Chapter 2Views on the bills
2.1This chapter summarises stakeholder views on the provisions of the Treasury Laws Amendment (Build to Rent) Bill 2024 (the BTR bill) and the Capital Works (Build to Rent Misuse Tax) Bill 2024 (imposition bill). It is informed by the bills’ explanatory materials, submissions received by the inquiry, evidence provided at the public hearing on 7 August 2024 and additional material submitted to the committee.
2.2The chapter concludes with the committee’s views and recommendations.
General views on build to rent concessions
2.3Build to Rent (BTR) is very common in Europe and the United States but is a nascent sector in Australia, currently supplying less than one per cent of housing stock nationally.Treasury advised that at the time of announcing the measures there were only 11 existing BTR projects and around 20 projects under active consideration.
2.4Inquiry participants were broadly supportive of reforms to encourage greater investment in BTR developments in Australia, particularly considering housing supply shortages.
2.5For example, HOME commended the intention to stimulate institutional investment in BTR with MIT withholding tax changes.
2.6Mr Tim Reardon, Chief Economist, Housing Industry Association (HIA) noted that, notwithstanding the positive outcomes of home ownership, there is clear scope for increasing BTR within Australia. He did not consider increased volumes of BTR would be likely to cause a fundamental change in housing dynamics.
2.7The Australian Housing and Urban Research Institute (AHURI) suggested that BTR projects can lead to faster development as developers and financiers build multi-unit buildings and retain them to rent, rather than more common developments requiring the sale of a majority of units ‘off the plan’ to finance construction.
2.8Evidence suggested BTR could benefit from incentivisation in Australia in order to contribute more significantly to the housing supply mix.
2.9Mirvac submitted that the BTR sector has stalled over the last 12 months with limited additional capital entering the sector. It noted that investors are seeking certainty and equity in investment settings and therefore awaiting the implementation of the changes anticipated in the BTR bill.
2.10Mr Reardon emphasised that the size of the current BTR market indicates unnecessary barriers exist to this particular form of investment. He argued that Australia’s acute housing shortage had primarily been caused by a structural increase in taxes over a course of decades that has restricted supply. As such, Mr Reardon was supportive of tax concessions for BTR developments. MrReardon advised:
Broadly, there appears to be a shortage of institutional investors building build-to-rent projects in Australia relative to other markets and therefore, consistent with the infant-industries argument, there would appear to be a role for government to create an incentive to establish a build-to-rent market in Australia. Of course, that incentive shouldn't go above and beyond other forms of investment.
2.11In contrast, Dr Cameron Murray argued against giving tax concessions to investors that are already investing in BTR. Dr Murray contended that Australian housing already attracted a large amount of investment and there was no lack of money looking to invest in Australian housing. He explained:
…the build-to-rent sector is already growing without these tax advantages. We've seen build-to-rent projects that already exist and won't change the supply of homes want to get these tax advantages because, clearly, the tax benefit, in terms of its financial value, is much, much higher than the reduction in rent required by the inclusion of affordable housing.
Attracting greater foreign investment in BTR developments
2.12Several inquiry participants welcomed the proposed BTR tax changes as a way of attracting greater overseas institutional investment in the sector.
2.13Local Residential submitted that reducing the MIT withholding tax rate on BTR investments from 30percent to 15percent would bring the tax treatment of BTR developments into line with the MIT withholding tax rate on other property assets, such as office, retail, industrial and student accommodation. This would, Local Residential argued, remove an existing barrier to overseas institutional investment in BTR developments.
2.14Treasury explained that foreign investors in Australia’s BTR market could provide both additional capital and valuable expertise to support the growth of the sector. Treasury representatives explained:
Over time, as you have a more established sector, perhaps bringing in those experienced players, the uncertainty goes down because you've got examples there that you can use to inform your modelling and there's more experience in the sector. That takes some of the risk and uncertainty away. You will then get more domestic players being able to partner with those international players and gain that experience and be ready to, if you like, snowball the sector into growing because you've brought in that experience.
Benefits to residents
2.15The committee also received evidence that BTR developments should be further encouraged because they offer a range of benefits to tenants that may be superior to the private rental market.
2.16The Property Council, for example, asserted that BTR could be a superior pathway for tenants to save for a deposit, given the stability of longer tenure. Mr Mike Zorbas, Chief Executive of the Property Council, further advised:
There is longer tenure by virtue of the fact that the incentives of that patient capital are to keep as many people for as long as possible, so there's much greater personalisation in the individual units and far greater communal support. It's professionally managed and obviously well located, because these sorts of projects are best found near public transport, and that's certainly been the experience in the Northern Hemisphere.
BTR concession concerns
2.17Some inquiry participants raised concerns about the overall aims of the BTR bill and the BTR bill’s ability to relieve housing pressure.
2.18Strata Community Association Queensland (SCAQ) questioned the social impact of prioritising and emphasising rental stock as a method of occupation rather than encouraging as many Australians as possible to own their own home.SCAQ further expressed scepticism as to the efficacy of BTR in relieving the long-term pressures on the Australian housing market, with institutional investors having obligations to their shareholders to maximise returns.
2.19Dr Megan Nethercote of RMIT questioned whether BTR with affordable housing eligibility criteria is the best mechanism to achieve affordable housing, if foregone revenue is considered a pool of money that can be invested in any affordable housing mechanism. She stated:
We know that giving money, granting money or lending money to registered agencies or housing providers for Australia is a very effective way of creating affordable housing that can be targeted at those who need it most. That's not to say there's not a role for affordable housing or build-to-rent; it just means we have to be very careful about where we direct our investment.
2.20HIA urged caution around including conditions on BTR developments, such as affordable components or inclusionary zoning, as they add to building costs. HIA argued that the additional burden may reduce the incentive to invest in housing and consequently reduce supply overall. Mr Reardon noted additional public housing is necessary, however ‘public housing is a public good and should be paid for by the public,’ rather than have the cost transferred onto BTR investors. He stated:
If what you're trying to do is build public housing stock or subsidised housing stock, the government should do that. The reason we have a lack of more affordable housing is we have a lack of housing overall.
2.21Per Capita Centre for Equitable Housing (CEH) considered that, despite BTR tax concessions supporting development of a more secure model of private rental, broader reforms are required to increase housing affordability and security across Australia. The CEH noted:
…the important role played by social housing in providing secure and affordable housing for low and very-low-income earners. Government retreat from social housing provision has left many Australians with no housing options outside the private rental market. The CEH reiterates the need for sustained increases in social housing investment to meet the ever-growing social housing shortfalls across the country.
Specific matters raised by stakeholders
2.22Although most stakeholders expressed broad support for incentivising investment in the BTR sector in Australia, many submitters and witnesses at the public hearing advocated for revisions to ensure the BTR bill better meets stated objectives.
Eligibility criteria
2.23Much of the evidence received by the committee focused on the eligibility criteria for BTR developers seeking access to one or both concessions in the BTR bill.
Construction commencement
2.24A range of stakeholders strongly supported an extension of the reduced MIT withholding tax rate to include BTR assets that are already operational or were under construction prior to the 9 May 2023 date set in the eligibility criteria.
2.25Ashurst, for example, highlighted some impacts of excluding existing BTR developments from the concessions:
…because of the way in which the bill limits the application to only subsequent assets, we're losing the opportunity to get affordable dwellings out of pre-existing assets and to ensure that minimum lease terms of three years are offered, and that is likely to have quite a substantial impact.
2.26The Community Housing Industry Association (CHIA) and the Property Council noted around 1200 affordable homes allocated to people on low and moderate incomes (10 per cent of BTR projects already in development) could come onboard in the next year if the concessions were extended to existing BTR developments. Ms Frankie Muskovic, National Policy Director, Property Council explained that modelling by EY for the Property Council indicated extending the concessional rates to pre-existing assets in development would only result in a marginal loss of tax revenue or around 8.6 per cent, which she stressed was worthwhile for the benefit of 1200 affordable homes.
2.27Mr Zorbas noted the need to unlock additional affordable rental housing as soon as possible, particularly given up to 6750 properties will cease to be affordable as the NRAS comes to an end this year.
2.28The Property Council further argued that the measures wrongly penalise early investors in the BTR sector, leaving them at a tax disadvantage compared to newer BTR assets.
2.29Mirvac similarly supported access to the 15 per cent MIT withholding rate for existing BTR assets to boost market confidence and attract additional capital investment.
2.30In contrast, Dr Murray argued that it seems ‘a bit of sovereign risk to change the tax settings on existing projects’, noting that existing projects are clearly keen to access the tax advantages.
2.31The Explanatory Memorandum noted that extending the concessions would come at a cost to the government in the form of foregone tax revenue over the life of the BTR projects and provide a gain to projects already considered commercially viable. Therefore, the supply of housing or affordable housing would not increase relative to the status quo.
Eligible building types
2.32Several submissions raised concerns with the BTR bill’s apparent limitations on eligible BTR building types.
2.33Home Tasmania outlined potential difficulties that BTR developments in Tasmania might have meeting the concession criteria, given the BTR bill limits the concessions to developments that are a single building containing 50 or more dwellings or ‘more than one building on the same or adjacent land’. (The example provided in the Explanatory Memorandum is of two towers on one plot of land.)
2.34Homes Tasmania noted that, given residential density in Tasmania, single residential apartment developments of this size are rare in the state. Homes Tasmania therefore advocated for BTR development to be permitted where developments consist of 50 or more unattached dwellings across multiple sites, even in different Local Government Areas or locations.
2.35Similarly, Ashurst called for the BTR bill to be amended to support a diversification of housing types under BTR, such as horizontal BTR projects where a new suburb or part thereof is owned and developed for rent by institutional investors.They argued that horizontal BTR could open up opportunities for housing other than apartments.
15-year retention period
2.36Several stakeholders commented on the BTR development eligibility criteria for a 15-year retention period under a single entity.
2.37While acknowledging the intent behind the 15-year retention period (extended from 10 years in the exposure draft), the Association of Superannuation Funds of Australia (ASFA) argued the compliance period should be reduced to 10years. ASFA explained:
A longer retention period imposes additional risks and reduced flexibility in fund management, potentially making BTR less appealing compared to other investment opportunities.
Adoption of the original at least 10 year proposal would increase available capital and encourage recycling of capital so that new stock is created and made available in the housing market. CAPEX [capital expenditure] requirements after 10 years begin to diminish project returns making the asset less attractive.
2.38In contrast, Grounded called for the compliance period to be extended to 20years or longer, noting a shorter compliance period would incentivise land banking as a driver of investment returns. Mr Fitzgerald further highlighted that the BTR bill does not offer enough incentive to maintain affordable rents after the 15-year period and could result in a similar loss of affordable housing, as is being seen with properties exiting the National Rental Affordability Scheme (NRAS). He explained:
We've seen in New York a lot of private capital zeroing in on these sorts of investment opportunities in the last 10 years to really turn these into penthouse developments, so I think the 15 years should be expanded to 25, if not 40, years. Getting 44 per cent depreciation is a serious subsidy, and we need a longer window.
2.39Mr Steve Whittington, Partner at Ashurt considered that the ability to access the reduced MIT withholding tax rate beyond the 15-year minimum if the development continues to meet the eligibility criteria provided some incentive to maintain the affordable housing provision.
2.40The Explanatory Memorandum advises that the 15-year period was selected to balance the need for BTR developments to provide additional rental housing over the medium term and the need for institutional investors to maintain some liquidity in their capital investment. The Explanatory Memorandum also states 15-years is consistent with some state and territory concessions.
2.41Additionally, evidence to the committee detailed concerns that the 15-year holding period appears to preclude tenants in common ownership arrangements, despite the fact that these arrangements are not in conflict with the policy intent of the bills.
2.42The Property Council argued that tenants in common ownership need to be accommodated as it is an important structure frequently used when different types of investors partner with each other. They suggested the BTR bill should include provisions which allow for unified ownership structures as per the NSW and Victorian approaches.
Affordable dwellings
2.43The majority of stakeholders supported the BTR bill’s eligibility criteria requiring a portion of the dwellings to be available as affordable tenancies.
2.44CHIA, for example, underscored the need for more affordable housing, highlighting the imminent decline of affordable rental properties with over 6,000 properties from the NRAS exiting the scheme in the next year, either through reverting to market rent or being sold off.
2.45However, a number of stakeholders called for adjustments to the BTR bill to ensure the affordable housing offering is appropriately targeted and managed, including to ensure tenancies in BTR are accessible to lower income households.
Defining affordable
2.46Many stakeholders noted that there is no national definition of ‘affordable housing,’ giving rise to inconsistency between jurisdictions.
2.47Treasury representatives advised that the affordability threshold in the BTR bill was set at just under 75 per cent of market rent in order to achieve some consistency for investors and similarity across common schemes and other concessions.
2.48The CEH submitted that even when discounted to 74.9 per cent of median rent, those rents were close to or above 30 per cent of the median weekly earnings for several capital cities. Rents at this level were therefore likely to remain unaffordable for low and very-low income earners.
2.49This sentiment was echoed by Dr Nethercote, who emphasised that affordability needs to be affordable for those households in the lower two quintiles of income distribution.
2.50To address these concerns, some stakeholders recommended that an income test be included in the BTR bill to ensure the housing provided was affordable to lower income households.
2.51CHIA, for example, argued that the BTR bill should be amended so rent payable under the lease for the dwelling is 74.9 per cent of market value or no more than 30 per cent of a household’s income, whichever is lower.
2.52With the same aim, Grounded proposed limiting affordable rents to 30 per cent of the median income for city BTR properties.
2.53Sub-section 43-153(3) of the BTR bill states that the Minister for Housing may determine by legislative instrument the eligibility criteria for the required affordable tenancies, including income requirements. UNSW noted this aims to ensure those with adequate means to access normal market rents are not provided affordable dwellings. Despite this provision, CHIA strongly recommended that a rationale or model for the setting of income limits be specified in the legislation.
2.54ASFA proposed that any instrument determining eligibility for the affordable BTR dwellings allow for key workers be captured in the target cohort.
2.55In addition to income tests, CHIA suggested 20 per cent of the required affordable BTR dwellings be specifically targeted to low income households to better target the provision of affordable housing in the BTR bill. CHIA noted this is only likely to be appealing to investors if the MIT withholding tax rate is lowered to 10 per cent (discussed later in this chapter).
2.56Submitters also emphasised the importance of government investment in social and public housing to provide options for very-low income earners.
2.57Given the BTR bill’s current affordability criteria may only provide housing accessible to moderate-income earners (as distinct from low-income earners), the CEH emphasised the important role of social housing. They stated:
Long-term, secure housing offered within social housing by housing providers without profit motives can meet the needs of low-income, insecurely housed and homeless individuals in a way privately- owned and operated housing cannot.
2.58Treasury advised it has not undertaken modelling of how many affordable tenancies may be available to low-income earners, noting the affordable offering may only be affordable for moderate income earners. The committee was advised that the BTR bill aimed to strike a balance between delivering some lower rental dwellings whilst still offering commercial viability to BTR developers. Treasury emphasised that if BTR developments were ‘not commercially viable they just won't be built’.
Baseline market rent and dwelling offerings
2.59Some stakeholders raised concerns about the method for calculating market rent, which in turn impacts upon the affordable dwelling rent-setting.
2.60To determine the market value, the Explanatory Memorandum states that ‘regard should be had to the rent payable for a comparable dwelling’ and outlines how to define a comparable dwelling, including the number of rooms, floor area, condition and facilities, inclusions, location and setting.Treasury described these criteria as ‘guardrails’ around how the discounted rent can be calculated.
2.61AHURI submitted that BTR developments have most commonly been offered as a ‘premium’ product with better amenity, security of tenure and other inducements, at higher rental prices and therefore a high benchmark.
2.62Similarly, Dr Nethercote of RMIT advised premium pricing for BTR products might also impede affordability:
It would be important to note that most build-to-rent operators openly concede that there will be a rental premium on their rental products of some 10 per cent to 20 per cent, which they justify on the basis of extra tenancy inclusions such as greater amenity and better service provision than a standard private rental. The build-to-rent model is also designed around securing increasing rents. So any attempt to secure more affordable housing should be cognisant of those practical realities of how build-to-rent is going to be delivered.
2.63ASFA recommended that the market rent for a comparable dwelling be measured by the rents charged for equivalent housing units within the same development that are subject to non-concessional rents.
2.64Submitters also expressed concerns about the methodology for establishing comparable dwellings.
2.65Dr Nethercote, for example, cautioned that the BTR bill requires 10 per cent of all dwellings, ‘not 10 per cent of an even cross section of dwellings’ to be provided as affordable dwellings.
2.66Despite the BTR bill’s provisions around comparable dwellings, Dr Murray noted ‘developers are very good at maximising on all the different design changes and margins that they have access to’. Dr Murray advised that this created risks around the likely size and quality of the affordable dwelling offerings.
2.67These concerns were not shared by all stakeholders. Ashurst, for example, highlighted that the current provisions ensure the affordable dwellings are not concentrated to the smallest dwellings in a BTR development or provided with a lower standard of inclusion.
Access to common areas and additional facilities
2.68The level of amenity in a BTR development available to tenants in the affordable dwellings was questioned by some stakeholders.
2.69RMIT researcher Ms Ani Landau-Ward emphasised poor provision of amenity was evident internationally. She also cautioned that ‘amenity provision in affordable BTR is unlikely to be better than any other affordable typology, and that in many overseas cases amenities are club goods’, with memberships incurring additional costs separate to rent.
2.70Ms Angela Buckley highlighted how Mirvac’s Olympic Park project offers a range of additional amenities such as a co-working facility, gym, kids playroom and communal dining areas free of charge to tenants but did acknowledge rents were higher than the median in that location.
2.71CHIA advised that renters of affordable tenancies should be able to opt out of service charges for amenities such as gyms or swimming pools, but the legislation should ensure they have access to common areas such as gardens.
2.72Ashurst similarly noted the Explanatory Memorandum should expressly state that payments for add-ons such as gyms, pool, furnishings, dry cleaning or other additional services are not included in rent.
Tenant change in circumstances
2.73Evidence suggested that, in the event an income threshold test is applied to affordable dwelling eligibility, security of tenure and supportive transition arrangements need to be available for tenants that move from a low to moderate income.
2.74The Australian Charities and Not-for-profits Commission (ACNC) called for BTR housing providers to be granted a safe harbour should a tenant’s income increase beyond any income eligibility threshold during their tenancy. They explained providers may be expected to move those tenants out, given the provider’s obligation to ensure the dwelling satisfies all eligibility criteria in order to receive the BTR tax concessions.
2.75Echoing these concerns, Ashurst proposed that ongoing eligibility should be determined on the tenant’s circumstances in the income year prior to signing the lease. They explain the BTR bill is unclear about potential consequences for both a tenant and the owner of the BTR asset where a tenant no longer satisfies the eligibility criteria because of a change in circumstances during their lease, such as a pay rise or marriage.
2.76The ACNC also highlighted charitable reasons why it might be judicious for such tenants to remain, including consideration that income increases may be temporary, stable housing can improve a tenants’ ability to obtain and retain employment, and other factors may mean tenants remain in distress or disadvantage and require relief through affordable housing.
Community Housing Organisations management
2.77Evidence received by the committee illustrated some support for affordable BTR tenancies to be managed in partnership with registered, not-for-profit community housing organisations (CHO).
2.78Dr Nethercote offered the following comments on the need for clearer management and reporting requirements:
…if there is to be an affordable housing feature in this bill, then there needs to be consideration of how that affordable housing is going to be safeguarded and governed, and audited as well, over that longer term window. Obviously, standard affordable housing is typically managed by registered housing providers, but it's less clear how this submarket of housing governance would work in terms of allocations, auditing and so forth, and whether that would be an additional burden for local councils.
2.79CHIA, National Shelter and Property Council called for a requirement in the BTR bill for affordable tenancies to be managed in partnership with CHOs. They highlighted that CHOs already own and/or manage over 130 000 social and affordable rental tenancies across Australia. CHOs, they suggested, are well placed to assist BTR as a regulated sector, with experience including relevant reporting to the ATO, reporting under the NRAS and maintaining affordable tenancy waiting lists.
2.80They proposed the CHO’s role should include determining the eligibility of prospective tenants and conducting compliance checks for reporting purposes. They did not propose the CHOs undertake management of the physical building or leases.
Management arrangements
2.81Another common theme in submissions was ensuring management arrangements for BTR developments include appropriate tenant protections for both affordable and market rental tenancies.
2.82Grounded, for example, emphasised that the legislation must ensure power imbalances between landlords and tenants are not magnified by BTR ownership and management arrangements. Grounded advocated for community land trusts as an alternative to deliver ‘perpetually affordable housing’.
2.83Ms Landau-Ward submitted that well-developed minimum standards and best practice frameworks already exist in other ‘living sector’ investment types such as student housing, co-living and retirement living, which similarly provide housing and housing services over time. She advised that there are opportunities to learn from management of these typologies.
Data use and reporting requirements
2.84Grounded highlighted that the legislation makes no mention of use and/or protection of tenant data, noting the prevalent use of ‘proptech’ by commercial operators.
2.85Ms Landau-Ward also raised concerns around legislative gaps relating to financial reporting of tenant data to investors. She noted there are legislative gaps:
…in the regulation of building management practices and systems which (particularly in the absence of [a] body corporate structure) are left up to individual investors, fund and building managers to design, with serious risks ranging from maintenance and security, to data breaches or discriminatory practices.
2.86In the same vein, Dr Nethercote noted the Residential Tenancies Act has very little to enable a tenant to put up a fight against a corporate landlord that has obtained their data throughout the course of the tenancy. She stated:
…corporate landlords in Australia have at their fingertips a wide range of data technologies which they have expressed every intention of using to help maximise the operational efficiencies of their build-to-rent developments. I think it opens up significant questions about tenant data, tenant data security and data protection. Whether there is enough protection for renters at the moment, I am highly doubtful. There is the Residential Tenancies Act; there is very little in that and beyond that that would allow them to put up a fight against a corporate landlord behemoth that has obtained a lot of their data throughout the course of their tenancy. There have been cases in the US about rent-setting monopolies and tenant data breaches. There is no reason to believe Australia will be immune to these under our current data protection settings.
2.87Grounded commented that the BTR bill could provide some protection against predatory corporate landlord behaviour by requiring BTR operators to report select data, such as vacancy rates, to government.
Tenant representation
2.88Ms Landau-Ward highlighted that regulatory gaps exist in relation to operational aspects of BTR, creating a new range of risks ‘compared to traditional Build to Sell, typologies, which are much more closely regulated within private property and strata law’.In particular, Ms Landau-Ward argued there remain regulatory gaps around matters such as collective tenant representation. She questioned what input tenants may have over common areas or building management practices given they are in a long term tenure within a BTR development. She further advised that Australia could learn from European social housing models and North American BTR projects.
Maintenance
2.89Some submissions raised concerns about building defects and ongoing maintenance under BTR management arrangements.
2.90SCAQ advised that defects in construction are commonplace, particularly multi-owned (strata or body corporate) multi-unit residential properties. They argued that defects in BTR developments could give rise to additional concerns, stating:
Whilst retention of the asset may theoretically encourage a proprietor to build to a higher standard, it is likely that after 15 years, when incentives to retain the property are ended, these properties will be sold off in freehold, often with significant maintenance issues which may only be “patched over” given the incentives placed upon these proprietors are to maximise yield.
2.91SCAQ went on to make the point that BTR developments create additional risk as there is not likely to be a sinking fund for maintenance when dwellings are eventually sold as strata properties after 15 years or beyond.
2.92Grounded raised similar concerns, calling for duty of care requirements, and noting the risk for repairs and maintenance to be increasingly neglected in the windup phase of the active BTR period.
2.93Treasury argued BTR developments could attract superior maintenance compared to private sector rentals. Treasury representatives explained:
Because you have one owner-operator for a large number of tenancies, you tend to get efficiencies in maintenance, and economies of scale in maintenance and refurbishments. That can mean, for instance, that they're better maintained and that they're more frequently refurbished compared with individual ones.
Rent increase caps and lease conditions
2.94Grounded submitted that there are no apparent provisions limiting rent increases or to prevent tenant evictions for the purposes of increasing rents. He highlighted that tenants in one of the first BTR developments in Victoria faced rent increases of between 9 and 17 per cent when nearing the end of their first year. Additionally, he warned ‘US proptech developers have been found to use algorithms to coordinate rent increases in oligopolistic fashion’.
2.95Grounded raised further concerns about dramatic rent increases being applied by short-term operators purchasing BTR properties in the last five years, or ‘wind down phase’, noting the poor experience for New York’s rent stabilised apartments.
2.96Dr Cameron Murray similarly highlighted that there are no mechanisms to limit above-market rent increases. He explained:
I think the long-term rental won't be a thing until there are much stricter controls and limits on the ability to increase rents and many more rights for the tenants to take ownership—more of a European-style thing—but that doesn't seem to be part of the mix in this conversation.
2.97Ms Landau-Ward also expressed concerns about BTR operators leveraging amalgamated tenant data to maximise rental increases across collective buildings, noting this was just one mechanism for revenue streams from BTR rentals and assets to be maximised.
2.98However, Mr Whittington, Ashurst, noted there are pre-existing protections for renters given all dwellings will be subject to residential tenancy acts in each of the states that limit the capacity to increase rents out-of-cycle.
Vacancy rates
2.99Similarly, stakeholders raised concerns about the potential risks of corporate BTR landlords manipulating property availability.
2.100For example, Mr Fitzgerald explained to the committee:
Because we have such poor measurements of vacancy rates, which only look at advertised vacancies and do not look at speculative vacancies held empty, this consolidation of market power as we are seeing in San Francisco, Atlanta, Spain and other places—many properties are held vacant and only released to the market at higher rents when tenants are desperate for property. That's the sort of future that this bill brings through without concern.
2.101Grounded proposed these risks could be reduced through a variety of means including limits to evictions and requiring BTR developers to ensure rental vacancies are no greater than three per cent. Grounded explained:
There should not be any reason BTR cannot maintain a 3% or lower vacancy rate for the majority of the financial year. It is imperative that this be addressed as the discounted land taxes will enable BTR operators to hold sites vacant until the resident is forced to pay the asking rent. Trickle down housing supply is not possible when market power is accentuated and reinforced by proptech and its associated algorithms.
2.102Lastly, Grounded proposed the government introduce a requirement for a maximum vacancy rate of 60 days and called for compulsory reporting to government on vacancy rate data.
No-cause evictions and longer lease offerings
2.103Whilst the BTR bill’s eligibility criteria require three-year lease terms to be offered, some stakeholders argued for the BTR bill to stipulate five-year lease terms, and a prohibition on no-cause evictions for BTR operators accessing these concessions, in order to better support long-term security of tenure.
2.104Ms Emma Greenhalgh, Chief Executive Officer of National Shelter, for example, explained that these changes would provide much more stability to BTR tenants, reducing housing insecurity and the uncertainty renters currently face with frequent moves or lease renewals and the associated costs.
2.105Grounded submitted that evictions should be limited to five per cent of tenants in a BTR development, with strict thresholds such as a record of rent in arrears with multiple mediation attempts with an independent arbitrator.
2.106Dr Liam Davies of RMIT called for regulations to be able to set criteria around tenant experience and tenant conditions such as tenure terms and protections. Dr Davies stressed:
If we're expending public money on a build-to-rent sector, we should be demanding better and clearer affordability outcomes and better outcomes for tenants with regard to security of tenure and longevity of tenure.
MIT withholding tax rate
2.107As discussed in Chapter 1, the BTR bill reduces the final withholding tax rate on eligible fund payments (distributions of rental income and capital gains) from eligible MIT investments from 30 per cent to 15 per cent with application from 1 July 2024.
2.108Various stakeholders strongly advocated for the MIT withholding tax rate to be lowered to 10 per cent for BTR projects to attract investment at levels that will achieve the desired increase to housing supply and to offset the costs of the affordable housing criteria.
2.109The Property Council, for example, argued that the 15 per cent rate does not provide a tax setting that will promote investment given the 10 per cent affordable tenancy requirement creates additional costs and complexities.
2.110Mr Whittington, Ashurst, reflected on the Property Council’s argument for the MIT to be reduced to 10 per cent, stating:
…it would make sense to provide a further incentive for build-to-rent affordable housing within build-to-rent assets to a lower rate of 10 per cent. That would be comparable to other similar regimes that apply to tax—other types of real estate assets that are seen to be advantageous for social or environmental reasons. For example, energy efficient buildings are sometimes taxed at a 10 per cent withholding rate. So there is an existing basis within the law to apply a lower withholding rate where certain social or environmental aims are seen as being achieved.
2.111Additionally, Ms Wendy Hayhurst, Chief Executive Officer of CHIA, explained that modelling by EY demonstrated an MIT withholding rate of 10 per cent was necessary to deliver genuinely affordable housing in BTR developments, when combined with other amendments, including an income test.
2.112Similarly, the Urban Development Institute of Australia (UDIA) stated the BTR withholding rate needs to be 10 per cent to allow for affordable housing to low and moderate income households without subsidy.
2.113HOME advised the cost of delivering the affordable dwellings needs to be offset by the lower concessional rate to incentivise these developments, similar to Clean Building MIT regulation. HOME further advised the current proposal will not stimulate the quantum of institutional investment to meet rental housing supply needs.
2.114Treasury advised that the 15 per cent withholding tax concession rate reflects a desire to level the playing field across investment types, particularly against commercial property, whilst maintaining the commercial viability of BTR projects in order to attract foreign investors, and with consideration to the sustainability of the tax system. It also advised that stakeholder feedback to Treasury indicated that, with the changes following the exposure draft consultation, the BTR bill offers a commercially viable environment.
2.115The Property Council advised the 15 per cent tax rate for investment in housing is already available to Australian investors. The MIT withholding tax rate applies to withholding tax that goes back to overseas investors, but foreign investors can also capital partner with Australian investors.
Review mechanisms and other limitations
2.116Several stakeholders called for a review mechanism or sunset clause to be included in the legislation.
2.117Some submissions, including the University of NSW (UNSW), argued an independent review of the BTR withholding tax framework should be required within three or five years of enactment to inform decisions on its continuation and ensure it is functioning as intended
2.118Dr Davies advocated for conditionality on the concessions as it will not be clear for a long time what the consequences of these concessions will bring about. He recommended a limit on how many tax concessions are issued each year, through regulation. He stated this would offer ‘a way to safeguard this running away’ and an opportunity to pause the concessions if they were not offering good value for money. Dr Davies explained:
If we were talking about introducing tax concessions like negative gearing or capital gains tax discounts today, I think we would expect some level of reciprocity. But we didn't do that. What we did was we opened them up as concessions, and now a new market has adapted to deal with that. It's only now that we can look back in hindsight and see what the costs of that have been.
Capital works deduction rate
2.119The bill also increases the capital works deduction rate from 2.5 per cent to 4percent per year for eligible new BTR developments. Unlike the reduced BTR final withholding tax rate measures, this measure is also available to domestic investors.
2.120UNSW explained that this measure allows expenses to be depreciated for tax over a 25-year span, rather than the standard 40 years. They noted that ‘in increasing the capital works deduction rate, the proposals bring BTR into line with the established framework for serviced apartments in this respect’.
2.121ASFA commented that this measure only leads to a very marginal change in investment returns for domestic investors. It indicated:
While ASFA is not opposed to this measure, we note the compliance requirements of this measure could continue to be a deterrent for institutional investors as discussed below. Changes to the provisions in the Bills increasing the scope of the tax concession for domestic institutional investors would lead to greater investment in BTR.
2.122ASFA indicated that the BTR bill will have a primary impact on overseas based investors with a small impact on local investors. They also noted that local investors already have other incentives to invest in housing. ASFA noted:
The main benefits seen for domestic investors are a demonstration effect and the build up of a stock of institutionally owned residential property in Australia.
BTR misuse tax
2.123Stakeholders raised concerns about the operation of the misuse tax, citing potential unintended consequences and penalties and clawbacks for inadvertent mistakes.
2.124The UDIA, for example, highlighted concerns with the proposed measures as they facilitate a ‘very serious claw back that ends the project for a mistake in any of the housing eligibility criteria’ even where the potential errors may not be in control of the investor, trustee or project manager. The UDIA went on to make the point that:
…the choice of outcome in this situation sits with the Commissioner with a multi-year penalty outcome if he chooses not to exercise the discretion. It is not viable to have such a significant outcome hang on a discretion exercisable by the Revenue.
2.125Ashurst similarly advised that the misuse tax is effectively a penalty, suggesting that investors may end up paying tax despite being in an overall tax loss position. Ashurst explained:
Where accelerated depreciation has been claimed and there is a subsequent failure of the relevant requirements, the misuse tax will apply and be payable, even if the taxpayer would be in a tax loss position in the absence of the overclaimed depreciation deductions. Accordingly, tax may be payable (at a rate that includes an interest component), notwithstanding there would have been no tax payable if capital works deductions were claimed at a 2.5% rate. This makes little sense. We would recommend that the accelerated depreciation deductions should be reversed by including an amount in assessable income equal to that amount.
2.126The Property Council called for the misuse tax to be replaced with an annual compliance declaration, noting some of the rationale for the tax reflected a misunderstanding of the BTR sector as it was to provide a strong deterrent to owners not to break up units within a building for sale. It argued that compliance with affordable tenancy requirements may also be better enforced by establishing partnerships with CHOs as discussed earlier.
2.127The UDIA proposed that the misuse tax be aligned with the established MIT penalty regime to align all integrity measures and remove unnecessary commercial risk. It stated penalties should only apply in respect of a year in which the conditions are not satisfied. The UDIA also called for sensible limitations where a trustee has sought to meet the required conditions.
Sub trust structure concerns
2.128Evidence received by the committee highlighted that the BTR bill currently prevents multi-tiered trust structures from accessing the MIT withholding concession and called for the relevant provisions to be removed.
2.129Ashurst, for example, explained that:
…it is common for real estate investment structures to comprise of a number of trusts, which would commonly include (at least) a Head Trust and an Asset Trust (typically, multiple Asset Trusts). The Asset Trust holds the title to the land, while the Head Trust holds the units in the Asset Trust. It is also not uncommon for structures to contain a Head Trust, Mid Trust, and Asset Trust. The principal reason for this is that it assists in obtaining third party finance at different levels (e.g., asset-specific debt at the Asset Trust level or portfolio- level debt at the Mid Trust level), without investors being required to provide security (as typically security would be granted over the equity in the borrower, which is below the top level of the fund structure, being the Head Trust).
2.130The Property Council and Public Sector Pension Investment Board (PSP) advised that the relevant provisions were inserted into the BTR bill after the exposure draft consultation, with no opportunity for stakeholder feedback. The Property Council explained the impact of this change on existing BTR funds which operate head trust/sub trust structures:
In relation to a MIT that receives a distribution from another trust that owns the BTR asset, the concessional rate is only available in limited circumstances and will severely restrict the number of entities who can access the concessional rate. This will adversely impact most if not all existing BTR funds (who operate with head trust/sub trust structures).
2.131The Property Council argued that, whilst the provision was intended to allow for easier administration of the misuse tax, it creates secondary issues in practically preventing BTR funds from operating with sub trusts.
2.132PSP explained the requirement for each trust to have the same trustee ‘was included in the BTR bill to allow the Commissioner to issue assessments to one trustee (rather than to multiple trustees).’ PSP submitted two detailed alternative approaches to support the administration of the concession without impacting the ability for the concessions to operate in practice.
2.133Treasury also observed that the use of a series of sub trusts is a common business model and noted concerns from stakeholders that the BTR bill doesn’t fit well with current business models. Treasury representatives advised they are ‘working with stakeholders to better understand how these businesses are structured in practice and how we can work through this in terms of making sure that the misuse tax is effective in incentivising the right behaviour.’ Treasury further advised that it did not currently propose any amendments to the BTR bill on this matter.
Capital gains and rental income treatment
2.134Following exposure draft consultation, the BTR bill was adjusted to ensure the 15 per cent MIT withholding tax rate extended to fund payments that include capital gains attributable to a BTR development, not limited to rental income.
2.135Whilst the Property Council noted this was a significant improvement, they indicated that the way the BTR bill provides for this does not result in comparable tax treatment with other commercial real estate asset classes in respect of the withholding tax rate.
2.136Ashurst echoed these concerns, noting there is no general feature in the MIT regime where incidental service income is treated in a different manner to rental income. Ashurst explained:
…the Bills exclude any other form of taxable income from being eligible for the MIT withholding tax concession, other than rental income and capital gains referable to the active build to rent development. This fails to capture other forms of income that may typically be derived through BTR assets, such as certain incidental service income.
2.137Both the Property Council and Ashurst called for the BTR bill to be adjusted to remove limitations on the income on which the concessional MIT withholding tax rate can be obtained.
2.138Ashurst noted that existing integrity measures, including ‘that the MIT is not a trading trust and the safe harbours in section 102MB and 102MC of the ITAA 1936’ should provide the government with sufficient comfort that the concession would not be misused to re-characterise trading income as passive income.
Committee view
2.139The committee notes there is broad support for encouraging growth in the BTR sector, particularly as a contribution to increasing rental housing supply nationally. The committee also welcomes the government’s commitment to affordable rental housing options.
2.140The committee notes views that BTR developments are a positive contribution to Australia’s housing mix, and that as a nascent sector in Australia BTR requires incentivisation if it is to grow.
2.141The committee welcomes that increased foreign investment into the BTR sector will add to overall housing stock and reduces risks and uncertainty for domestic investors as the sector grows to be more established and experienced.
2.142The committee is of the view that the 15 per cent MIT withholding tax rate, representing a 50 per cent concession on the existing rate, is an attractive and suitable measure to increase investment in BTR developments in Australia.
2.143Importantly, the proposed changes bring BTR development concessions in line with other investments, such as commercial offices, shopping centres, and affordable housing which have a withholding tax rate of 15 per cent, making BTR housing an equally attractive investment option.
2.144The committee also recognises this bill will provide incentives to domestic investors by increasing the capital work deductions rate from 2.5 to 4 per cent per year for eligible new BTR developments, reducing the depreciation period from 40 years to 25 years.
2.145The committee also welcomes the government’s commitment to affordable rental housing options in this bill which will complement the $32 billion investment in new housing supply over the next decade from the federal government.
2.146The inclusion of affordable housing criteria will help tenants aspiring to home ownership to save and get over the deposit hurdle, with longer leases and capped rents offering greater stability to tenants and investors alike.
2.147The committee notes views from inquiry participants about access to the affordable housing in BTR developments and observes that the BTR incentives are an important measure to expand well-located housing supply for essential workers, as part of the government’s $32 billion pipeline of private, social and affordable homes.
2.148The committee acknowledges that there is a broad range of supports available across the low-income threshold including through the Housing Australia Future Fund (HAFF), increases to the Affordable Housing Bond Aggregator, Social Housing Accelerator payments and the National Housing Accord.
2.149The committee is pleased that the Treasury is continuing to work with stakeholders who structure their businesses using sub-trusts to clarify the application of the BTR incentives.
2.150The committee recommends that the bills be passed.
Senator Jess Walsh
Chair
Labor Senator for Victoria