Build-to-rent: Victorian Budget 2020/21 land tax policy

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.

Get in touch

If you need urgent advice or just have a general query, please contact one of us below.

Jane Hodder
Jane Hodder
Partner, Real Estate, Melbourne
+61 3 9288 1692
Julie Couch
Julie Couch
Partner, Real Estate, Sydney
+61 2 9225 5425
Nicholas Cowie
Nicholas Cowie
Partner, Real Estate, Sydney
+61 2 9225 5551
Julie Jankowski
Julie Jankowski
Partner, Real Estate, Brisbane
+61 7 3258 6515
Michael Back
Michael Back
Partner, Real Estate, Brisbane
+61 7 3258 6611
Frank Poeta
Frank Poeta
Partner, Real Estate, Perth
+61 8 9211 7893

Changes to FIRB guidelines in relation to lease renewals

On 29 March 2020 monetary thresholds for acquisitions of leases of land of more than 5 years (including options to renew) by foreign persons were reduced to zero.  This meant that a large volume of leasing transactions which previously did not require approval fell into the Foreign Investment Review Board (FIRB) net.  On 3 September 2020, the FIRB amended these temporary measures to allow renewals and material variations of leases to proceed without approval in some circumstances. The new measures took effect on 4 September 2020.

What were the key changes?

In summary, the key changes were as follows:

  1. For the renewal or material variation of existing non-sensitive leasehold interests in developed commercial land (where the same acquirer held a substantially similar interest under a lease before 10:30pm on 29 March 2020), the previous monetary thresholds have been reinstated.
  2. The reinstated thresholds for the value of the leasehold interest being acquired (below which approval is no longer required) are set out in the table below:
Type of land Threshold – more than:
Land that is being acquired by a foreign person who is an agreement country or region investor $1,192 million
Land that is being acquired by any foreign person other than an agreement country or region investor, or a foreign government investor $275 million
Land that is being acquired by a foreign government investor $0

In this context, “renewal” means the extension of a lease through the exercise of an option to renew or the entering into of a new lease on substantially the same terms as the previous lease.  A “material variation” can include things like an extension of the term (including adding options) which can be regarded as a new lease for FIRB purposes.

  1. Certain transitional arrangements were introduced which govern the treatment of applications submitted under the regime before 3 September 2020 where such applications relate to actions which are no longer notifiable under the new rules set out above (such as withdrawal of applications and waiver or refund of application fees paid). We can provide guidance on this on a case by case basis if required.
  2. For all other leasehold acquisitions by a foreign person (where the term of the lease including options is reasonably likely to exceed 5 years) the $0 monetary screening threshold continues to apply and the acquisition of the leasehold interest will therefore need to be notified to the FIRB and approval obtained before the transaction proceeds.
  3. Examples of leasehold transactions still caught where the term is sufficiently long are an agreement for lease where the land is vacant at the time and a lease of developed commercial land which is regarded by FIRB as “sensitive” land.

Further information

For more information, the full FIRB guidance note 53 can be found here.

Contact Us

If you have any questions, please reach out to your HSF contact, who will be happy to discuss.