New changes to Vacant Residential Land Tax: is your holiday home affected?

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Posted By , and on 23/05/24 at 2:24 PM

Victorian holiday homeowners will have been paying close attention to the expansion to vacant residential land tax (VRLT) provisions in the Land Tax Act 2005 (Vic) (Land Tax Act) which come into effect from the 2025 land tax (calendar) year. These changes have been particularly concerning for those holding holiday homes in trusts or companies, as no exemption from the new tax previously applied. However, relief is on the horizon with a proposed new Bill offering a potential exemption for holiday homes in trusts and companies.

WHAT IS THE VACANT RESIDENTIAL LAND TAX? 

In an effort to alleviate pressure on the rental market and increase available housing stock, the Victorian Government previously passed the State Taxation Acts and Other Acts Amendment Act 2023 (Vic) (Amendment Act). Key changes effective from 1 January 2025 included:

  • An expansion of the provisions of the VRLT from limited council areas in Melbourne’s inner city to encompass all residential land in Victoria. Under these amendments, any residential land in Victoria left vacant for an aggregate period of six months within a calendar year will be subject to VRLT (unless an exemption, such as the holiday home exemption, applies).
  • The taxable value for VRLT purposes remains based on the capital improved value of the land. However, the Amendment Act introduced a tiered system for the rate of VRLT, departing from the previous flat rate of 1% of the capital improved value of the land. Now, the rate varies: 1% applies to land not previously liable VRLT, 2% for land previously liable in the preceding year but not the one before, and 3% for land liable in the last two preceding tax years.
WHAT EXEMPTION FOR HOLIDAY HOMES CURRENTLY APPLIES?

Currently an exemption from VRLT exists for holiday homes used for at least 4 weeks a year by the individual owner or “vested beneficiary” or a relative of either of those persons. A “vested beneficiary” is limited in its definition under the Land Tax Act to natural person beneficiaries of a trust who have a vested beneficial interest in possession in the land or are the principal beneficiary of a special disability trust. Importantly, this does not include a beneficiary of a discretionary/family trust as they do not have such a vested interest.

Note, the definition of relative includes:

  • a spouse or domestic partner of the owner;
  • a lineal ancestor or lineal descendant of the owner or of their spouse or domestic partner;
  • a brother, sister, or child of a brother or sister, of the owner or their spouse or domestic partner;
  • a spouse or domestic partner of the owner’s child; or
  • a spouse or domestic partner of a brother or sister of the owner.

In addition to the above occupancy requirements, the owner or vested beneficiary must still satisfy the Commissioner that the property indeed served as a holiday home. Factors such as the property’s location, proximity to the owner’s primary residence, and usage patterns remain considerable in the Commissioner’s determination.

The holiday home exemption only applies to one holiday home per calendar year. Those holding multiple properties are unable to side-step the VRLT on multiple properties.

WHAT IS NOW PROPOSED FOR HOLIDAY HOMES IN TRUSTS AND COMPANIES?

The State Taxation Amendment Bill 2024 (Vic) (Amendment Bill), released 14 May 2024, introduces several highly anticipated amendments to the VRLT. Notably, it broadens the application of the holiday home exemption to include properties held in trusts or companies, effective 1 January 2025.

Although trusts and companies will need to step through several hoops before qualifying for this proposed exemption, it provides an alternative for those entities previously unable to satisfy the exemption. The requirements of the proposed exemption include:

  • Ownership period: the owner of the property must have continuously held the holiday home since 28 November 2023, or the holiday home must have been under the contract to purchase as at that date and the owner continuously held it since that time;
  • Beneficiaries: the specified beneficiaries of the trust, the shareholders in a company or the unit holders in a unit trust must not have changed since 28 November 2023, or since the date of settlement under a contract entered into before 28 November 2023. The only caveat is where such changes are between relatives, however amendments must be carefully made as they may have flow on effects. For example, including additional specified beneficiaries of a trust may expose the trustee to challenges similar to those in Owies v JJE Nominees Pty Ltd [2022] VSCA 142 where specified beneficiaries were not considered in annual distributions.
  • Ownership interest: in the case of companies and unit trusts, at least 50% of the shares or units (as applicable) must be held by natural persons. Natural person/s must also have a separate principal place of residence (PPR) in Australia;
  • Use and occupancy: the holiday home was occupied as a holiday home, in the year preceding the tax year, for a period of at least 4 weeks (whether continuous or aggregate) by a specified person; and
  • Commissioner’s satisfaction: the Commissioner is satisfied that the land was used and occupied as a holiday home in the preceding tax year. The Commissioner must take into account the property’s location, its proximity to the PPR of the shareholder/unitholder/beneficiary/specified beneficiary, and the nature and frequency of its use.

Until the Amendment Bill is enacted, there is no applicable exemption for holiday homes held within companies, discretionary or unit trusts. Consequently, to escape VRLT, the company or trust must ensure that the holiday home it holds meets the general requirement of being occupied for over six months (rather than 4 weeks), either continuously or in aggregate. While this occupancy criterion may be satisfied through leasing or short-term letting arrangements, it is crucial to note that merely being available for rent – a common feature of holiday homes – will not suffice; actual occupancy is necessary.

WHAT ARE THE PROPOSED CHANGES FOR HOLIDAY HOMES WITH CONTIGUOUS LAND?

A further proposed amendment to the holiday home exemption concerns holiday homes with contiguous land. Starting 1 January 2026, the Amendment Bill proposes to extend the holiday home exemption to include contiguous land adjoining a holiday home.

This exemption ensures that land in metropolitan Melbourne, which constitutes residential land from 1 January 2026 due to being separately titled land that has been unimproved for five years or more, is exempt from the VRLT if it is contiguous to holiday home land.

The separately titled land owned by the owner of the holiday home will be exempt from VRLT provided the land:

  • enhances the holiday home;
  • is owned by the same owner of the exempt holiday home;
  • is used solely for the private benefit and enjoyment of the person who uses and occupies the holiday home; and
  • is contiguous with the holiday home land or is separated from the holiday home land only by a road, railway or some other similar area across which movement is reasonably necessary.
TAKEAWAYS
  • The proposed measures depend on the Bill passing in its current form and there are only seven months left until 31 December 2024. Therefore, owners need to be mindful now to arrange appropriate occupancy for their residential properties as soon as possible. If no occupancy has occurred to date, it must commence by 1 July 2024.
  • Directors of companies or trustees of discretionary or unit trusts aiming to rely on the proposed expansion to the holiday home exemption should carefully review trust deeds and member registers to ensure conditions are satisfied. Seek advice where appropriate – in particular, seek advice if intending to make any changes, to ensure no adverse outcomes.
  • All owners of holiday homes should maintain documentation of the property’s usage through a logbook or diary entry to record occupancy.

If you are unsure how these changes will affect you, or would like to take steps to ensure that you satisfy the conditions reach out to a member of our Tax & Structuring team.

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