this occurred during the 15-year compliance period, the BTR development ceases to be an active BTR development through the operation of subsection 43-152(4) of the ITAA 1997.

The entity notifies the Commissioner of the ineligibility in 2035.

The BTR development misuse tax will apply to the tax benefits derived by the entity for the period while the BTR development was an active BTR development (i.e., from 2026 to 2033).

Under subsection 170(10AA) of the ITAA 1936, the Commissioner may amend the entity's assessments for the period after the BTR development ceased to be an active BTR development (i.e., between 2034 and 2035), clawing back any tax benefits wrongfully claimed during that time.

1.110 It is noted that an entity is required to notify the Commissioner of cessation no later than 28 days after the event. Thus, the entity in Example 1.7 will have breached the requirements in section 43-154 of the ITAA 1997.

1.111 In relation to the BTR accelerated capital works deduction, if an active BTR development ceases to be an active BTR development during the compliance period, then the development is treated as having been subject to the 2.5 per cent deduction rate for the time when it had been subject to a 4 per cent deduction rate. This is to ensure the BTR development is depreciated over 40 years instead of 25 years. [Schedule 1 to the Bill, item 10, section 43-237 of the ITAA 1997]

Consequences of non-compliance after the compliance period

1.112 After the BTR development has been an active BTR development for the 15year compliance period, it can no longer be subject to the BTR misuse tax in the event of non-compliance. When cessation occurs after the compliance period has been completed, the benefit derived from the tax concession(s) will be addressed by amended assessment.

1.113 What triggers non-compliance after the compliance period differs between the BTR accelerated capital works deduction and the withholding tax concession.

1.114 In relation to the BTR accelerated capital works deduction, after the 15-year compliance period has been completed, the only eligibility condition that must continue to be met is the single ownership requirement. If the single ownership requirement is contravened after the compliance period has ended, the ability to claim BTR accelerated capital works deduction will cease. [Schedule 1 to the Bill, item 7, subsection 43-145(2) of the ITAA 1997]

1.115 In relation to the 15 per cent concessional rate of MIT withholding tax, after the 15-year compliance period has been completed, all eligibility criteria must continue to be met in order to continue to claim the concessional rate of MIT withholding tax. [Schedule 1 to the Bill, item 18, subsection 12-450(6) in the Schedule 1 to the TAA 1953]

1.116 Consequently, it is possible for a BTR development to continue to be eligible for the BTR accelerated capital works deduction but not the concessional rate of MIT withholding tax if there is non-compliance after the compliance period.

1.117 For example, if, in year 20 of the BTR development, the requirement for 10 per cent of the BTR dwellings to be affordable dwellings is breached, this will result in the concessional rate of MIT withholding no longer being available to the BTR development. However, as the single ownership requirement has not been breached, the BTR accelerated capital works deduction can continue to be claimed.

1.118 In relation to the accelerated depreciation concession, the single entity owner of the BTR development will be required to notify the Commissioner if the ownership of the BTR development changes. [Schedule 1 to the Bill, item 9, paragraph 43-154(1)(c) of the ITAA 1997]

1.119 In relation to the concessional rate of MIT withholding tax, an entity must notify the Commissioner if it is paying BTR withholding amounts to the Commissioner in the approved form. The Commissioner can require information about compliance with eligibility requirements, regardless of whether the compliance period has ceased, to be included in the approved form. [Schedule 1 to the Bill, item 20, subsection 16-150(4) in Schedule 1 of the TAA 1953]

Consequences of non-compliance when there is an expansion of the BTR development

1.120 As discussed at paragraph 1.35 above, an active BTR development can expand to include new dwellings. Importantly, the compliance period for the new dwellings will be different to the compliance period for the existing dwellings.

1.121 To illustrate, a BTR development can contain 50 dwellings for which the compliance period has ended (original dwellings) as well as 30 dwellings that are still subject to the compliance period because these dwellings were added to the BTR development as part of a subsequent expansion (expansion dwellings). If the 30 expansion dwellings subject to the compliance period continue to meet the eligibility criteria, the development remains an active BTR development. If any of the 50 original dwellings (for which the compliance period has ended) no longer meet an eligibility criterion, this does not affect the status of the active BTR development. [Schedule 1 to the Bill, item 9, subsections 43-152(3) and (4) of the ITAA 1997]

1.122 In the above example, the ability to claim the BTR accelerated capital works deduction in relation to the 50 original dwellings would not be affected because the compliance period has ended. The 30 expansion dwellings can continue to claim the BTR accelerated capital works deduction as eligibility has not been breached. [Schedule 1 to the Bill, item 7, paragraph 43-145(2)(c) of the ITAA 1997]

1.123 Further in relation to the above example, the ability to claim the concessional rate of MIT withholding tax would end for the original 50 dwellings. The ability to claim the concessional rate of MIT withholding tax in relation to the expansion dwellings would continue as they have continued to meet the eligibility criteria. [Schedule 1 to the Bill, item 18, subsections 12-450(5) and (6) in Schedule 1 to the TAA 1953]

Commissioner's discretion

1.124 The dwellings in an active BTR development could have failed to satisfy one or more of the following eligibility criteria during the 15-year compliance period due to events outside of the entity's control:

•

the requirement that each dwelling is available to the public to be tenanted for a lease term of at least 3 years or tenanted as a result of being made available as such;

•

the requirement that at least 10 per cent (rounded down if required) of the dwellings are affordable dwellings; and

•

the requirement that applies to each of the affordable dwellings, requiring that the number of comparable non-affordable dwellings is greater than or equal to the number of comparable affordable dwellings.

1.125 Examples of events outside of the entity's control could include:

•

a temporary unforeseeable event (such as a fire, flood or earthquake) resulting in a dwelling no longer being available to the public for rent or tenanted for a period of 3 years or more;

•

requirements determined by the Minister relating to the income of the tenant of an affordable dwelling not being satisfied and requirements in relation to the minimum number of dwellings offered as affordable dwellings not being met as a result of changes to a tenant's income with the entity unaware of the requirements not being met; or

•

a tenant becomes ineligible to continue to occupy an affordable dwelling due to a salary increase but they cannot leave the dwelling because of a lack of alternative accommodation.

1.126 In such scenarios (as well as others – the above should not be taken to be exhaustive), the Commissioner has discretion to determine that the dwellings satisfy one or more of the eligibility criteria in paragraph 1.124 above (the particular eligibility criteria) at all times during a particular period.

1.127 The particular period is not specified but it is expected that it would reflect the time taken to have rectified the cause of the ineligibility.

1.128 For the Commissioner to exercise the discretion, the entity must apply to the Commissioner in the approved form, requesting the Commissioner to exercise the discretion. It is expected that the entity applies to the Commissioner as soon as the cause of the ineligibility has been rectified. While the Commissioner may temporarily delay making an assessment of misuse tax if an entity signals an intent to apply to the Commissioner for exercise of the discretion, the Commissioner need not do so. Where the Commissioner proceeds to assess an entity in relation to misuse tax, and the entity later applies for exercise of the discretion, the entity will also need to request an amendment to their assessment of misuse tax. The period of review for a misuse tax assessment is generally 4 years after notice of the assessment was first given to the taxpayer. After the period of review has lapsed, the Commissioner will no longer be able to consider an application for exercise of the discretion. Taxpayers should apply for the exercise of the discretion as soon as possible to avoid having to pay misuse tax, and the costs of having to engage in the amended assessment or objection and review processes that arise where applications are not made promptly.

1.129 The Commissioner must be satisfied of the following to determine that the dwellings satisfied one or more of the particular eligibility criteria at all times during the specified period:

•

the dwellings did not satisfy one or more of the particular eligibility criteria at all times during the specified period a result of events outside of the entity's control;

•

the entity took all reasonable steps to ensure that the dwellings would satisfy that eligibility criteria;

•

the dwellings satisfy that eligibility criteria at the time of the determination; and

•

the entity intends that each dwelling will satisfy the eligibility criteria in subsection 43-153(1) (including the particular eligibility criteria) for the remainder of its compliance period. [Schedule 1 to the Bill, item 9, subsection 43-153(7) of the ITAA 1997]

1.130 To avoid doubt, a determination has effect according to its terms. [Schedule 1 to the Bill, item 9, subsection 43-153(8) of the ITAA 1997]

1.131 To avoid doubt, the Commissioner may decline to exercise this discretion if the circumstances warrant it. Consistent with existing provisions, an entity is able to object to the Commissioner declining to exercise this discretion by objecting against an assessment of the misuse tax in the manner set out under Part IVC of the TAA 1953.

The build to rent development misuse tax

1.132 The BTR development misuse tax is a key integrity feature of the BTR scheme and aims to ensure that BTR developments are available for rent throughout the 15-year compliance period. The misuse tax approximately claws back tax benefits claimed by entities where the BTR development ceases to be an active BTR development during the 15year BTR compliance period. As discussed at paragraph 1.112 above, the misuse tax does not apply where a BTR development ceases to be an active BTR development after the compliance period. Any non-compliance is dealt with through the amended assessment process. [Schedule 1 to the Bill, item 11, sections 44-1 and 44-5 of the ITAA 1997]

1.133 Schedule 1 to the Bill inserts new Division 44 into the ITAA 1997 which, together with the Imposition Bill, imposes BTR development misuse tax for an income year. The misuse tax is only payable if the entity has a BTR misuse amount for the income year. An entity only has a BTR misuse amount for an income year if the entity is non-compliant with the eligibility criteria for an active BTR development. [Schedule 1 to the Bill, item 11, section 44-15 of the ITAA 1997, and section 4 of the Imposition Bill]

1.134 This tax is imposed under section 4 of the Imposition Bill.

1.135 The tax is calculated based on the sum of an entity's BTR capital works deduction amounts and that entity's BTR withholding amounts. The sum of these two amounts is the BTR misuse amount. An entity is not liable to pay BTR development misuse tax for a year if that person has no BTR misuse amount for the year. [Schedule 1 to the Bill, item 11, sections 44-15 and 44-20 of the ITAA 1997, and section 5 of the Imposition Bill]

1.136 The BTR misuse amount for an income year is the sum of an entity's BTR capital works deduction amounts and 10 times the sum of the entity's BTR withholding amounts.

1.137 To avoid doubt, where an entity only claimed the BTR capital works deduction, the BTR misuse tax is only the sum of the capital works deductions. Similarly, where an entity only claimed the concessional MIT withholding rate, the BTR misuse tax is only 10 times the sum of the BTR withholding amounts. Where an entity claimed both the capital works deduction and the concessional MIT withholding rate, the amount is the sum of the entity's BTR capital works deduction amounts and 10 times the sum of the entity's BTR withholding amounts. [Schedule 1 to the Bill, item 11, section 44-20 of the ITAA 1997]

1.138 This amount is subject to a tax rate of 1.5 per cent. The total amount of tax is roughly equal to the tax benefit gained, increased by 8 per cent, which represents interest and costs associated with the tax shortfall. [Schedule 1 to the Bill, item 11, sections 44-25 and 44-30 of the ITAA 1997, and section 5 of the Imposition Bill]

BTR capital works deduction amount

1.139 The method statement in section 44-25 instructs how to calculate a BTR capital works deduction amount. This amount is roughly equal to the accelerated capital works tax benefit plus 8 per cent. This process is summarised below.

•

Step 1: identify each income year in which (at any time during that year) the BTR development was an active BTR development.

•

Step 2: for each of these years, identify the portion of construction expenditure attributable to the active BTR part that was used in the 4 per cent manner (see subsection 43-145(2)), multiply that by the proportion of days of the income year that the person owned, was lessee of, or was holder of, the active BTR part, and divide by 365.

•

Step 3: reduce the amount previously calculated by the extent to which the active BTR part was used only partly for the purpose of producing assessable income in the year. This only applies if part of the income from the active BTR part of the construction expenditure area is exempt income; part of the active BTR part of the construction expenditure area was not used for the purpose of producing assessable income or was not available for that use; or the active BTR part of the construction expenditure area was not used for such a purpose during part of the days used period.

•

Step 4: for each year, add up the amounts calculated in Step 3 for each construction expenditure area.

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Step 5: add up the amounts worked out under Step 4 for each year.

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Step 6: multiply the Step 5 amount by the applicable tax rate. The applicable tax rate is:

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for a company (other than in the capacity as trustee): the corporate tax rate for the year in which the BTR development ceases to be an active BTR development (the 'cessation year');

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in any other case: the maximum rate specified in the table in Part I of Schedule 1 to the Income Tax Rates Act 1986 for the cessation year. At present, this rate is 45 per cent.

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Step 7: the BTR capital works deduction amount is the Step 6 amount multiplied by 1.08.

BTR withholding amount

1.140 The method statement at section 44-30 instructs how to calculate a BTR withholding amount. The BTR withholding amount is equal to 1.08 times the sum, over each year in which the BTR development was an active BTR development, of the total sum of fund payments made where:

•

the BTR development was an active BTR development;

•

the fund payments were subject to the 15 per cent rate of tax; and

•

those payments were attributable to rental income under a lease of a dwelling that is part of an active BTR development. [Schedule 1 to the Bill, item 11, section 44-30 of the ITAA 1997]

Power to make an assessment

1.141 The amount of BTR development misuse tax is defined as an assessable amount. This enables the Commissioner to make an assessment for BTR development misuse tax. [Schedule 1 to the Bill, item 21, subsection 155-5(2) of Schedule 1 to the TAA 1953]

1.142 However, a person cannot force the Commissioner to make an assessment of the BTR development misuse tax. This is to minimise administration requirements for the Commissioner because the BTR development misuse tax is used to roughly claw back tax benefits incorrectly claimed and will not apply to all entities. [Schedule 1 to the Bill, item 22, paragraph 155-30(3)(e) of Schedule 1 to the TAA 1953]

When is tax payable

1.143 The rules regarding the payment of the BTR misuse tax are contained in the new Subdivision 44-C of the ITAA 1997. [Schedule 1 to the Bill, item 11, section 44-35 of the ITAA 1997]

1.144 The BTR development misuse tax is due and payable at the end of 21 days after the Commissioner gives a person notice of assessment of the amount of BTR development misuse tax payable. [Schedule 1 to the Bill, item 11, section 44-40 of the ITAA 1997]

1.145 If the Commissioner amends an entity's assessment, the extra assessed amount of BTR development misuse tax is due and payable at the end of 21 days after the Commissioner gives the entity notice of the amended assessment. [Schedule 1 to the Bill, item 11, section 44-45 of the ITAA 1997]

General interest charge

1.146 Similar to most taxes (which are listed in subsection 8AAB(4) of the TAA 1953), the general interest charge applies, calculated daily based for each day on the unpaid amount, starting on the day the assessed BTR development misuse tax was due to be paid, and ending at the end of the last day where any of the following remains unpaid:

•

the assessed BTR development misuse tax; or

•

general interest charge on such assessed BTR development misuse tax. [Schedule 1 to the Bill, items 11 and 13, section 44-50 of the ITAA 1997 and subsection 8AAB(4) of the TAA 1953]

1.147 The amount of general interest charge is worked out in accordance with Part IIA of the TAA 1953. [Schedule 1 to the Bill, item 11, note to section 44-50 of the ITAA 1997]

No deduction available for BTR development misuse tax

1.148 No deduction is available for an amount of BTR development misuse tax that an entity pays. [Schedule 1 to the Bill, items 2 and 3, sections 12-5 and 26-99B of the ITAA 1997]

Rulings

1.149 The Commissioner can issue rulings with respect to the BTR development misuse tax. [Schedule 1 to the Bill, item 24, section 357-55 of Schedule 1 of the TAA 1953]

Further minor and consequential amendments

1.150 A minor editorial amendment is made to a heading before a section for added clarity on the operation of the section. [Schedule 1 to the Bill, item 4, section 43-140 of the ITAA 1997]

1.151 A minor editorial amendment is made to the start of a section, to accommodate the addition of a new subsection. [Schedule 1 to the Bill, item 5, section 43-145 of the ITAA 1997]

1.152 A new heading, 'Industrial activities', is inserted before a section for added clarity on the operation of the section and for consistency with other headings throughout the subdivision in which the section is contained. [Schedule 1 to the Bill, item 8, section 43-150 of the ITAA 1997]

1.153 References to terms newly defined for these amendments are included in the Dictionary of the ITAA 1997. [Schedule 1 to the Bill, item 12, subsection 995-1(1) of the ITAA 1997]

1.154 An amendment is made to the TAA 1953 to identify that the BTR development misuse tax is a tax-related liability. [Schedule 1 to the Bill, item 23, subsection 250-10(2) in Schedule 1 to the TAA 1953]

1.155 Amendments are made to two subsections in Schedule 1 to the TAA 1953, by inserting new paragraphs, to extend the requirement for an entity to give the recipient of a fund payment written notice or make information available on a website that the recipient can readily access for not less than five continuous years to cover fund payments in relation to income from a BTR development. [Schedule 1 to the Bill, items 16 and 17, paragraphs 12-395(3)(ad) and 12395(6)(ad) of Schedule 1 of the TAA 1953]

Commencement, application, and transitional provisions

1.156 The Imposition Bill commences on the first 1 January, 1 April, 1 July or 1 April to occur after the day the Imposition Bill receives Royal Assent. [Section 2 of the Imposition Bill]

1.157 Schedule 1 to the Bill commences at the same time as the Imposition Bill. However, the provisions of the Bill do not commence at all if the Imposition Bill does not commence. [Section 2 of the Bill]

1.158 The amendments in Schedule 1 to the Bill (other than the amendments to section 12-450 of Schedule 1 to the TAA 1953) apply to capital works that commence after 7:30 pm, by legal time in the Australian Capital Territory, on 9 May 2023.

1.159 The amendment of section 12-450 in Schedule 1 to the TAA 1953 made by Schedule 1 to the Bill apply to an amount that is referrable to a payment of rental income made on or after 1 July 2024; or an amount that is, or is attributable to a capital gain, or part of a capital gain, from a CGT event that happens on or after 1 July 2024. [Schedule 1 to the Bill, item 25]