In 2024, land acquisition in Victoria faces the impact of some notable tax changes which demand closer scrutiny from both vendors and purchasers. Navigating these tax intricacies will undoubtedly shape the success of your acquisitions and sales.
Our specialist Tax & Structuring team possesses expert skills in state taxes and structuring property purchases, providing invaluable guidance through this process. Complementing their expertise, our Commercial Property & Development team adeptly drafts sale documents, incorporating these pivotal changes to minimise risks of triggering unexpected duties and taxes.
The key changes to understand are:
Corporate reconstruction concession expansion
The transfer of dutiable property (such as land) from one entity to another generally triggers duty. The corporate reconstruction concession (CRC) applies to reduce duty to 10% where the transfer is between members of the same corporate group. Effective from 13 December 2023, the CRC undergoes an important change as it now includes “sub-sale” transactions within the same corporate group.
The sub-sale provisions were introduced to address a perceived mischief whereby developers, who never intended to purchase land, acquired land and subsequently nominated a third-party entity they had enticed to fund the purchase. The drafting of the sub-sale provisions has however created significant problems for taxpayers due to the breadth of their application.
In broad terms the sub-sale provisions will apply a second lot of duty (double duty) when a person other than the initial purchaser becomes the eventual transferee after additional consideration is paid or property development occurs. Typically, this occurs when the buyer is “Party X and or nominee” and some development occurs prior to a party being nominated as the eventual purchaser. “Development” has a broad definition and can include preliminary development steps such as preparing a plan of subdivision (even if not registered).
Cases such as Hartman v Commissioner of State Revenue (Review and Regulation) [2022] VCAT 28 demonstrate the problem with the drafting of the sub-sale provisions as it may capture related parties. Despite calls from the industry to modify the provisions, the SRO maintains its position that it will continue to administer the provisions according to the law. The recent amendments to the provisions offer some relief to parties in corporate groups (not applicable to Hartman).
To ensure no double duty, best practice is that the intended owner is stated as purchaser in the contract or is nominated soon thereafter, with no development occurring until such nomination. However, members of a corporate group unsure of the ultimate owner of the land should consult with their advisors and consider the effectiveness of head companies executing with “and or nominees”, weighing this against the 10% cost.
Prohibition of WGT and land tax apportioning
It has been common practice for parties to a contract of sale to make certain settlement adjustments which include apportionments of Windfall Gains Tax (WGT) and land tax liabilities. However, effective from 1 January 2024, vendors are prohibited from making such amendments on property sales in Victoria, with the prohibition applying to land tax only where the sale price is less than $10 million. This may add significant costs for vendors, particularly for settlements scheduled early in the calendar year. Nevertheless, a known WGT can be reflected in the purchase price negotiated.
Any inclusion of such a clause in a contract will be rendered ineffective, constituting an offence. For individuals, the penalties for this offence will amount to 60 units, equating to $11,540. Body corporates, on the other hand, will face a more substantial penalty of 300 units, totalling $57,693. Connect with our Commercial Property & Development team for guidance on adjusting settlements effectively so as not to trigger these significant penalties.
An important exception however is where the WGT liability is unknown – ie a notice of assessment has not been received. Where the liability is not yet known at the time of entering into a contract of sale of land or option agreement then pass-on clauses would be necessary, and arguably not void, to deal with that unknown future liability.
Land tax threshold decreased
An element of the “COVID Debt Repayment Plan” package introduced by the Victorian Labor Government is the reduction in the tax-free threshold for land tax. The threshold for grouped holdings of non-exempt land with capital unimproved value (CUV) of $300,000 was decreased to $50,000, effective from the 2024 land tax year.
From the 2024 land tax year, the land tax rates and thresholds for taxable landholdings not held on trust will be as follows:
- Between $50,000 and $100,000, a $500 flat surcharge will apply.
- Between $100,000 and $300,000, a $975 flat surcharge will apply.
Over $300,000, $1350 plus 0.3% of amount > $300,000. A complete breakdown of rates and those applicable for trusts can be found on the SRO’s website here.
This already legislated measure is intended to be temporary only, in place for 10 years until 30 June 2033. However, off the back of significant increases in interest rates and property prices throughout the state, this may be of limited comfort to homeowners already burdened with excessive costs at the more modest end of the market.
Land tax absentee owner surcharge increased
The absentee owner surcharge was introduced in the 2015-16 financial year to tax foreign owners of property in Victoria. The rate has now doubled from 2 percent to 4 percent from 1 January 2024. Additionally, the minimum threshold for non-trust absentee owners will decrease from $300,000 to $50,000.
The absentee owner provisions are complex and particularly where land is held by trusts careful analysis should be made to ensure it is not an absentee owner. The definition of “absentee owner” is significantly complex. It generally does not include land owned by Australian citizens and permanent residents and New Zealand citizens with special category visas. However, there are a variety of trusts and companies connected to such persons that can fall within the definition. If you are unsure whether you are an absentee owner or have received an audit notification from the SRO on this issue, reach out to one of our Tax & Structuring specialists for guidance.
Fixtures to be included in Capital Improved Value
Amendments have been made to the Valuation of Land Act 1960 to ensure that ‘Capital Improved Value’ of land, includes all items affixed to land irrespective of ownership and whether they are considered fixtures at law.
This alteration is aimed to reflect a property’s value more accurately, considering not only the land itself but also the improvements and fixtures integral to its overall worth. These amendments, which came into effect from 1 January 2024, will impact valuations, council rates, fire services levy, WGT and vacant residential land tax.
It is understood that this amendment aims to address the impact of the Victorian Supreme Court decision of AWF Prop Co 2 Pty Ltd v Ararat Rural City Council [2020] VSC 853. In that case the Court held that tenant’s fixtures, namely windfarms, are not to be included when determining the capital improved value of land.
Stamp duty abolition on commercial and industrial property from 1 July 2024
As we previously reported, Victoria is set to witness a monumental shift in stamp duty with the proposed abolition of duty on commercial and industrial property. Stamp duty on commercial and industrial properties is to be phased out and replaced with the Commercial and Industrial Property Tax (CIP Tax).
Key details of the CIP Tax are:
- It will be calculated at a fixed rate of one percent of the property’s unimproved land value
- It will commence ten years after the first eligible transaction (acquisition) of a commercial or industrial property on or after 1 July 2024. That first transaction will be subject to one final stamp duty payment. From then on it will be free from duty
- Aligning with land tax practices, assessments will be raised against the property owner as of midnight on December 31 in the year preceding the tax year, and
- Existing concessions and exemptions on commercial and industrial property may continue to apply despite the introduction of the CIP Tax.
If you are considering acquiring commercial or industrial property in Victoria, consult with one of our tax advisors to understand your potential duty and/or CIP Tax obligations.
Expansion of Vacant Residential Land Tax
A significant expansion of the Vacant Residential Land Tax (VRLT) is set to commence on 1 January 2025. At present the VRLT applies to residential properties in metropolitan Melbourne only. However, this is to be expanded to residential property across all of Victoria.
The VRLT will apply to residential property that is unoccupied for more than 6 months in the preceding calendar year (this does not need to be consecutive). Therefore, it is important to consider the extent of any vacancy of your properties in 2024.
The VLRT will also be expanded to include unimproved residential land tax that has remained unimproved for 5 or more years. The VLRT percentage increases annually, the longer the land is held unimproved. If you hold vacant residential land, now is the time to consider whether this could be construed as “land banking” and may trigger costly taxes for your venture.
Looking ahead: more changes
While 2024 brings transformative changes, it’s imperative to keep an eye on the horizon. The Victorian government has already signalled further adjustments to the way it taxes land, with the introduction of the Short Stay Levy of 7.5% on short term rentals to be effective from 1 January 2025.
As 2024 unfolds, stakeholders operating in the property sectors must navigate these amendments carefully, recognising the opportunities for growth and efficiency despite legislative changes. The evolving regulatory landscape demands a proactive approach, ensuring that businesses and investors are well-prepared for the dynamic future of property transactions in the region.
Reach out to one of our specialists if you have any questions.
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