On 12 December 2023, the State Taxation Acts and Other Acts Amendment Act 2023 (the Act) received Royal Assent.
In our latest Property Tax alert, we look at the major changes introduced by the Act to Victorian property taxes, including prohibiting the apportionment of land tax and windfall gains tax in contracts for the sale of real estate.
Apportionment of land tax and windfall gains tax (WGT)
Land tax
From 1 January 2024, the apportionment of land tax between a vendor and purchaser under a contract of sale of land will be prohibited. This prohibition will not apply to contracts where the consideration is $10 million or greater (to be indexed).
Contracts entered into before 1 January 2024 are not subject to the new regime, and the land tax adjustment provisions in those contracts are still enforceable.
The current general practice for land tax liability in respect of the year of settlement is to adjust this liability between the vendor and the purchaser. However, the Act removes the ability to adjust land tax, which will result in the vendor having to pay out any land tax arrears prior to settlement. The cost of this change will be substantial for vendors, particularly where there is a large land tax liability and settlement is scheduled early in the year.
Further, the amendment will not affect the apportionment of other rates, taxes, assessments, fire insurance premiums and other outgoings.
WGT
Also from 1 January 2024, vendors will be prohibited from passing on WGT to a purchaser under a contract or option agreement entered into after the WGT liability has been assessed.
Broadly, landowners are liable to WGT where a government rezoning results in a ‘taxable value uplift’ to their land of more than $100,000 (subject to limited exclusions). Following a liable rezoning, the landowner will be issued with a WGT assessment, which must be paid by the due date unless a deferral election is made. Where the WGT liability has been deferred, the subsequent sale of the land will cease deferral, triggering a liability to pay the WGT, which can no longer be passed onto the purchaser. This amendment does not impact options to enter into a contract of sale of land granted before 1 January 2024.
Penalties
Any adjustment clauses that purport to require the purchaser to pay an amount towards land tax or WGT is of no effect and unenforceable. Further, it will be an offence for a vendor to enter into a contract of sale that purports to require the purchaser to pay an amount for, or towards, the vendor’s land tax or known WGT liabilities. The penalties are substantial, with a maximum penalty being 60 penalty units for a natural person ($11,538) or 300 penalty units for a body corporate ($57,693).
Given most contracts contain standard conditions permitting the apportionment of these taxes, there will be a need to review all contracts to ensure compliance.
Vacant residential land tax (VRLT)
Currently, VRLT applies to homes in specified council areas that were vacant for more than six months in the preceding calendar year. The tax is assessed by calendar year, and is set at 1% of the capital improved value (CIV) of taxable land. For example, if a vacant home has a CIV of $1 million, the tax will be $10,000.
At present, only vacant homes in the following council areas are affected: Banyule, Bayside, Boroondara, Darebin, Glen Eira, Hobsons Bay, Manningham, Maribyrnong, Melbourne, Monash, Moonee Valley, Merri-bek (formerly Moreland), Port Phillip, Stonnington, Whitehorse and Yarra.
With effect from 1 January 2025, VRLT will apply to residential land across all of Victoria if the land is vacant for more than six months in the preceding calendar year.
A new progressive rate of VRLT will apply to non-exempt vacant residential land across all of Victoria based on the number of consecutive tax years the land has been liable for VRLT. The new rates will apply as follows:
- 1% of the CIV of the land for the first year the land is liable for VRLT where the land was not liable for VRLT in the preceding tax year;
- 2% of the CIV of the land where the land is liable for VRLT for a second consecutive year; and
- 3% of the CIV of the land where the land is liable for VRLT for a third consecutive year.
Accordingly, VRLT will expand from existing council areas in inner and middle-Melbourne to all landholdings in Victoria. Importantly, properties that are deemed ‘vacant’ (that is, not occupied for six months in the previous year) will be taxed based on their CIV, which can be substantially higher than the land’s unimproved value.
While these changes take effect from 1 January 2025, they are based on the occupancy of premises in the preceding year, that is, from 1 January 2024. Accordingly, the tax effectively starts from 1 January 2024. This is to provide landowners affected by these changes adequate time to take steps to occupy their residences, make them habitable or available for occupation, complete construction or renovation of their residence and/or to prepare their land for development for residential purposes.
Unimproved residential land
From 1 January 2026, VRLT will apply to all unimproved residential land in metropolitan Melbourne that has remained undeveloped for at least five years, and is capable of residential development.
New VRLT exemptions will apply for:
- unimproved residential land that is contiguous to a principal place of residence (PPR) — this exemption reflects the policy that residential land contiguous to a person’s PPR, such as land used for a tennis court or swimming pool, is exempt from VRLT; and
- unimproved land incapable of being used or developed for residential purposes, or where it is practicably impossible to use or develop the land for residential purposes. This exemption does not apply in cases where development of the land is merely uneconomical or inconvenient.
Changes to exemptions
Holiday home exemption
The VRLT holiday home exemption applies to a property used and occupied by the owner or a vested beneficiary of the trust as their holiday home for at least four weeks in a calendar year. From 1 January 2025, the holiday home exemption will be amended to enable the usage and occupancy requirement to be satisfied by a relative of the owner or vested beneficiary.
New residential premises
Land that becomes residential land during the calendar year is not subject to the tax in the following year. For example, where the construction of new residential premises has been completed, the property is exempt for the following tax year.
From 1 January 2025, this exemption will be extended to allow a maximum exemption period of three years, provided the owner has made genuine and reasonable efforts to sell the land. If the property continues to be unoccupied and unsold after this time, the land will be liable for VRLT at the rate of 1% until sold.
To qualify for this exemption, the owner or vested beneficiary must also have a PPR in Australia (not necessarily one that they own themselves, but one that they occupied as their home) in the relevant tax year.
Corporate reconstruction and consolidation concessions
Broadly, the corporate reconstruction concession provides relief from stamp duty where an eligible dutiable transaction occurs between members of a corporate group (being a parent and a 90%-owned subsidiary). Eligible transactions attract duty at the concessional rate of 10% of the duty otherwise payable.
With effect from 13 December 2023:
- the concession applies to sub-sale arrangements between members of the corporate group. Broadly, the sub-sale provisions can trigger double duty in certain circumstances, where the transferee of land differs from the purchaser named in the contract (or grantee of an option), particularly where there has been land development prior to nomination; and
- the timing of the 30-day period in which multiple eligible transactions may occur to be part of the same arrangement has been clarified, to ensure the concession is available even if a second or subsequent eligible transaction occurs on the same day as the first transaction in that arrangement.
The amendments regarding sub-sale arrangements is a welcome extension of the concession, given the ease at which the sub-sale provisions can inadvertently be triggered, with significant cost implications. This extension also provides corporate groups with flexibility as to their arrangements for the acquisition of land where they may use nominee entities.
To access this concession, an exemption application must be lodged with the State Revenue Office. Importantly, the concession only applies to legitimate corporate reconstructions, generally undertaken to have a more efficient corporate structure moving forward. The concession does not apply to restructures undertaken for the purpose of sale.
Other Changes
The Act introduces further changes, including those detailed below.
Build-to-rent (BTR) special land tax
The Land Tax Act 2005 has been amended to ensure the BTR land tax formula accurately reflects the land tax rates and the absentee owner surcharge rate.
With the recent surge of BTR developments throughout Victoria, it is important that developers seeking to claim the BTR concession seek further advice on how the change in land tax rates will impact their anticipated project. Most rate changes will impact absentee landowners.
Single holding land tax concession
The law has been clarified to ensure that owners of charitable, municipal, public land and nominated PPR beneficiaries of unit trust schemes and discretionary trusts are not required to pay the fixed lump sum component of the COVID-19 debt temporary land tax surcharge more than once (that is, once for each property). These changes will commence in the 2024 land tax year.
Comment
The inability to adjust for land tax or WGT from 1 January 2024 will have significant cost implications for owners. If the purchase price of land is increased to enable the vendor to absorb the cost of at least some of the WGT for which they are liable, there is a risk that this may attract the penalty provisions if it considered that the vendor is attempting to pass on the WGT liability.
The expansion of the VRLT regime is significant and will impose an annual levy, in addition to land tax, on any lands that are deemed vacant (that is, not occupied for six months in the previous year). The VRLT will be imposed on the CIV of the relevant land, based on the Valuer-General’s valuation for rating purposes. If you consider your property’s CIV is too high, you may challenge a ratings valuation and, if this challenge is successful, can lessen the impact of ongoing taxes such as VRLT and land tax.
More information
If you would like to discuss the above amendments and how they will affect you, please contact a member of our Tax or Property teams.