Build to Rent income tax exposure draft released

13 minute read  12.04.2024 Hamish Wallace, Adrian Varrasso, Jason Hawe, Pooja Tandon

Treasury has released an Exposure Draft for new build-to-rent concessions. While some industry recommendations have been adopted, unresolved issues and surprises linger.


Key takeouts


  • Consistent with the 2023-24 Budget announcement, qualifying BTR projects will benefit from a reduced MIT withholding tax rate on rental income and an increase in the capital works deduction depreciation rate.
  • The reduced MIT withholding rate appears to only apply to rental income derived from qualifying BTR projects and not capital gains, which is an unattractive feature as compared to other commercial residential asset classes.
  • It is proposed that a BTR misuse tax be introduced to offset tax concessions claimed in respect of a BTR development which ceases to comply with the relevant eligibility requirements during a 15 year compliance period.

See our latest updates on the topic of build-to-rent concessions.


On 9 April 2024, the Treasury released for consultation an Exposure Draft Bill to implement the managed investment trust (MIT) and accelerated capital works deduction incentives for new build-to-rent (BTR) developments, as announced in the 2023-24 Budget. The consultation period is short with submissions on the draft Bill due by 22 April 2024. While it seems Treasury has adopted a number of recommendations provided through its more targeted consultation with property industry stakeholders, a number of issues remain, and there are some surprises, that need to be further considered or clarified.

BTR concession Exposure Drafts

Treasury has released for consultation the Treasury Laws Amendment Bill 2024: Build to rent developments (BTR Bill), together with Explanatory Materials (EM) and a Policy Fact Sheet, which proposes to implement the following incentives for eligible BTR developments (BTR concessions):

  • a reduction in the MIT withholding tax rate on fund payments (i.e. rental income from an active BTR development) from 30% to 15% (MIT withholding concession); and
  • an increase in the rate for capital works deductions from 2.5% to 4% per year (accelerated capital works concession).

The above measures were initially announced as part of the 2023-24 Budget.

Treasury has also released the Capital Works (Build to Rent Misuse Tax) Bill 2024 which imposes a BTR misuse tax. The BTR misuse tax seeks to neutralise any tax benefits obtained by an entity where the BTR concessions have been claimed in respect of a BTR development that ceases to comply with the relevant requirements during a 15 year BTR compliance period.

Qualifying requirements

The BTR Bill proposes the following eligibility criteria to access the BTR concessions:

  • the BTR development’s construction commenced after 7:30PM (AEST) on 9 May 2023;
  • the BTR development consists of 50 or more dwellings made available for rent to the general public;
  • 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 offered for lease terms of at least 3 years throughout the 15 year period (although the tenant can request a shorter term); and
  • at least 10% of the dwellings in the BTR development must be offered as affordable tenancies throughout the 15 year period.

Observations on the draft BTR Bill

Capital gains on BTR developments

As currently drafted, the MIT withholding concession only applies in respect of eligible rental income derived from a qualifying BTR development. It does not extend to capital gains derived from a BTR development. This is an unattractive distinguishing feature as compared to other commercial residential asset classes where offshore investors are able to obtain the benefit of a reduced withholding rate for capital gains.

Access to MIT withholding concession limited to 15 year BTR compliance period

The MIT withholding concession will only apply for the 15 year BTR compliance period. While the EM indicates that this was a deliberate outcome, this is surprising given a 15 year limit on accessing the MIT withholding concessions was neither foreshadowed in the Budget announcement nor in previous targeted consultation with property industry stakeholders. It brings up a query as to whether foreign investors will look to have a horizon on their investment and the value of that investment as the 15 year window closes.

Construction post 9 May 2023

The clear policy intent is that construction of the BTR development must have commenced after 7:30PM (AEST) on 9 May 2023. However, as a technical matter, we are not convinced that the current drafting in the BTR Bill is adequate to properly incorporate this as a requirement that needs to be met in order to access the BTR concessions, at least in respect of the MIT withholding concession.

Item 16 of the BTR Bill indicates that the amendments made by the BTR Bill apply to capital works begun after 7:30pm, by legal time in the Australian Capital Territory, on 9 May 2023. It is therefore clear that the reduced MIT withholding concession can only be claimed in respect of fund payments made after that date. However, to access the MIT withholding concession, the requirement is that there be a payment of rental income attributable to an active build to rent development period. Neither the definition of active build to rent development nor the conditions in proposed new section 43-152 refer to construction needing to commence post 9 May 2023 nor do those provisions refer to the concept of 'capital works'.

It is unusual that the drafting is not consistent with the drafting adopted for accessing the clean building reduced MIT withholding rate. For example, in order to access the clean building reduced MIT withholding rate subsection 12-430(1) of Schedule 1 to the Taxation Administration Act 1953 (Cth) states that construction of the building must have commenced on or after 1 July 2012. An equivalent requirement is not included in the proposed new subsection 12-450(5) which deals with the BTR MIT concession.

We consider it open to interpretation that the BTR Bill does not currently impose a construction requirement as intended.

Existing asset

Leaving aside our comments above, the EM indicates that the construction requirement can be satisfied where alterations and structural improvements are made to repurpose an existing building into a BTR development. The EM specifically references the conversion of a warehouse to BTR apartments. It seems to us that repurposed office buildings or hotels could also therefore be capable of satisfying the relevant construction requirement. This may present an opportunity for owners of currently underutilised assets to retrofit their existing assets into new residential rental properties.

While this is a welcome clarification, it seems Treasury has not proposed to expand the BTR concessions to a number of existing operating or under construction BTR projects in Australia, which is a significant disadvantage for early adopters of the BTR model.

50 or more residential dwellings

The way this concept is introduced means there is some flexibility in how a BTR development is structured. For example, a BTR development can be part of a building or it can comprise parts of multiple buildings where, taken on an aggregated basis, those multiple buildings meet the relevant conditions, in which case the BTR concessions would only apply in respect of the qualifying parts.

Single ownership rule – 15 years

The single ownership rule has been extended from a suggested 10 years (the minimum period referred to in the Budget announcement) to 15 years. This is not particularly surprising given both NSW and Victoria incorporate a 15 year timeframe for a similar condition under the respective State based regimes.

Single ownership rule – sale transactions

The single entity ownership requirement should not prevent access to the BTR concessions in respect of a qualifying BTR development that is sold, provided that all dwellings in the development (and common areas that are part of the BTR development) continue to be owned together by a single entity. The requirement should also not prevent upstream ownership changes nor should it prevent a MIT from holding an interest in multiple BTR projects. However, this requirement will prevent multiple investors from holding a direct interest in the project (i.e. as a tenant in common) as opposed to holding an interest in a project vehicle that holds the direct interest in the project.

Single ownership rule – management entity

The single entity ownership requirement does not appear to incorporate any requirements around there being a single management entity engaged in respect of common property and leasing BTR dwellings, which is a point of distinction with the requirements that apply for various state tax concession requirements.

Affordable housing component

The Budget announcement foreshadowed the possibility of there being a mandatory affordable housing component and this is reflected in the BTR Bill. It is currently proposed that for 10% or more of the dwellings in the BTR development rent payable under any lease offered for such dwellings must be 74.9% or less of the market rate applicable for a dwelling of an equivalent size and standard located in the same development.

Further, any dwellings in a BTR development that are not affordable dwellings must be the same size and have the same amenities as at least one of the affordable dwellings. The EM explains that this requirement is to prevent a BTR owner from allocating only the lowest standard of dwellings in a development as affordable dwellings.

The concept of 'amenities' as used in the provisions is not defined. 'Amenities' are generally understood to be desirable or useful features or facilities, which is a particularly broad concept. The EM focuses on the number of bedrooms and bathrooms however the wording used suggests that these are not necessarily the only criteria that would be used to determine whether the same 'amenities' are offered. For example, one may expect such term to also include things like car parks or storage units. What is less clear is whether the term would capture things such as floor level or quality of views.

The absence of a definition for this term leaves considerable uncertainty for operators and investors, which is significant given the failure to comply jeopardises access to the BTR concessions for the entire development with no ability to rectify.

It seems that the affordable dwelling requirement will also incorporate tenant income limits that will need to be met (which will be prescribed by the Minister via a legislative instrument) as set out in the accompanying Policy Fact Sheet. The current proposed limits as set out in the Policy Fact Sheet (which are to be based on a calculated percentage of annualised average weekly earnings) are:

  • Single adult - $122,179
  • Couple, no dependant - $132,361
  • Family, one or more adults with one or more dependants - $142,543.

In applying the thresholds, the owner of a BTR development will be required to assess initial and ongoing tenant eligibility.

15 year compliance period

The 15 year compliance period will generally start from the day the development began operating as an active BTR development (i.e. the day that each of the qualifying requirements are met). Where further dwellings are added to an already qualifying BTR development, then the 15 year compliance period in respect of those dwellings will commence from that later date. Accordingly, where a particular BTR development is constructed in stages, there may be multiple 15 year compliance periods running for particular dwellings in that development.

Safe harbour

The way in which the concept of an active BTR development is defined in the BTR Bill means a development that ceases to qualify can no longer requalify for the concessions. There appear to be no safe harbour measures in place nor any ability to rectify temporary non-compliance. This may be of concern to some operators and investors particularly given the requirements around the affordable housing component. For example, if there was any uncertainty around the market value of rent offered in respect of affordable dwelling then this could jeopardise access to the BTR concessions on a permanent basis. Similarly, if a tenant under the relevant income limit unexpectedly received a significant amount of income in a particular year the particular dwelling may no longer qualify as an affordable dwelling with the potential loss of access to the BTR concessions for the entire development. Where access to the BTR concessions are tied to subjective criteria or criteria outside the control of the operator, then it would seem appropriate to include some form of safe harbour to protect against unintentional disqualification particularly where non-compliance is only temporary or reasonable endeavours are undertaken to prevent or rectify the non-compliance.

Adjacent land

For the purposes of the BTR concessions, the reference to the term building as used in the provisions (which is relevant in determining what constitutes a BTR development) includes a reference to other buildings that are on the same or adjacent land. This means that a BTR development may consist of multiple buildings on the same or adjacent land where, taken on an aggregated basis, a number of dwellings would meet the qualification requirements. However, no definition of this concept is included in the BTR Bill nor is any explanation provided in the EM that would assist with ascertaining what might satisfy this same or adjacent criteria. For example, if two buildings on separate land parcels were separated by a road, would they qualify as being on adjacent land?

Specific reporting

The BTR Bill imposes various notification obligations on both the owner of the BTR development and the trustee of a MIT who makes a relevant fund payment to which the reduced MIT withholding rate is applied during the year.

A notification obligation is triggered where:

  • the BTR development commences to be an active BTR development – the EM indicates that this is to ensure the relevant start date for the application of the 15 year compliance period is known with certainty;
  • there is an expansion of an active BTR development during the minimum period of ownership/operation – which would again be relevant in determining the start of the 15 year compliance period for the dwellings that form part of the expanded development;
  • there is a change of the direct ownership interest in an active BTR development – based on the current use of the term 'ownership interest', the requirement to notify should only be triggered where there is a change in the direct ownership of the BTR asset and not where there is a change in the upstream interests held by investors;
  • a BTR development ceases to be an active BTR development.

Where one of the above events occur, each entity mentioned above must notify the Commissioner within 28 days.

Misuse tax

As foreshadowed above, the Government also proposes to introduce a BTR misuse tax which seeks to neutralise the tax benefits obtained by an entity where a BTR development ceases to meet the relevant qualification requirements during the 15 year BTR compliance period.

The misuse tax is roughly equal to the accelerated depreciation and reduced MIT withholding rate benefits obtained, increased by 8%.

Importantly, any misuse tax assessed by the Commissioner will not be deductible and will be subject to the general interest charge.

In addition to the misuse tax, the BTR Bill also provides an exception for the Commissioner to the general amendment limitation period giving him a power to amend assessments that may otherwise be out of time where the BTR concessions have been improperly claimed.

Next steps – public submissions

Given the magnitude of the proposed reforms, we expect that there will continue to be strong engagement by property industry stakeholders during the short consultation process.

In seeking submissions, Treasury have indicated that they are particularly interested in views on:

  • the impacts of including a minimum proportion of dwellings to be made available as affordable tenancies; and
  • whether the minimum period of 15 years during which dwellings must be retained under single ownership strikes the right balance between investment needs and meeting public demand for long term tenancy availability. As outlined above, our observation is that the minimum period currently proposed seeks to align the changes with the 15 year period applied by some States in respect of state tax concessions for BTR developments.

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https://www.minterellison.com/articles/build-to-rent-income-tax-exposure-draft-released