Build to Rent: Understanding eligibility for discounted rent and tax concessions

The Build to Rent (BTR) tax concessions have received royal assent and per the Treasurer, are expected to support the construction of around 80,000 new homes to rent over ten years.

The Treasurer has now released a legislative instrument detailing the requirements of an eligible tenant for affordable housing in a BTR development.

The concessions

There are two primary concessions provided to eligible BTR projects. These are:

1. An increase in the capital works deduction from 2.5% to 4% for the eligible BTR expenditure. This change could create substantial cash flow savings on projects given the cost associated with their construction and reduce payback periods making more projects viable.
2. A reduction in the final withholding tax rate applicable to Managed Investment Trusts (MIT) on eligible fund payments from 30% to 15%. The intent of this provision is to make BTR projects more attractive to foreign investment. 

Eligibility criteria

To qualify for the tax concessions, the development must be an active BTR development that consists of at least 50 residential dwelling that, for the 15-year BTR compliance period, are:

• Made available for rent to the general public for a minimum period of at least five years or shorter as requested by the tenant;
• Not commercial residential premises (as defined under the GST Act);
• Owned by a single entity (including common areas);
• Comprised by at least 10% ‘affordable dwellings’ (rounded down to the nearest whole number), with the number of comparable dwellings within the development that are not ‘affordable dwellings’ exceeding the number that are ‘affordable dwellings’^[1].

Broadly an affordable dwelling is one which is available for rent, for no more than 74.9% of the rent of comparable dwellings in the BTR development, to tenants who meet certain income thresholds.

For increased capital works deductions (only), construction of the BTR development must also have commenced after 7:30pm (AEST) on 9 May 2023 (the time of the budget announcement). 

An eligible tenant?

The legislative instrument released by the Treasurer specifies the income thresholds to which an affordable dwelling must be tenanted or available to be tenanted in order to count towards the 10% requirement. The income threshold, the satisfaction of which is determined by reference to taxable income for the most income year preceding the assessing event, changes depending upon the composition of the household:

• An adult living alone whose taxable income for the most recent income year for which the Commissioner has given the adult a notice of assessment ending before the dwelling’s most recent assessing event was less than 120% of the average annual earnings;
• Two or more adults living together whose combined taxable incomes for the most recent income year for which the Commissioner has given each adult a notice of assessment, ending before the dwelling’s most recent assessing event, was less than 130% of the average annual earnings;
• One adult with one or more dependent children of the adult, where the adult’s taxable income for the most recent income year for which the Commissioner has given the adult a notice of assessment, ending before the dwelling’s most recent assessing event, was les than 140% of the average annual earnings; 
• Two or more adults with one or more dependent children of any of the adults, where the adults’ combined taxable income for the most recent income year for which the Commissioner has given each adult a notice of assessment, ending before the dwelling’s most recent assessing event, was less than 140% of average annual earnings.

For the purposes of the assessment average annual earnings is the full-time adult average weekly ordinary times earnings (original) for the most recent period for which an amount has been published by the Australian Statistician (usually available on the Australian Bureau of Statistics website), multiplied by 52.

The latest release was May 2024 with the average weekly ordinary times earnings being $1,924.60. This results in annual average earnings of $100,079. The release of the November 2024 earnings is expected on 20 February 2025, which will result in a change in the average annual earnings. 

For the purpose of the above, an assessing event for a dwelling is:

a)    a lease being entered into for the dwelling;

b)    the lease for the dwelling being renewed; 

c)    after a lease is entered into or renewed, on or more of the following occurring:

i)    an adult individual moving in or out of the dwelling;

ii)    a dependent child of an adult individual occupying the dwelling, result in no dependent children of an adult individual occupying the dwelling continuing to occupy the dwelling.

In essence, the household income needs to be reassessed when there is a change in the composition of the household. Whilst it is not clear from the above, presumably where a dependent child no longer meets the definition of dependent child, this could be an assessing event if deemed to be considered to be an ‘adult moving into the dwelling’ even though no change in the household composition has occurred. 

Whilst assessing events a) and b) would seem to be relatively straightforward for BTR developers to determine, there may be some practical difficulties in identifying when assessing event c) could occur given this is movement at the household level. Where a dependent child not on the lease moves out or no longer meets the definition of dependent child as they may have taxable income over the threshold, an assessing event may occur. If the tenant has a one-off gain that pushes their taxable income above the threshold prior to the assessing event, this could then result in a failure of the income threshold. 

Given the implication of failing to be an active BTR development is the application of the BTR misuse tax, essentially a tax unwinding the build to rent concessions enjoyed up to the point of failure, record keeping associated with the tenancies is paramount, particularly as it pertains to eligible tenants.
 

FOR MORE INFORMATION

If you would like to learn more about the topics discussed in this article, please contact your local RSM office.

1] This requirement is to prevent a BTR entity from allocating only the lowest standard dwellings in a development as affordable dwellings.