The build-to-rent sector has typically been viewed in Australia as a less attractive investment option due to lower levels of returns compared to other asset classes such as commercial, retail and industrial. This has in part been due to a number of Federal and State taxes, and in Victoria, particular concerns around land tax.
In a build-to-rent development, an investor owns the whole development and provides long-term leases to residential tenants. The investor is liable for the land tax assessed on the entire development and cannot pass this cost on to the residential tenants. Additionally, a build-to-rent asset may trigger the absentee owner surcharge which is payable by an investor on top of the assessed land tax. Under the current state of play, the land tax and absentee owner surcharge payable by an investor on a build-to-rent asset is a significant cost. As a result, property investors are likely to favour other investment sectors, such as commercial and industrial developments, where the land tax can be passed onto tenants.
In a welcome move to the real estate sector, the Victorian Budget 2020/21 includes numerous measures to stimulate construction and increase the housing supply. Two such measures are the introduction of a 50% land tax discount and an exemption from the absentee owner surcharge on eligible developments in the build-to-rent sector in Victoria. This follows on from a similar approach adopted in NSW in the middle of this year.
The land tax discount and absentee owner surcharge exemption on build-to-rent assets, which will take effect from 1 January 2022 through to 2040, will reduce an investor’s holding costs and aim to put the different property asset classes on a more level playing field. The measures aim to make the build-to-rent sector viable in Victoria.
The effect of the discount is anticipated to stimulate construction, attract investment in build-to-rent developments and provide an increase in the housing supply and rental market.
There are still more tax reforms that need to occur, including at the Federal level, to further stimulate the sector such as the treatment of GST and the withholding tax rate for MIT fund payments to foreign investors. However, the announcement on land tax in Victoria is a step in the right direction.
By Jane Hodder, Partner and Jordana Cawood, Solicitor.
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