On 29 July 2020, the NSW Government introduced the State Revenue Legislation Amendment (COVID-19) Housing Response Bill 2020, and within it a reduction of 50% on land tax valuations of new build-to-rent development projects where construction commenced on or after 1 July 2020. This concession will result in up to a 50% land tax discount and will be available for eligible land until the 2040 tax year (that is, land owned at midnight on 31 December 2039). The Bill also provides for exemptions and refunds of surcharge purchaser duty and surcharge land tax for land with build-to-rent properties, a relevant consideration for foreign owners.
Current tax landscape
Land tax in NSW is calculated on the total value of taxable land owned by an entity above the land tax threshold at the general rate of 1.6% and the premium rate of 2%. For the 2020 tax year, the general threshold is $734,000 and the premium threshold is $4,488,000. Certain Australian-based developers who are also “foreign persons” for land tax purposes may also be liable to surcharge land tax of 2% in addition to any land tax payable in respect of residential land.
Likewise, Australian-based developers who are "foreign persons" for duty purposes may be liable to surcharge purchaser duty of 8% in addition to any transfer duty payable on the acquisition of residential land.
In 2018, the NSW Government brought in legislative provisions which effectively gave concessions from surcharge purchaser duty and surcharge land tax in NSW to Australian-based developers who were “foreign persons” constructing new homes or subdividing land for the purpose of constructing new homes to sell to an unrelated third party.
On this basis, it would presently be more tax efficient for a property developer to build and sell individual units to third party purchasers, rather than engage in build-to-rent developments, in order to take advantage of the generous tax-free thresholds and concessions available for build-to-sell developments.
By implementing the proposed changes outlined in this Bill, the NSW Government will be removing tax barriers to build-to-rent developments with the aim to making professionally managed, large-scale rental developments more profitable, while providing more housing options and security for tenants in the future.
Land tax discount
Broadly, in order to be eligible for the land tax discount, the development project must satisfy the following requirements:
- there must be a building situated on the land;
- construction of the building must have commenced on or after 1 July 2020;
- the Chief Commissioner must be satisfied that the building is being used and occupied for a build-to rent property in accordance with the Treasurer’s guidelines; and
- an application for the land tax discount must be submitted to the Chief Commissioner.
The Treasurer’s guidelines for build-to-rent projects have not yet been issued, however based on the Ministerial Media Release published on 29 July 2020, a build-to-rent property should include the following features:
- comprise at least 50 units in metropolitan areas (with a different threshold for regional areas to be considered);
- provide purpose-built rental units;
- be managed under unified ownership; and
- include options for longer leases.
We expect the Treasurer’s guidelines will be circulated in full in the coming weeks.
Additional concessions for build-to-rent developers who are "foreign persons"
Under the Bill, the land tax discount will also be accompanied by concessions from surcharge land tax for build-to-rent properties owned by Australian companies who are “foreign persons” from 31 December 2020 until 31 December 2039, and changes to the Duties Act to accommodate corresponding exemptions and refunds for surcharge purchaser duty for the transfer of certain build-to-rent properties to Australian companies who are “foreign persons”.
These new provisions operate in a similar manner to the provisions introduced in 2018 for build-to-sell developments, and provide a refund of any surcharge land tax paid or surcharge purchaser duty to Australian corporations (including corporations acting as trustees) that are “foreign persons” where:
- the corporation:
- in the case of surcharge land tax – owns land on which there is residential-related property as of midnight on 31 December 2020, or
- in the case of surcharge purchaser duty – enters into a transfer of residential-related property on or after 1 July 2020 (other than a transfer made in conformity with an agreement for sale or transfer entered into before 1 July 2020);
- the residential-related property was constructed in accordance with the eligibility requirements for the land tax discount set out above; and
- the corporation was entitled to the land tax discount.
If cash flow is a consideration or if a developer would expect to be regularly impacted by these surcharge provisions, applying for an exemption may be a more appropriate alternative to paying the surcharge amount upfront and then claiming a refund at a later date.
The Chief Commissioner may approve a person as an exempt person from paying surcharge amounts for a particular parcel of land (in the case of surcharge land tax), or particular transfer (in the case of the surcharge purchaser duty) if the Chief Commissioner is of the opinion that the person is likely to become entitled to a refund of surcharge land tax or surcharge purchaser duty. If the exemption is approved then it will also apply for future land tax years and future transfers of land.
There are, as always, some limitations that should be noted. The first, is that the exemption from surcharge land tax or surcharge purchaser can be conditional or revoked, and revocation may be backdated. However, more importantly, if within 15 years of any of the aforementioned concessions being granted, the land concerned is subdivided or the ownership of the land is otherwise divided, the concession will be revoked and the relevant liability must be re-assessed as if the concession did not apply from the date of the subdivision or division. On this basis, parties to build-to-rent projects should ensure that land tax and transfer duty implications are carefully considered.
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, as well as refunds of or exemptions from foreign investor surcharges from the 2020 tax year going forward.