New incentives for build to rent developments

In response to Australia’s housing affordability challenges, both federal and state governments have introduced a suite of incentives aimed at bolstering the Build-to-Rent (BTR) sector. These measures are designed to stimulate investment, increase the supply of rental housing, and provide more affordable options for residents.​

Federal Initiatives

As part of the “Homes for Australia” plan, effective from January 1, 2025, the federal government has implemented key tax incentives for BTR developments:

1. Enhanced Depreciation Rates: The capital works tax deduction rate for eligible BTR projects has been elevated from 2.5% to 4%. This adjustment reduces the depreciation period for construction costs from 40 years to 25 years, allowing investors to recoup expenses more rapidly.
2. Reduced Withholding Tax: The withholding tax rate for eligible fund payments from managed investment trusts (MITs) related to BTR income has been lowered from 30% to 15%, making BTR projects more appealing to both domestic and foreign investors. ​

To ensure these incentives contribute to genuine affordability, the government has established initial affordability standards for BTR developments. These standards, effective from January 1, 2025, require that a portion of the dwellings be offered at below-market rates to eligible tenants. ​

State-Level Measures

Individual states have introduced complementary incentives to further promote BTR developments:​

• Victoria: Eligible BTR projects can benefit from a 50% reduction in land tax for up to 30 years and an exemption from the absentee owner surcharge during this period. To qualify, developments must consist of at least 50 self-contained dwellings available for lease terms of at least three years. ​
• South Australia: Legislation has been introduced to provide a 50% reduction in land tax for BTR properties where construction commenced on or after July 1, 2023. This concession is available for the 2023-24 financial year up to the 2039-40 financial year. ​
• Western Australia: The state government has proposed a 50% exemption from land tax for eligible BTR developments for up to 20 years, starting from July 1, 2023. ​

Implementation and Compliance

To prevent misuse of these incentives, the federal government has introduced the Build-to-Rent Misuse Tax. This measure aims to reclaim tax benefits if a development ceases to meet the BTR criteria within the designated compliance period, ensuring that the incentives fulfill their intended purpose of increasing affordable rental housing. ​

These initiatives represent a concerted effort by Australian governments to address housing affordability through the promotion of BTR developments. By offering tax concessions and establishing affordability standards, the aim is to attract investment into the rental market, increase housing supply, and provide more affordable housing options for Australians.​

Sources: www.ato.gov.au, www.sro.vic.gov.au