Tax changes for build-to-rent accommodation

Announced shortly before the 2023 Federal Budget, investors in build-to-rent accommodation will benefit from an increase in allowable deductions.

Currently, a tax deduction is available on the cost of constructing of a building (eg a rental property), once the building has begun to be used for a deductible purpose. One such method to get the tax deduction is to begin renting out the newly constructed dwelling.

For construction projects that are build-to-rent accommodation that commence after 9 May 2023, the owners of the accommodation will be entitled to a capital works deduction of 4% per annum.

This is an increase from the current 2.5% per annum that will continue to be available for other construction projects.

A build-to-rent project consists of 50 or more apartments or dwellings made available for rent to the general public. The dwellings must be retained under single ownership for at least 10 years before being able to be sold and landlords will be required to offer a lease term of at least 3 years for each dwelling.

Further consultation will take place on implementation, including any minimum proportion of dwellings being offered as affordable tenancies and the length of time dwellings must be retained under single ownership.

Managed investment trusts

Australian tax residents have the option to invest directly in a build-to-rent accommodation project, or indirectly through a managed investment trust.

The change in the capital works deduction will also apply to managed investment trusts, meaning that you have the option to invest whichever way you wish and still get access to the increased deduction. However, please note that eligibility criteria do apply, meaning that only bona fide build-to-rent accommodation projects will get the additional deduction.

Foreign investors in a managed investment trust that choose to commence a build-to-rent accommodation project will also benefit from a reduction in withholding tax after 1 July 2024, from 30% to 15%.

Construction commencement

As previously mentioned, this change will apply to new builds only. That is, construction on the build-to-rent accommodation project must have commenced after 9 May 2023.

Otherwise, the capital works deduction is available at its current rate over 40 years at 2.5% per annum.

Claiming the deduction

A capital works deduction is allowable if the capital works are used in a deductible way during the income year. That is, capital works deductions are not available until the construction of the capital works have been completed.

However, this announcement makes a proposed investment in build-to-rent accommodation more attractive as the construction costs for a newly built project can now be written off over 25 years instead of 40.

If you have any questions about this proposed change, and its progress through the parliamentary process, please contact our office.

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