On 20 March 2024, the Commercial and Industrial Property Tax Reform Bill 2024 (Bill) was introduced into Victorian Parliament.
The Bill introduces the Commercial and Industrial Property Tax (CIPT), which commences on 1 July 2024.
The measure was first announced in the 2023-24 State Budget, with the Victorian Government announcing the reform to move away from stamp duty for qualifying commercial and industrial properties, to be replaced by the new annual CIPT.
On 11 December 2023, the Government released further details of the reform which we covered in our previous article available here.
Detailed below we examine the critical aspects of this new complex regime.
Overview
By way of summary:
- The CIPT regime applies to land with a qualifying commercial or industrial use, as determined by the Australian Valuation Property Classification Code (AVPCC) allocated to the land as part of the valuation process under the Valuation of Land Act 1960.
- From 1 July 2024, qualifying land will enter the regime when it is sold, or if a relevant acquisition occurs under the landholder provisions in the Duties Act 2000 (Duties Act). Land that enters the regime is ‘tax reform scheme land’.
- Land will enter the regime if the transaction is not eligible for an exemption, and the transaction relates to an interest of at least 50% in the land (a ‘qualifying interest’).
- Once land is brought within the scheme, stamp duty will be payable one final time, with eligible purchasers having the option to access a government-facilitated loan on commercial terms to fund the payment of duty.
- After a transition period of 10 years, commencing on the date the land entered the scheme, the CIPT begins to apply annually to the land. The rate of CIPT is a flat rate of 1% of the site value of the land (or a concessional rate of 0.5% for build-to-rent land).
It is critical that clients review these new measures and consider their impacts, particularly if they are considering acquiring commercial or industrial land in the near future.
What land will qualify for the CIPT regime?
Land will qualify for the CIPT regime if it has been allocated an AVPCC in the ranges of:
- 200 – 499 (commercial, industrial and extractive industries); or
- 600 – 699 (infrastructure and utilities land).
Land used solely or primarily for eligible student accommodation will also qualify.
‘Mixed-land’ will qualify for the regime where it has been allocated more than one AVPCC, with at least one being within the above eligible ranges. This land must also be used solely or primarily for a commercial or industrial use.
Other types of properties will not qualify for the regime. The CIPT will not apply to properties coded by the Valuer-General as residential, primary production, community services or sport, heritage and culture purposes.
The eligible AVPCC codes do not encompass commercial residential premises, such as properties used as boarding houses, retirement homes and aged care facilities. Accordingly, such properties appear to be excluded from the regime.
When will qualifying land come within the regime?
Land will enter the regime if any of the following occur on or after 1 July 2024:
- an entry transaction;
- an entry consolidation;
- an entry subdivision.
Entry transactions
Eligible land will come within the regime if it is the subject of a dutiable transaction or relevant acquisition which impacts 50% or more of the land. This is known as an ‘entry transaction’.
An entry transaction is defined to mean a qualifying dutiable transaction or qualifying landholder transaction. The transaction must relate to a 50% interest either alone, or when aggregated with other interests in the land.
While an entry transaction may only transfer a partial 50% interest in land, the whole of the land will be brought within the CIPT regime.
What is a qualifying dutiable transaction?
A qualifying dutiable transaction includes most transactions relating to interests in Victorian land (i.e. sales and transfers), except:
- the grant, transfer or assignment of certain long-term leases;
- the acquisition of economic entitlements;
- transactions that are eligible for an exemption from duty;
- transactions that qualify for the corporate reconstruction and consolidation concessions in section 250A of the Duties Act.
A sale of land that is eligible for the 50% duty concession for commercial, industrial and extractive industries in regional Victoria may still cause the land to enter the CIPT regime, as land eligible for this duty concession is not specifically excluded.
As noted above, where qualifying land is sold pursuant to a transaction that is eligible for stamp duty exemption, that transaction will not cause the land to enter the regime. However, any subsequent sales of those properties that attract stamp duty (with no exemption) will enter the CIPT regime.
What is a qualifying landholder transaction?
A qualifying landholder transaction is a ‘relevant acquisition’ (as defined in the Duties Act) of shares in a private company or units in a unit trust scheme, where that entity holds certain types of interests in Victorian land. Upon the first acquisition of an interest in a landholder, the relevant acquisition threshold is 50% in a private company or 20% in a unit trust scheme.
The types of interests in land that are relevant include:
- an estate in fee simple;
- a life estate;
- an estate in remainder;
- a Crown leasehold estate;
- a land use entitlement.
As with land transfers, a landholder transaction will not cause land to enter the regime if the transaction is exempt from duty, or qualifies for the corporate reconstruction or consolidation concessions. Broadly, the underlying landholdings of the landholder will enter the CIPT regime if at least a 50% interest in the underlying land is transferred. Final stamp duty will then be payable on the land, with CIPT becoming payable 10 years after that date.
The underlying land of a landholder may also enter the CIPT regime if a person already held an interest in the landholder prior to 1 July 2024, and subsequently acquires a ‘further interest’ in that entity that causes the 50% threshold to be reached.
| Example – Acquisition of further interests |
| On 1 January 2023, Person A acquires a 10% interest in a landholder that is a private company. On 1 August 2025, Person A acquires another 40% interest in the landholder under an agreement or arrangement entered into on or after 1 July 2024.
The acquisition on 1 August 2025 is a relevant acquisition as it amounts to a significant interest in the landholder when aggregated with the interest acquired on 1 January 2023. That relevant acquisition is not excluded as a qualifying landholder transaction, because the acquisition on 1 August 2025 was made under an agreement or arrangement entered into after the commencement of the Act. |
Once land is within the CIPT regime, exemptions from stamp duty will apply to subsequent transactions if the land still has a qualifying use.
Entry consolidations and subdivisions
Entry consolidations and entry subdivisions will cause land to enter the CIPT regime.
Entry consolidations
A consolidation of land will cause the consolidated land to enter the CIPT regime if land already within the scheme is consolidated with other land, and 50% or more of the consolidated land is land already within the scheme. In this case, the date on which the total consolidated land will come within the CIPT regime will be the date the plan of subdivision is registered.
However, if, after consolidation of scheme and non-scheme land, less than 50% of the area of the consolidated land is CIPT scheme land, that land is taken to no longer be within the CIPT regime. Accordingly, such land will fall out of the regime and may attract stamp duty on future transactions.
When consolidating land, it will be critical to consider the impacts of a consolidation of scheme and non-scheme land, and to confirm whether future transactions for the consolidated land will attract CIPT or stamp duty. If land falls out of the regime, there may be unanticipated stamp duty on future transactions.
Entry subdivisions
A subdivision of land within the CIPT regime is an ‘entry subdivision’. The effect is that all child lots following the subdivision remain within the CIPT regime.
Aggregation of transactions
Interests in land obtained under separate transactions must be aggregated if:
- the transactions occur within a three-year period and either involve the same purchaser, or involve separate purchasers that are associated persons (i.e. such as relatives, related bodies corporate, and trustees of related trusts); or
- the contracts of sale are entered into within 12 months, and the transactions together form, evidence, or give effect to ‘substantially, one arrangement’.
Accordingly, separate acquisitions of less than a 50% interest in qualifying land may be aggregated so that the land is bought within the regime. These aggregation rules will also apply to landholder transactions occurring within a 3-year period.
| Example – Aggregation of interests |
| Person A obtains a 20% interest in land under a qualifying landholder transaction occurring on 1 December 2024 (qualifying landholder transaction A).
Person B obtains a 40% interest in the land under a qualifying landholder transaction occurring on 1 July 2026 (qualifying landholder transaction B). Person A and Person B are associated persons. The interests Persons A and B acquired in the land are aggregated, and together amount to a qualifying interest. This means qualifying landholder transaction B is the entry transaction for the land. |
The three-year rule and calculation of stamp duty
When Treasury initially released details of the CIPT regime, the guidance indicated that upon a property entering the regime (where a 50% interest or more was transacted), stamp duty would be paid one final time, with the CIPT commencing 10 years after the entry transaction.
The regime under the Bill differs. The Bill provides that where land has entered into the CIPT regime through a transaction involving the transfer of less than a 100% interest in that land, stamp duty will be payable on the acquisition of any further interests in the land within a three-year period, or until full duty has been assessed on the land (whichever occurs sooner).
| Example |
| Person A acquires a 50% interest in land under a transfer of land which occurs on 1 January 2026. This is a qualifying interest in the land and the dutiable transaction is an entry transaction.
Person A acquires another 30% interest in the land on 1 January 2027 under a qualifying dutiable transaction. Person B is the beneficial owner of the remaining 20% interest in the land. On 1 July 2027, Person C purchases the land from Person A and Person B. No duty is chargeable on this transaction to the extent that the interest acquired by Person C is the same, or substantially the same, as the entry interest for the land (50%) and the further interest acquired in the land (30%). Duty is assessed on the remaining 20% interest in the land acquired by Person C. |
Government-funded loan for final stamp duty payment
From 1 July 2024, eligible first purchasers of a commercial or industrial property entering the CIPT regime may access a government-funded transition loan to finance the final upfront stamp duty liability upon entry of the land into the regime.
Treasury has released new details on this transition loan, which will be available to Australian businesses and Australian citizens or permanent residents, where the value of the relevant property does not exceed $30 million.
The loan, which will be on commercial terms, will be for a term of 10 years from the date of settlement. No repayment can go beyond the 10-year term to avoid overlap with the CIPT on the property, which commences from year 11 onwards.
Change of use of land within the CIPT regime
If land in the CIPT regime undergoes a change of use to a non-qualifying use, such as residential, stamp duty may be payable on any transaction that received an exemption from duty.
The owner of land that is within the CIPT regime may be subject to a ‘change of use duty’ liability where:
- a full or partial exemption from duty applied to the dutiable transaction;
- after the dutiable transaction, there is a change of use of the land;
- as a result, the land no longer as a qualifying use (i.e. commercial / industrial); and
- at the time of the change in use, the taxpayer under the dutiable transaction that was initially assessed as exempt continues to hold an interest in the land (the ‘assessable interest’).
The Commissioner must then assess the dutiable transaction (calculated on the taxpayer’s assessable interest), subject to any other exemptions or concessions. Duty will be calculated based on the value of the land at the time of the initial exempt dutiable transaction, rather than at the time of the change of use.
However, the rate of duty will be reduced by 10% for each calendar year that has elapsed since the date of the dutiable transaction.
Application of the CIPT
Once land is within the CIPT regime, the CIPT will apply following a transition period of 10 years from the date the land entered the scheme.
CIPT is assessed on a calendar year basis, on land owned as at midnight on 31 December in the year preceding the tax year, similar to land tax.
CIPT will apply annually at the rate of 1% of the site value (unimproved value) of the taxable land. A concessional rate of 0.5% will apply to build-to-rent land. As we have previously noted, the site value of land can significantly increase following a rezoning of land. So while the CIPT is stated to be a flat 1% rate, this is not a stagnant calculation, as rezonings may exponentially increase the site value of land, increasing CIPT, land tax and council rates.
Any unpaid CIPT (including interest and penalty tax) is a first charge on the land. However, where a bona fide purchaser obtains a property clearance certificate from the Commissioner in respect of the land, the charge does not secure any amount of CIPT in excess of the amount set out in the certificate.
Anti-avoidance provisions
The Bill contains detailed anti-avoidance provisions, which broadly apply where, under a tax avoidance scheme, either a person obtains a reduction in, or exemption from, CIPT, or land that would otherwise be within the CIPT regime does not become scheme land.
Where the Commissioner considers a person has participated in a tax avoidance scheme, he may disregard the scheme, determine the land is within the regime and make an appropriate assessment. Interests in land may be aggregated if the Commissioner is satisfied the transactions formed part of the one tax avoidance scheme.
Notification requirements
The Bill imposes various notification requirements on taxpayers. This ties into the penalty tax regime, under which notification defaults attract penalty tax (typically at the rate of 25% of the tax shortfall, unless the Commissioner considers there has been intentional disregard in which case penalty tax will be imposed at the rate of 75%).
A person served with a notice of assessment of CIPT must, within 60 days of receipt of the assessment, notify the Commissioner of any error or omission in the notice, such as any land being incorrectly specified as not being subject to CIPT.
Further, an owner of land within the regime must notify the Commissioner of a change of use in the land (or part thereof), within 30 days after the change of use.
Objections
A taxpayer who is dissatisfied with a valuation used in the assessment of the CIPT may object to that valuation, as is currently the case with land tax. The valuation objection will then be assessed by the valuation authority engaged by the relevant Council on behalf of the Valuer-General.
Comment
Individuals and businesses seeking to invest in commercial or industrial land on a long-term basis will need to urgently consider entering into a contract of sale before 1 July 2024, if they wish to prevent the property from entering the regime. This is because if the land is held long-term, the same taxpayer will pay the final stamp duty upon entry into the regime, and also the CIPT on an annual basis, which commences to be payable 10 years after the first transaction (whether or not the property is transacted in the meantime).
While the government loan can provide cash flow assistance, the recurring CIPT liability after the 10-year period needs to be considered (in addition to existing taxes such as land tax, windfall gains tax, and council rates).
There are many details to this Bill that need to be carefully considered, including the various risks once properties are within the regime, such as land consolidations which can inadvertently bring new land within the regime.
More information
If you would like to discuss the CIPT and how it will affect you, please contact our Tax or Property teams.
Note: The above examples have been extracted from the Bill and the accompanying Explanatory Memorandum.
| Disclaimer: This publication contains comments of a general nature only and is provided as an information service. It is not intended to be relied upon, nor is it a substitute for specific professional advice. No responsibility can be accepted by Rigby Cooke Lawyers or the authors for loss occasioned to any person doing anything as a result of any material in this publication.
Liability limited by a scheme approved under Professional Standards Legislation. © 2024 Rigby Cooke Lawyers |