Senate

Supplementary Explanatory Memorandum relating to sheet PC122

(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)

Chapter 1: Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 - Parliamentary Amendments to Schedule 1

Outline of chapter

1.1 The Government has a comprehensive $32 billion plan to build 1.2 million new homes by 2029. The Build to Rent measure is an important part of this plan to make all parts of the housing market more affordable, including for renters. The Parliamentary Amendments to the Bill will help secure more BTR developments, more affordable tenancies and more protections for renters.

1.2 The Parliamentary Amendments to Schedule 1 to the Bill:

•

extend the minimum lease period for dwellings in an active BTR development from three years to five years, requiring dwellings to either be made available to the public to be tenanted for a lease term of at least five years or tenanted for a lease term of at least five years;

•

require each of the dwellings to be made available to the public to be tenanted or tenanted by way of lease in accordance with any requirements relating to lease terms that are determined by the Minister by legislative instrument;

•

amend the definition of 'affordable dwelling' to provide that a dwelling is an affordable dwelling if it satisfies the requirements determined by the Minister by legislative instrument;

•

revise the provisions that deal with the BTR misuse tax by imposing liability to pay the BTR misuse tax on the entity that owns the BTR development immediately before that development ceases to be an active BTR development;

•

adjust the way the BTR misuse tax is calculated;

•

extend the notification obligation for the acquisition of an ownership interest in the BTR development, requiring the acquiring entity as well as the disposing entity to notify the Commissioner of the change of ownership interest within 28 days of the change of ownership event; and

•

extend eligibility for the MIT withholding tax concession to all BTR developments that satisfy the eligibility requirements, even if the development, even if the development existed, or construction on the development had commenced, before or on 7:30 pm, by legal time in the Australian Capital Territory, on 9 May 2023 (existing BTR developments).

Context of amendments

1.3 Following the introduction of the Bill, stakeholders provided feedback directly to Treasury and through the Senate Economics Committee inquiry into the provisions of the Bill about the eligibility criteria for BTR developments, the operation of the BTR misuse tax, as well as existing BTR developments being unable to elect to be eligible for the MIT withholding tax concession.

1.4 Concerns were raised with the carve-out preventing multi-tiered trust structures from accessing the MIT withholding concession (see item 14 in Schedule 1 to the Bill). This limitation was necessary to balance the compliance burden imposed on participants and support the administration of the BTR misuse tax, if, as the Bill provided at that time, multiple entities could be liable for the BTR misuse tax and the amount of BTR misuse tax each entity is liable for must be calculated individually.

1.5 Stakeholders also recommended that the minimum three-year lease period requirement be increased to a minimum five-year lease period requirement to improve security of tenure for tenants. Stakeholders further suggested strengthening the rights of tenants in BTR developments, especially in relation to the eviction of tenants without the tenant having breached their tenancy agreement or without being provided a reason as to why the tenancy is being terminated (known as 'no cause' and 'no grounds' evictions).

1.6 Stakeholders further recommended that the definition of 'affordable dwelling' be revised, and that affordable dwellings be required to be managed in partnership with registered, not-for-profit community housing providers.

1.7 Concerns were also raised that BTR developments that existed, or were under construction, before or on 7:30 pm (by legal time in the Australian Capital Territory) on 9 May 2023 would be substantially disadvantaged if the MIT withholding tax concession was not extended to these developments.

1.8 The Parliamentary Amendments respond to this feedback and specifically include amendments to:

•

increase the minimum lease period to five years to support long-term security of tenure for tenants;

•

provide that a dwelling is an 'affordable dwelling' if it satisfies the requirements determined by the Minister by legislative instrument;

•

require each of the dwellings to be made available to the public to be tenanted or tenanted by way of lease in accordance with any requirements relating to lease terms that are determined by the Minister by legislative instrument, such as requirements that the terms of the lease may not allow 'no cause' evictions;

•

remove the carve-outs from the 15 per cent concessional final MIT withholding rate and, consequentially:

-

impose liability to pay the BTR misuse tax on the entity that owns the BTR development immediately before that development ceases to be an active BTR development; and

-

adjust the way the BTR misuse tax is calculated; and

-

extend the notification obligation relating to the acquisition of an ownership interest in the BTR development, requiring the acquiring entity as well as the disposing entity to notify the Commissioner of the change of ownership interest within 28 days of the change of ownership event. This extended notification obligation assists with the administration of the BTR misuse tax; and

•

amend the application of amendments provision to extend eligibility for the MIT withholding tax concession to all BTR developments that meet the eligibility requirements, even if the development existed, or construction on the development had commenced, before or on 7:30 pm, by legal time in the Australian Capital Territory, on 9 May 2023.

Detailed explanation of amendments

Minimum lease period

1.9 Dwellings in a BTR development must be either made available to the public to be tenanted for a lease term of at least five years or tenanted to tenants for lease terms of at least five years. This supports long-term security of tenure for tenants in BTR developments by offering longer lease terms.

[Amendments 1 and 3, Schedule 1, item 9, paragraph 43-153(1)(a) of the ITAA 1997]

1.10 The five-year lease period 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.

[Amendment 5, Schedule 1, item 9, note to subsection 43-153(1) of the ITAA 1997]

Lease terms

1.11 Dwellings in a BTR development must be made available to the public to be tenanted or tenanted by way of lease in accordance with any requirements relating to lease terms determined by the Minister by legislative instrument.

[Amendments 2, 4 and 6, Schedule 1, item 9, paragraph 43-153(1)(a) and subsection 43-153(1A) of the ITAA 1997]

1.12 This means that any requirements determined by the Minister by way of legislative instrument must be satisfied for the dwellings in a building to be an eligible active BTR development.

1.13 It is intended that the Minister will impose requirements prohibiting leases for dwellings in a BTR development from containing terms allowing the eviction of a tenant without the tenant having breached their tenancy agreement, or without being provided a reason as to why the tenancy is being terminated (where such a lease term requirement is permissible under a law of a State or Territory). These forms of eviction are typically known as 'no cause' or 'no grounds' evictions.

1.14 This delegation of legislative power is appropriate as the lease term requirements may need to be varied on a regular basis to respond to changes in the residential tenancy market and align with relevant state and territory legislation. Providing the lease term requirements by way of legislative instrument will enable responsive management of lease term requirements, which adds to the integrity of the measure by allowing the inclusion of requirements for lease terms that support the rights of tenants in the BTR developments and provide greater security. The legislative instrument will be subject to disallowance and sunset after no more than 10 years and will therefore be subject to appropriate parliamentary scrutiny.

1.15 A requirement relating to lease terms can be disregarded if complying with that requirement would contravene a law of a State or Territory. This means that a BTR development owner (or an entity providing management services to the BTR development owner in the form of leasing activities with respect to the BTR development) need not comply with a lease term requirement determined by the Minister where complying with that requirement would require non-compliance with a State or Territory law

[Amendment 6, Schedule 1, item 9, subsection 43-153(1B) of the ITAA 1997]

1.16 Residential tenancies are regulated by State and Territory law. The exception providing that requirements about lease terms are of no effect if they would require action contrary to State and Territory law makes clear, for the avoidance of doubt, that there is no intention to override State and Territory laws which regulate residential tenancies. Given this, the new subsection 43-153(1B) does not raise any potential issues with section 109 of the Constitution. In any case, there can be no inconsistency between these provision and State residential tenancy laws. This is because a requirement as to the terms of a lease in a legislative instrument made under the new provision does not create a legal obligation or duty. Such a requirement is merely a condition for receiving the tax concession. The BTR development owner (or an entity providing management services to the BTR development owner in the form of leasing activities with respect to the BTR development) may freely decide whether they need not comply with the requirement to access the BTR concessions at the risk of breaching other conditions under State and Territory laws.

Affordable dwellings

1.17 For a development to be a BTR development, among other things a certain proportion of the dwellings in the development must be affordable dwellings.

1.18 Dwellings will be considered affordable dwellings if the dwellings satisfies any requirements for a dwelling to be an affordable dwelling determined by the Minister by legislative instrument. These requirements may include (and are not limited to) requirements relating to the rent payable under the lease for the dwelling as well as requirements relating to the income of the tenant or prospective tenant. [ Amendment 7, Schedule 1, item 9, subsections 43-153(2) and (3) of the ITAA 1997 ]

1.19 It is expected that a legislative instrument will be made as soon as practicable providing that, for a dwelling to be an affordable dwelling, its rent must be no more than 74.9 per cent of what would be the market rent for the dwelling, as well as setting requirements about the maximum income of tenants or prospective tenants. It is also expected that there will be additional requirements added after further consultation with stakeholders on issues that have been raised in consultation to date, such as the use of separate low and middle income thresholds to allow a portion of affordable dwellings to be reserved for those in greatest need and the involvement of community housing providers in managing affordable dwellings for owners of BTR developments.

1.20 This delegation of legislative power is appropriate as the affordability requirements may need to be varied on a regular basis to respond to changes in the residential tenancy market and key considerations for affordability. It ensures that the dwellings reserved for use as 'affordable dwellings' are not provided to those with the means to rent dwellings at market rates and delivering the policy intent that the affordability requires remain both meaningful and reasonable.

1.21 The legislative instrument will be subject to disallowance and sunset after no more than 10 years and will therefore be subject to appropriate parliamentary scrutiny.

BTR misuse amounts

1.22 The BTR misuse tax is a core integrity rule ensuring that tax benefits in relation to a BTR development under the measure are clawed back should a BTR operator not comply with the eligibility requirements. This is important for providing confidence to the community that tax benefits are only provided where the intended policy outcome is achieved. The Parliamentary Amendments improve the operation of these rules to better accommodate common commercial structures, targeting the claw back to the entity responsible for the failure to comply.

1.23 To expand upon the changes, an entity is liable to pay the BTR misuse tax for an income year if the entity has a BTR misuse amount for that income year.

1.24 An entity has a BTR misuse amount for an income year if the BTR development ceases to be an active BTR development during that income year and the entity owned the dwellings of the BTR development immediately before the cessation.

1.25 An entity's BTR misuse amount for the income year consists of:

•

the sum of an entity's BTR capital works deduction amounts (calculated under the method statement) for each BTR development that ceases to be an active BTR development during the income year;

plus

•

10 times the sum of that entity's BTR withholding amounts (calculated under the method statement) for each BTR development that ceases to be an active BTR development during that income year.

1.26 If a BTR development has had more than one owner immediately before the cessation, the entity's BTR misuse amount will also relate to periods where the active BTR development was held by any previous owners. This ensures that the owner at the time of cessation bears the total burden of paying the BTR misuse tax, therefore ensuring that previous owners that met the eligibility criteria are not penalised.

[Amendment 12, Schedule 1, item 11, subsections 44-20(2) and (3) of the ITAA 1997]

1.27 An entity's liability for the BTR misuse tax is 1.5 per cent of the BTR misuse amount.

BTR capital works deduction amount

1.28 An entity's BTR capital works amount is calculated by applying the method statement in section 44-25 of the ITAA 1997. This amount is roughly equal to the accelerated capital works deductions obtained in respect of the BTR development up to the point of cessation, plus 8 per cent. The amount would also reflect deductions obtained by any entities that previously owned the BTR development. The calculation process is summarised below:

•

Step 1: identify each income year in which (at any time during a year) the BTR development was an active BTR development. This may include income years in which another entity owned the BTR development.

•

Step 2: for each of those years, identify each construction expenditure area of capital works that are or include the active BTR development area of the BTR development at any time during the year ('construction expenditure area').

-

For each construction expenditure area, identify the portion of construction expenditure attributable to the active BTR part. This is the 'portion of construction expenditure'.

-

Determine the 'days used', the days that the portion was used in the 4 per cent BTR manner (see subsection 43-145(2)). This is the number of days of the income year that any entity owned, was lessee of, or was holder of, the active BTR part and used it in the 4 per cent BTR manner or that any entity held the active BTR part under a quasi ownership right or an exempt foreign government agency, and used it in the 4 per cent BTR manner.

-

Multiply the 'portion of construction expenditure' and 'days used', and then divide that by 365. This resultant amount is to be determined for each construction expenditure area.

•

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 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 a part of the days used period.

•

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

•

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

•

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

-

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');

-

in any other case: the maximum rate specified in the table in Part I of Schedule 7 to the Income Tax Rates Act 1986 for the cessation year. At present, this rate is 45 per cent.

•

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

1.29 To avoid doubt, an entity can have more than one BTR development for which the entity has a BTR capital works deduction amount, resulting in the entity having multiple BTR capital works deduction amounts.

[Amendment 13, Schedule 1, item 11, subsection 44-25 of the ITAA 1997]

BTR withholding amount

1.30 The method statement at section 44-30 of the ITAA 1997 explains how to calculate a BTR withholding amount. The BTR withholding amount is equal to 1.08 times the total sum of fund payments made for each year in which the BTR development was an active BTR development, where:

•

the BTR development was an active BTR development;

•

the fund payments would have been subject to the 15 per cent rate of tax if paid to a resident of an information exchange country by the trustee of a withholding MIT; and

•

those payments were attributable to either rental income under a lease of a dwelling that is part of an active BTR development or a capital gain from a CGT event in relation to a dwelling that is part of an active BTR development.

1.31 Effectively, the method statement ensures that the tax base for the BTR misuse tax is the total fund payments of (all) the owners of the BTR development up to the point of cessation that are referable to rental income from the leases of dwellings in the active BTR development and any capital gains from a CGT event in relation to a dwelling in the active BTR development for each income year.

1.32 The calculation 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 those years, identify each fund payment (or part of a fund payment) that the owner of the active BTR development makes (if any fund payments are made) to the extent these are referable to:

-

each payment of rental income under a lease of a dwelling that is part of an active BTR development, or

-

a capital gain from a CGT event in relation to a dwelling of the active BTR development.

•

Section 12-405 (and section 12A-110 in the case of attribution managed investment trusts) in Schedule 1 to the TAA defines 'fund payment' and how they are calculated. For this purpose, it does not matter whether an amount must be withheld from the fund payment under Part 2-5 in Schedule 1 to the TAA 1953.

•

Step 3: in relation to each year, add up the amounts identified under Step 2.

•

Step 4: add up the amounts worked out under Step 3.

•

Step 5: the BTR withholding amount is the Step 4 amount multiplied by 1.08.

[Amendment 14, Schedule 1, item 11, subsection 44-30 of the ITAA 1997]

Notice of acquisition

1.33 Entities participating in BTR developments must notify the Commissioner of events and information when required.

1.34 An event that triggers the requirement to notify the Commissioner is where the ownership interest in the BTR development is acquired. The owner of the development at the time immediately before the acquisition (the trigger event) must notify the Commissioner within 28 days of the trigger event. The notification must occur by way of a form approved by the Commissioner.

1.35 The term 'build to rent development' is defined in subsection 995-1(1) and refers to the dwellings collectively in a development. To avoid doubt, ownership interest in the BTR development refers to the ownership interest in the dwellings collectively (the whole development). It does not refer to an ownership interest in individual dwellings in the development.

1.36 As a result of these amendments, the notification obligation relating to the acquisition of an ownership interest in the BTR development extends to the entity that acquires the ownership interest in the BTR development. This means that both the acquiring entity and the disposing entity must notify the Commissioner in relation to the acquisition.

[Amendment 8, Schedule 1, item 9, paragraph 43-154(3)(c) of the ITAA 1997]

1.37 This extension ensures that the Commissioner is notified of the new owner that may be responsible for meeting the eligibility criteria for an active BTR development, and connecting them to any earlier owner, for the purposes of administering the misuse tax (if it applies).

Availability of 15 per cent final MIT withholding tax rate

1.38 As a result of the application of the BTR misuse tax wholly on the entity that owned the dwellings of the BTR development immediately before cessation, two items from Schedule 1 to the Bill are omitted as these items are no longer required.

1.39 The items were previously required by the Bill, as introduced, to balance the compliance burden imposed on participants and support the administration of the BTR misuse tax when more than one entity could be liable for the BTR misuse tax in the same ownership structure.

[Amendment 15, Schedule 1, items 14 and 15]

Consequential amendments

1.40 Minor editorial amendments are made to the guide to Subdivision 44-B to reflect the new operation of Subdivision 44-B.

[Amendments9, 10 and 11, Schedule 1, item 11, section 44-10 of the ITAA 1997]

Commencement, application, and transitional provisions

1.41 The amendments commence at the same time as the Imposition Bill. However, the amendments do not commence at all if the Imposition Bill does not commence.

1.42 The Imposition Bill commences on the first 1 January, 1 April, 1 July or 1 October to occur after the day that Bill receives Royal Assent.

1.43 The amendments to section 43-145 of the ITAA 1997 made by Schedule 1 to the Bill apply to capital works that commenced after 7:30 pm, by legal time in the Australian Capital Territory, on 9 May 2023.

[Amendment 16, Schedule 1, item 25]

1.44 This extends eligibility for the MIT withholding tax concession to all BTR developments that satisfy the eligibility criteria, even if the development existed, or construction on the development commenced, before or on 7:30 pm (by legal time in the Australian Capital Territory) on 9 May 2023 (in addition to BTR developments whose construction commenced after 7.30 pm, by legal time in the Australian Capital Territory). The application is appropriate as the application of the reduced rate is wholly beneficial. Without it, the MIT withholding tax concession will not be available for BTR developments that existed, or whose construction on the development commenced, before or on 7:30 pm (by legal time in the Australian Capital Territory) on 9 May 2023. In any case, the BTR development owner can only access the MIT withholding tax concession once they choose to form the BTR development in accordance with subsection 43-152(6) of the ITAA 1997, so there will be no effect on developments unless the owner choose to makes an election.

1.45 To avoid doubt, the BTR capital works tax deduction is only available for BTR developments whose construction commenced after 7.30 pm (by legal time in the Australian Capital Territory) on 9 May 2023.

1.46 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 referable 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.