The Commercial and Industrial Property Tax — Overview of reforms from 1 July 2024

In the 2023-24 State Budget, the Victorian Government announced a reform to move away from stamp duty for qualifying commercial and industrial properties, to be replaced by the new annual Commercial and Industrial Property Tax (CIPT).

On 11 December 2023, following consultation with business and industry representatives, the Government announced the final design of the new tax and released a Commercial and Industrial Property Tax Reform – Information Sheet.

Legislation to enact these reforms is expected to be introduced into Parliament shortly, ahead of the 1 July 2024 start date.

Which property transactions will come within the new regime?

The new tax will apply to commercial and industrial property transactions with both a contract and settlement date on or after 1 July 2024.

The new regime will apply to transactions where:

• a contract of sale is entered into on or after 1 July 2024 (i.e. both execution and settlement occurs on or after 1 July 2024);
• at least 50% or more of the property transacts;
• there is a positive duty liability – i.e. duty is payable, even if the liability is reduced by concessions, such as the concession for regional commercial and industrial properties. The ‘positive duty liability’ includes a liability to stamp duty or landholder duty.

The requirement that 50% or more of the property transacts includes both direct dealings in the property itself, or indirect transfers via dealings in shares and units under the landholder regime.

How will the new regime apply to eligible transactions?

For property transactions with both a contract and settlement date on or after 1 July 2024:

• stamp duty will be paid one final time on this property when it is transacted; and
• the CIPT will be payable 10 years after the final stamp duty payment, regardless of when that property has transacted again.

If the property is sold again, even if sold multiple times within the 10-year transition period, stamp duty will not apply if the property continues to have a commercial or industrial use.

Government loan to pay stamp duty

Upon settlement of a contract entered into on or after 1 July 2024, purchasers will have the option of accessing a government-facilitated transition loan as an alternative to self-financing the upfront stamp duty.

Eligible purchasers who obtain this loan will be required to make annual repayments over 10 years, equivalent to the property’s upfront stamp duty liability plus interest (equal to the Treasury bond rate plus a credit risk margin).

The loan will be available to eligible applicants, who are:

• Australian citizens/permanent residents or Australian businesses;
• the first purchaser of a qualifying property under a contract entered into from 1 July 2024;
• purchasing property up to a maximum price of $30 million; and
• approved for finance from an Authorised Deposit-taking Institution or other approved lender.

If the property is sold within the 10-year transition period and the initial purchaser opted for a transition loan, they will be required to make the remaining repayments prior to settlement of the sale.

Application of the CIPT

The CIPT will become payable 10 years after the initial transaction, regardless of whether the property has been transacted since. The CIPT will be set at a flat 1% of that property’s unimproved land value.

The CIPT will be based on land ownership as at 31 December following the 10th anniversary of the first transaction of the property since 1 July 2024. So for contracts executed and settled during the 2024 land tax year, the first CIPT liability will arise as at 31 December 2034, and the State Revenue Office (SRO) will assess the taxpayer for the full year of 2025 CIPT.

The CIPT is separate from, and in addition to, the existing land tax system, which will continue to apply. However, existing land tax exemptions will apply to the CIPT (i.e. such as exemptions for primary production land and charitable land).

As long as the property continues to be used for a commercial or industrial purpose, no upfront stamp duty will be payable on any transaction, with the owner instead being assessed to CIPT.

Which properties will fall within the regime?

A property will enter the regime if it has a qualifying ‘commercial or industrial use’ at settlement. This will be satisfied if the property meets one of the following conditions:

• the property is allocated an Australia Valuation Property Classification Code (AVPCC) that represents commercial, industrial, extractive industries, or infrastructure and utilities land; or
• the property is used solely or primarily for providing accommodation to tertiary students.

Examples of qualifying AVPCCs include Retail, Hospitality, Manufacturing, Entertainment (e.g. cinema), Warehousing, Quarry, Mine, Transport or Office facilities. Properties allocated such a code will become subject to the regime.

Stamp duty concessions will continue to apply once these properties enter the reform (e.g. transfers of qualifying properties which are eligible for the regional commercial and industrial duty concession will continue to receive a 50% reduction on the final stamp duty payment).

Excluded properties

The reform will not apply to the following properties:

• property primarily used for residential purposes;
• property primarily used for primary production, community services or sport, heritage and culture purposes;
• commercial and industrial property purchased prior to 1 July 2024 (unless 50% or more of the property is transacted after this date).

The Government has not confirmed whether the reforms will apply to commercial residential premises, being properties used as boarding houses, retirement homes, aged-care facilities and short-term accommodation (e.g. hotels, motels). Such properties do not fall within the qualifying AVPCC codes, and it appears that commercial residential premises may be excluded from the regime. Government clarification on this issue will be required.

Mixed-use properties

Where properties have a mix of qualifying and non-qualifying uses (e.g. a street level shop with a residence above), these residences may have both qualifying and non-qualifying AVPCCs.

For these properties, the intended approach is to take a ‘sole or primary use test’ to determine if the property will enter the regime when it is transacted. Whether the sole or primary use of a property is commercial or industrial will be determined by factors such as the land and floor area of each use; the relative intensity; the length of time of each use; and the ‘economic and financial significance’ of each use.

Where an application of the sole or primary use test indicates that a property would qualify for the regime, the CIPT will apply to the entire mixed-use property. We anticipate many mixed-use properties will fall within the regime despite having a non-qualifying use such as residential premises, given that the ‘economic and financial significance’ of the commercial use is likely to be given more weight.

Change-of-use duty

If a commercial or industrial property that is within the regime subsequently converts to a non-qualifying use (i.e. residential), the property will not be liable to CIPT. Whether the property has been converted to a non-qualifying use will be determined at the liability date for CIPT for a given tax year (i.e. 31 December).

If the owner sells the property whilst it has a non-qualifying use, stamp duty will be payable (consistent with sales of other non-qualifying properties).

A new ‘change-of-use duty’ will apply to property that has already entered the reform and:

• is sold for a second or subsequent time with a qualifying commercial/industrial use (i.e. no duty payable); and
• subsequently converts to a non-qualifying use (e.g. residential).

The change-of-use duty will be calculated based on the stamp duty that would have been payable when the property was transacted (including any concessions), but reduced by 10% for every 31 December that has passed since that transaction, to a maximum of 100%.

For example, if the change-of-use duty is payable seven years after a transaction, then the duty payable would be equal to 30% of the duty otherwise payable (reduced by 70% across the seven prior years).

The below example is based on our understanding of how the change-in-use duty is intended to apply:

• Retail Co acquires a commercial property on 1 August 2036 for $4 million.
• This acquisition was exempt from stamp duty, as the property came within the CIPT regime as a result of a prior transaction from 1 July 2024.
• Retail Co converts the property to a residential use on 1 August 2040, as it determines to develop residential apartments.
• Retail Co will be liable for change-in-use duty calculated at 60% of the duty that would have been applicable on 1 August 2036 (i.e. a 40% reduction as Retail Co owned the property for 4 years).
• Change-in-use duty is estimated at $144,000 (i.e. duty of $240,000 reduced by 40%).

Property owners will need to notify the SRO within 30 days of a change of use occurring. This places a positive obligation on owners to take action within a short timeframe of 30 days, with a failure to notify the SRO in a timely manner likely to constitute a notification default under the penalty provisions. For notification purposes, the Government will need to clarify when a ‘change of use’ occurs, which we would hope does not extend to mere scoping/feasibility activities, or other similar preliminary steps.

Stamp duty exemptions continue to apply

Where sales of commercial and industrial properties are eligible for full stamp duty exemptions, those transactions will not cause the property to enter the regime; this is because there is no ‘positive duty liability.’ Examples of duty exemptions include those applying to deceased estates, purchases by charities and Friendly Societies, transfers between spouses and partners, and transfers of dutiable property upon a change of trustee.

Subsequent transactions of these properties that attract stamp duty will enter the reform and incur that property’s final stamp duty payment.

Comment

While the new regime will remove the upfront stamp duty burden on the purchase of qualifying properties, the CIPT will ultimately be an ongoing, recurrent cost in addition to existing land taxes and surcharges.

Whether taxpayers will actually benefit from tax savings, following the 10-year transitional period, depends on the capital improved value (CIV) of the property, its unimproved (site) value, and how long the property is held.

For example, if a $15 million property has an unimproved value of $8 million, the stamp duty saving is $955,000 and the additional CIPT is $80,000 per year. In this example, if the land is held for less than 12 years, the owner will still have an overall duty saving. This will not be the case if the property is held for a longer period; the owner’s CIPT liability will exceed the stamp duty formerly payable.

Further, while the CIPT is based on a flat 1% rate on the unimproved value of land, this unimproved value can significantly increase following a rezoning. So although the CIPT is stated to be simply 1% (‘with no complicated rates or thresholds’), this is not a stagnant calculation, particularly as rezonings may exponentially increase the site value of land, increasing not only land tax, but also CIPT (and trigging windfall gains tax).

We anticipate that once the measures are introduced into Parliament, further aspects of their operation will be clarified, including when a ‘change in use’ occurs, and the application of the regime (or not) to commercial residential premises.

More information

If you would like to discuss the CIPT and how it will affect you, please contact our Tax or Property teams.