A recent decision of the Victorian Civil and Administrative Tribunal (Tribunal) regarding a land tax surcharge may have a significant impact upon property investors and their tenants.
What was the decision?
In Kamirice Pty Ltd v Commissioner of State Revenue (Review and Regulation)  VCAT 2087, the Tribunal upheld the Commissioner’s decision not to grant an exemption to building owner, Kamirice, from the (0.5%) land tax surcharge imposed in 2016 on absentee corporations.
This appears to be is the first decision made which interprets the applicability of the Victorian land tax surcharge provisions and the associated guidelines gazetted by the Treasurer in relation to the applicability of the legislation.
Kamirice is the owner of 500 Collins Street, Melbourne, a significant commercial building in the CBD, its only property in Victoria.
According to the decision, Kamirice is a wholly-subsidiary of a foreign company (incorporated in the British Virgin Islands). And while Kamirice has spent significant amounts in upgrading the building, and employs over 100 service contractors, the Tribunal took the view that Kamirice was effectively a passive investor, and could not be seen as making a significant contribution to the economy of Victoria. The Tribunal considered that Kamirice did nothing more than any other significant building owner would do to maintain, improve and lease a property asset.
It was relevant that while Kamirice’s foreign holding company had never interfered with operations in Australia, the Tribunal took that view that it could do so if it wanted – particularly given it had not (at the time of the case) charged Kamirice any interest on a $192 million, 10 year loan it had made to Kamirice.
How will this effect other landlords?
On that basis it would seem that other “passive investors” who are wholly-owned subsidiaries can expect similar treatment by the Commissioner, and accordingly be liable for an additional 0.5% land tax (on top of the current top rate of 2.25% applicable on site values above $3 million). Note that the surcharge was increased to 1.5% in 2017. Other Australia states have introduced similar surcharges.
It may well be that this is precisely the legislature’s intention – so as to reap greater taxes from foreign investors holding land in Victoria. Arguably, this may discourage incoming investment into Victoria, and accordingly impact development as a whole. The counter-argument is that “passive investors” are not developing property in Victoria, and accordingly not aiding the economy.
Other factors relevant to the decision as to whether an exemption should be granted include the nature and degree of ownership, control and influence of the foreign holding company, competition considerations, compliance with FIRB requirements, the character of the entity, and the nature and extent of business activities in Victoria.
It will be interesting to see where the line will be drawn when deciding whether a property owner has sufficiently contributed to the Victorian economy. Will the Commissioner grant an exemption to an entity in a similar position, but which holds multiple assets and has developed some of them itself?
How will this effect tenants?
An important related issue, which the Tribunal briefly referred to, was the ability of Kamirice to pass on the land tax surcharge to its tenants.
While some tenants will have the protection of the Retail Leases Act 2003 (Vic) which prohibits landlords passing on land tax, this will only protect “retail tenants”. Tenants without such protection, whose leases allow the landlord to fully recover land tax as part of outgoings, may face increased occupancy costs as a result of this decision. The Tribunal effectively took the view that the market would sort things out. But for incumbent non-retail tenants, that might be cold comfort.
Landlords who are absentee corporations should already have notified the State Revenue Office of their status. Many such landlords may already have obtained exemptions from the land tax surcharge. However, the Kamirice decision may embolden the Commissioner to revisit exemptions, and analyse whether the entity remains entitled to the exemption each tax year.
Absentee corporations may need to consider how to put the best foot forward to argue that they are entitled to a new or ongoing exemption, in the light of the decision.
Finally, tenants of absentee corporations should carefully check their existing (and proposed) leases and outgoings statements to determine whether their landlord is passing (or entitled to pass) any surcharges on to the tenant.
KHQ Lawyers has the skills and experience to advise landlords and tenants alike as to how best to deal with the issues arising out of the land tax surcharge (and for that matter, in relation to the foreign purchaser additional duty imposed upon acquisitions of residential land). Please don’t hesitate to contact us if you’d like to discuss.