NSW: Australia’s ‘build-to-rent’ state
The absence of an Australian 'build-to-rent' (BTR) market has been a hot-button issue for a number of years. Investors and developers often highlight Australia’s taxes as 'show-stoppers' to a flourishing BTR market.
Compare this with overseas, where more mature BTR markets are as entrenched there as ‘the great Australian dream’ of home ownership is here in Australia.
However, murmurings about BTR have more recently developed into enthusiastic chatter and gained genuine traction, with NSW leading the way. The momentum in BTR is expected to grow, with NSW recently introducing new tax concessions to support and encourage investment in NSW’s BTR sector.
A strong BTR market with appropriate conditions, support and incentives (or removal of disincentives) can provide many benefits for the economy and the community, including:
- sustainable returns for investors and developers;
- more affordable housing alternatives;
- benefits to owners/landlords through longer tenancies and, potentially, more ‘house-proud’ tenants treating the residence as their home even though they don’t actually own it;
- for residents, the flexibility associated with renting paired with additional certainty and security typically afforded to home owners – allowing residents to settle into their home and their community; and
- potential additional benefits of new builds with a focus on sustainable living.
The State Revenue Legislation Amendment (COVID-19 Housing Response) Act 2020 (Act) amends the Duties Act 1997 (NSW), the Land Tax Act 1956 (NSW) and the Land Tax Management Act 1956 (NSW).
The new measures provide for the following concessions:
- For land tax purposes, the taxable value of land for certain BTR properties constructed on or after 1 July 2020 will be reduced by 50%.
- Australian corporations will be entitled to claim a refund of land tax surcharges imposed from the 2021 land tax year.
- Surcharge purchaser duty and surcharge land tax will not apply to land on which BTR properties are or will be constructed.
The Act also amends the Payroll Tax Act 2007 (NSW) to provide that certain wages paid or payable to employees funded by the Commonwealth government’s ‘Aged Care Retention Grant Opportunity’ program are exempt from payroll tax in NSW.
Land tax concessions
The Act provides two land tax concessions for BTR properties. Once claimed, these concessions will continue to apply until the end of the 2040 land tax year, provided the property remains eligible.
In NSW, land tax is imposed annually based on the combined value of all ‘taxable land’ owned by a particular taxpayer (or taxpayer ‘group’ in some circumstances) at progressive rates.
Generally, no land tax is payable if the aggregated ‘taxable value’ of land held by a taxpayer does not exceed the ‘general threshold’ (currently $734,000). Land above this threshold is generally assessed for land tax at a rate of approximately 1.6% up to the ‘premium threshold’ (currently $4,488,000). The aggregate taxable value of land above the premium threshold is assessed at a rate of 2%. Some differences apply for particular types of taxpayers.
An additional 2% land tax ‘surcharge’ is also imposed on residential land owned by ‘foreign persons’ (which is defined to capture more taxpayers than one might ordinarily expect).
The effect of the aggregation of taxable values is that taxpayers with more land generally pay a higher effective land tax rate than taxpayers with less land.
For example, ten separate and unrelated taxpayer companies that each own one rental property with a taxable value of $700,000 (and no other taxable land in NSW) will pay no land tax. On the other hand, one corporate taxpayer that owns ten rental properties that each have a taxable value of $700,000 will pay land tax of $110,404 for 2020 (assuming none of these taxpayers are ‘foreign persons’). Their effective land tax is $11,040 (almost 1.6%) per property, which is assessed annually (though the values and thresholds change).
Consequently, aggregation operates as a disincentive to ‘professional’ landlords with multiple rental properties, as they need to foot the bill for land tax that smaller landlords either do not pay or pay at a lower effective rate.
Under the new measures, the taxable value of eligible BTR land will be reduced by 50% for land tax purposes, significantly reducing this disincentive. In order to be eligible for this reduction:
- a building must be situated on the land;
- construction of the building must have commenced on or after 1 July 2020;
- the owner must make an application for the reduction; and
- the Chief Commissioner of State Revenue must be satisfied the BTR building is used and occupied in accordance with the Treasurer’s BTR guidelines, which are yet to be released (Guidelines).
The landholder can only make an application for the 50% reduction once the BTR property has been constructed on the land. In other words, the reduction will not be available prior to or during construction.
The Guidelines will be released in due course and, in accordance with the Act, will include circumstances in which a building is taken to be a BTR property, such as:
- the planning or development standards that must be complied with;
- the minimum lease conditions that must be offered to tenants;
- the minimum scale of a building to qualify; and
- the nature of the ownership and management of the BTR property.
The use of guidelines to provide such concessions is becoming more prevalent in state taxes. Guidelines provide more flexibility to adjust the requirements to align with the policy behind them.
The Act includes a claw-back of the land tax concession if the land is subdivided, or ownership of the land is otherwise divided, within 15 years after the first year in which the concession was claimed.
Refund of surcharge land tax
‘Australian corporations’ will be entitled to claim a refund of part or all of the 2% land tax surcharge imposed from the 2021 land tax year if the Chief Commissioner is satisfied that:
- they are entitled to the 50% reduction in the taxable value of the relevant land; and
- the BTR building was constructed by the corporation or a related body corporate.
An application for a refund must be made within 12 months of the landholder becoming entitled to the refund and within 10 years of the relevant land tax year. The Chief Commissioner may also provide an exemption from the surcharge upfront if the landholder is likely to become entitled to this concession.
As with the 50% taxable value reduction, a claw-back of the surcharge concession applies if the land is subdivided, or ownership of the land is otherwise divided, within 15 years of the landholder surcharge refund/exemption first applying to the taxpayer.
Stamp duty surcharge concession
Surcharge purchaser duty of 8% generally applies to acquisitions of residential land in NSW by ‘foreign persons’. Under the new measures, a refund of surcharge purchaser duty may be available for contracts entered into on or after 1 July 2020 if the Chief Commissioner is satisfied that:
- the acquirer is an ‘Australian corporation’;
- the corporation or a related body corporate has constructed a BTR property on the land; and
- the corporation has become entitled to the 50% reduction in the taxable value (for land tax purposes, as outlined above) of the relevant land.
The Chief Commissioner may also provide an exemption from the surcharge if the Chief Commissioner is of the opinion that the acquirer is likely to become entitled to this refund (of the full amount of surcharge purchaser duty).
As with the Land Tax amendments, an application for a refund must be made within 12 months of the landholder becoming entitled to the refund and within 10 years of the relevant transfer of land.
Where to from here?
The new package is welcome news, as the NSW economy recovers from the impact of COVID-19, with growth in the BTR market hoped to provide a boost in residential construction.
Other state governments are also taking steps to assist the BTR sector. For example:
- Queensland has a BTR Pilot Project.
- Victoria’s guidelines regarding its discretionary exemptions from ‘foreign purchaser’ surcharge duty and ‘absentee owner’ land tax surcharge were amended to specifically refer to BTR developments.
It will be interesting to see whether these are the first tentative steps in gradually bringing Australia into line with the BTR market overseas.
If you would like to learn more about the new BTR measures, contact us.
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