New concessions and constraints for build-to-rent developments

On 12 October 2021, the Victorian Government introduced the Windfall Gains Tax and State Taxation and Other Acts Further Amendment Bill 2021.  Amongst other new amendments, the Bill amends the Land Tax Act 2005 (Vic) to provide an exemption from the absentee owner surcharge and a reduction of 50% on the taxable value of land used for an eligible build-to-rent development. These benefits are for a limited duration of 30 years from the date that the benefits first apply to the land, and subject to compliance with a 15-year eligibility requirement. If the eligibility requirement is not complied with, a built-to-rent special land tax will be imposed on the land.

Current tax landscape

Land tax in Victoria is calculated on the total value of taxable land owned by an entity above the land tax threshold. For the 2021 land tax year, the threshold is $250,000.

In 2018, as part of the Victorian Government's initiatives to support the build-to-rent sector, the Treasurer issued guidelines in respect of how build-to-rent developments could qualify for exemptions from the absentee owner surcharge and the foreign purchaser additional duty. However, that exemption in respect of the absentee owner surcharge would cease to apply once the build-to-rent development was completed on the basis that the land owner would then be a passive investor or landlord.

The proposed changes outlined in this Bill demonstrate the Victorian Government's continued targeted support for the residential construction sector by removing further tax barriers to build-to-rent developers and providing further clarity in respect of the requirements for a build-to-rent development. This Bill follows the introduction of similar legislation adopted in New South Wales in July 2020. 

The duty position remains unaffected.

Build-to-rent benefits

Broadly, in order to be eligible for the 50% reduction to taxable value of land and the exemption from the absentee owner surcharge, the development project must provide at least 50 self-contained dwellings that are:

• fixed on the same parcel of land;
• owned by one owner or owned collectively;
• managed by a single management entity (unless the dwellings are used to provide affordable housing or social housing);
• suitable for occupancy on a date that is on or after 1 January 2021 and before 1 January 2032; and
• rented, or available for rent, under a residential rental agreement for a fixed term of not less than 3 years, or for any other period as agreed between the owner of the dwelling and the renter, subject only to such restrictions required to ensure public health and safety or to provide social or affordable housing.

The development project must satisfy these requirements for a continuous period of at least 15 years from the occupancy date of the development project to be eligible for the build-to-rent benefits. If the development project land is subdivided prior to the expiry of the 15-year eligibility requirement, the child lots created by the subdivision must meet the remaining 15-year eligibility period. Notwithstanding this, the Commissioner may apply these build-to-rent benefits to land in anticipation of compliance with this 15-year eligibility requirement. To obtain these build-to-rent benefits an application must be made with the Commissioner.

We note that land or part of land can only receive the build-to-rent benefits for one continuous period and for no more than 30 years.  Consequently, where eligibility has ceased, the land or part of the land will not be eligible for the build-to-rent benefits in future years.

Build-to-rent special land tax

If a build-to-rent benefit has been applied to land in anticipation of compliance with the 15-year eligibility requirement but the development project ceases to comply with the 15-year eligibility requirement during that period, a build-to-rent special land tax will be imposed.  This special land tax arises at the time that the land or part of the land ceases to comply with the eligibility requirement, and the owner of the land at this time is liable to pay the special land tax.  Previous owners who do not own the land at this time but may have benefited from the build-to-rent benefits are not liable for the special land tax.

If the development project land is subdivided and a subdivided lot is sold prior to the expiry of the 15-year eligibility requirement, the special land tax will apply in respect of the subdivided lot.

Essentially this build-to-rent special land tax operates to claw back the build-to-rent benefits. However, the rate of the build-to-rent special land tax is 1.275%, or 3.275% for absentee owners, and interest is also applied. 

The onus is on the owner of the land to give written notice to the Commissioner of Taxation within 30 days if there has been a change in circumstances resulting in the land no longer being eligible for the build-to-rent benefits. Failure to notify the Commissioner may result in penalty tax and interest being imposed under the Taxation Administration Act 1997 (Vic).

Next steps

In light of these proposed changes, if you are constructing or planning a build-to-rent development, you may be eligible for a reduction in land value for land tax purposes and an exemption for absentee owner surcharges from the 2022 land tax year going forward.

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