The build-to-rent market is gaining momentum in Australia, offering property developers and business owners new opportunities for investment and growth (and a potential solution to the nation’s housing crisis). Recent tax changes introduced by the Federal Government are set to provide significant incentives for developers to explore this market segment.
In this article, we delve into the impact of these tax measures on property developers, eligibility criteria for qualifying projects, steps to maximise tax benefits, and other important considerations to be aware of.
What is Build to Rent?
Build to rent is a property development model where homes are built and designed specifically for long-term rental purposes, rather than for sale. It focuses on creating high-quality rental properties with desirable amenities and services to cater to tenants' needs.
Build to Rent Development in Australia
Build-to-rent developments are on the rise in Australia, with Melbourne accounting for more than half of Australia's build-to-rent market, as traditional residential developers look to mitigate risk. Since rental demand is projected to remain stronger than demand for off-the-plan sales, the share of built to rent properties in Australia’s real estate market is projected to increase.
Understand (and Take Advantage of) the Federal Government’s Build to Rent Incentives
The tax changes introduce new incentives that make the build to rent space more attractive to developers. The advantages include accelerated depreciation and tax deductions for qualifying construction expenses. By aligning the tax landscape with the growing trend of build to rent developments, these measures enhance the financial viability of projects.
With the increasing demand for rental housing, developers can benefit from a stable income stream and long-term returns. The tax incentives foster innovation and investment in the build to rent sector, encouraging developers to explore this market segment.
Increased capital works tax deduction
The capital works tax deduction rate increase from 2.5% to 4% per year will have a direct impact on property developers. It shortens the depreciation period for eligible building construction costs from 40 to 25 years. By accelerating deductions, developers can offset the rent and other income from eligible build to rent projects. This reduction in tax paid frees up cash for further property development investments or makes it more accessible to new investors.
Reduced withholding tax rate
The reduced withholding tax rate, from 30% to 15% for foreign residents investing in eligible residential build-to-rent projects, encourages overseas investment. Passing a greater portion of profits back to investors enhances returns and makes build-to-rent projects more appealing, attracting larger capital investments.
Eligibility criteria for build to rent projects to qualify for these tax measures
To qualify for the increased capital works tax deduction and reduced withholding tax rate, build to rent properties must meet specific eligibility criteria. These criteria include:
- commencing construction after 9 May 2023
- having at least 50 dwellings available for rent to the general public
- retaining single ownership for at least 10 years
- offering lease terms of at least 3 years for each dwelling.
How achievable are the build to rent incentives?
Additional eligibility criteria vary among state governments, including requirements related to ownership, occupancy permits, construction time frames, and workforce participation. Developers may need to demonstrate affordability criteria or provide social benefits to tenants. The achievability of these criteria depends on factors such as the developer's resources, expertise, and ability to navigate regulatory frameworks. While some criteria may present challenges, thorough planning and consultation with tax professionals can help developers meet the requirements of the build to rent incentives.
How to Maximise the New Build to Rent Tax Benefits
- Understand the eligibility criteria at both the federal and state levels.
- Seek advice from tax advisors or accountants specialising in property development who can provide valuable guidance tailored to specific circumstances.
- Keep detailed records of expenses, supported by proper documentation. This is essential to substantiate claims for deductions and credits.
- Explore strategic tax planning opportunities , such as tax-efficient business structures and optimised depreciation schedules.
- Regularly review and adjust tax strategies to ensure developers make the most of available incentives.
Talk to our Property Industry Experts About Your Build to Rent Projects
These recent tax changes provide property developers with new incentives to explore build to rent, making projects more financially viable and attractive to investors. By understanding eligibility criteria, taking strategic steps to maximise tax benefits, and remaining aware of additional considerations and opportunities, developers can navigate the evolving tax landscape successfully.
These measures foster innovation, investment, and accelerated growth in the build to rent sector, offering promising opportunities for property developers in Australia, particularly in Melbourne. Get in touch with our property and construction business advisors to start your build to rent adventure.
