Further to our Commercial and industrial stamp duty reform in Victoria update released in December 2023, the Victorian Government has confirmed that it will proceed with a transition from stamp duty to an annual property tax for commercial and industrial properties in Victoria.
On 20 March 2024, the Government introduced a bill (Bill) which contains new legislation (and amends existing legislation) to implement the transition.
The transition is to commence on 1 July 2024. On 22 March 2024, the Victorian Parliament entered a 5 week recess however we expect the Bill to become law shortly thereafter.
Application of the new CIPT regime
The Bill confirms that the new 'commercial and industrial property tax' (CIPT) regime will generally apply in respect of a property where:
- the relevant contract of sale is entered into (or landholder duty event occurs) on or after 1 July 2024;
- the property has a qualifying 'commercial' or 'industrial' use at the date of settlement (or as at the date of the landholder duty event, as applicable);
- the transaction (either directly in respect of the land, or indirectly in respect of a 'landholder' entity) relates to an interest of 50% or more in the property (or an interest that would amount to 50% or more when aggregated with other interests in certain circumstances); and
- the transaction is not exempt from duty (or eligible for a corporate reconstruction concession or a corporate consolidation concession).
Relevantly, a dutiable transaction (or landholder duty event) will not bring land into the CIPT regime if the transaction occurs pursuant to an agreement or arrangement entered into before 1 July 2024. The scope of what may comprise a pre 1 July 2024 'arrangement' is not defined. However, the Commissioner of State Revenue has previously accepted that an 'arrangement' can have a broad meaning. Accordingly, term sheets, options and rights of first refusal are examples of potential 'arrangements' that could attract the operation of this transitional rule.
Where the CIPT regime does apply, the first purchaser of a commercial or industrial property on or after 1 July 2024 will be the last person to ever pay stamp duty in respect of that property (provided that the property continues to have a qualifying commercial or industrial use). CIPT will then become payable annually, with the first CIPT year being 10 years after that first transaction (whether or not the property is transacted again in the meantime). Note it does not matter if only a part interest in the property has been sold (provided a 50% threshold interest in the property for a transaction has been first triggered), CIPT will apply to the whole of the property.
The CIPT will apply at a flat per annum rate of 1% of the unimproved land value (with no tax-free threshold), unless the land is qualifying build-to-rent land (in which case the rate is 0.5% per annum). The reduced CIPT rate for qualifying build-to-rent land is in line with the 50% land tax discount applicable to eligible build-to-rent land (read our previous update on build-to-rent land tax concessions).
Qualifying commercial or industrial use
A property will have a qualifying commercial or industrial use if:
- it is allocated an Australian Valuation Property Classification Code (AVPCC) by the Valuer-General that is in the following ranges: 200-299 (commercial), 300-399 (industrial), 400-499 (extractive industries) or 600-699 (infrastructure and utilities - industrial) (refer below for comments on 'mixed-use' properties); or
- it is land that is used solely or primarily as 'eligible student accommodation', being 'commercial residential premises' (as that concept is defined for GST purposes) that is designed for occupation by students of a 'higher education provider' (within the meaning of the Higher Education Support Act 2003 (Cth)) and is occupied or available for occupation by students of a higher education provider.
Exclusions from the new regime
The new regime will not apply to:
- commercial or industrial properties purchased (or the subject of an agreement or arrangement to purchase entered into) before 1 July 2024;
- properties primarily used for residential, primary production, community services, sport, or heritage or cultural purposes (based on the AVPCC code assigned to the property by the Valuer-General);
- properties the subject of a post 30 June 2024 transaction that is exempt from transfer duty or landholder duty (or eligible for a corporate reconstruction concession or corporate consolidation concession) – importantly however, properties the subject of other duty concessions (e.g. in the context of the takeover of a listed landholder or in the context of a regional Victoria commercial and industrial duty concession claim) can still enter the CIPT regime in the event of a post 30 June 2024 transaction; or
- properties that are the subject of certain non-standard transactions that can give rise to duty, e.g. the grant or transfer of a 'dutiable lease' or the grant or acquisition of an 'economic entitlement'.
The Government has confirmed that existing exemptions and concessions from stamp duty will continue to apply to the first post 30 June 2024 transaction that occurs in respect of a property that is the subject of the new regime.
Creeping acquisitions and integrity measures
While the acquisition of a direct interest or indirect interest (i.e. a landholder duty acquisition) of less than 50% in a property will generally not cause that property to enter into the CIPT regime, a detailed analysis may be required to confirm the position having regard to the specific facts.
In particular, if two or more transactions together amount to a direct interest of 50% or more in qualifying land, those transactions are aggregated and the whole of the land will generally enter into the CIPT regime if:
- the transactions are required to be aggregated for duty purposes (this would include most scenarios where contracts of sale are entered into within 12 months of each other and the transactions form part of substantially one arrangement); or
- interests in qualifying land acquired by a person or 'associated persons' (as that term is defined for duty purposes) of that person, are made within 3 years of one another.
In the landholder duty context:
- special rules apply to address creeping acquisitions made in a landholder in order to determine if a '50% or more' threshold interest in the land is met;
- land can in certain circumstances be brought into the CIPT regime if an initial interest was acquired prior to 1 July 2024 and a further interest is acquired on or after that date (and those interests together amount to an interest of 50% or more).
In addition, the Bill contains anti-avoidance rules aimed at schemes which seek to:
- reduce (or obtain an exemption from) CIPT;
- prevent land from entering into the CIPT regime; or
- cause land to enter the CIPT regime in order to avoid duty that would otherwise be charged on subsequent transactions.
Mixed-use properties
Where a property on one title has a mixture of qualifying and non-qualifying uses, a 'sole or primary use' test will apply to determine if a post 30 June 2024 transaction of the property causes it to enter the CIPT regime. This test is not relevant where the multiple uses are on separate and distinguishable land titles.
If the sole or primary use of a property is a qualifying commercial or industrial use, the CIPT will apply to the entire property (i.e. there is no apportionment), however concessions or exemptions from the CIPT may apply to relevant portions of the property.
The Commissioner of State Revenue may take account of various factors in determining the sole or primary use of the property, including land or floor area associated with each use, relative intensity, economic and financial significance of each use and length of time of each use.
Similarities to and differences from the land tax regime
The CIPT will be separate to, and will be imposed in addition to, land tax. Accordingly, the two regimes will share a number of similarities (though there will be some differences). These include:
- Assessments: like land tax, the CIPT will be assessed for a calendar year based on land ownership as at midnight on the 31 December immediately preceding that year. It will first apply to the calendar year immediately following the 10th anniversary of the first transaction of the property since 30 June 2024 and will continue to apply as long as the property is not converted to a use that is not a qualifying commercial or industrial use.
The State Revenue Office will issue CIPT assessments annually. Interestingly, it is proposed that the Commissioner will have an unlimited period in which to reassess previously assessed CIPT liabilities (rather than the 5 years which generally applies in the land tax context).
- Notification requirements: a person served with a CIPT assessment has 60 days to notify the Commissioner of any errors in or omissions from the assessment. Further, if there is a relevant change in use of CIPT land, the owner must notify the Commissioner within 30 days of that change.
- No AOS: unlike the 'absentee owner surcharge' under the land tax regime, a higher rate of CIPT will not apply to foreign owners.
- Property clearance certificates: certificates will include details of any unpaid CIPT amounts (and the Commissioner may also state whether the land has entered the CIPT regime, and if so, when). Outstanding CIPT will form a charge on the land which has priority over all other encumbrances (except for any 'transition loan' charge – refer below).
- Pass-through: a landlord will generally be able to negotiate to recover amounts on account of CIPT from their tenants. However, consistent with land tax, recovery under a 'retail premises lease' will be prohibited by way of amendments to the Retail Leases Act 2003 (Vic). Further, CIPT cannot be passed on to tenants or other 'renters' under a residential rental agreement (e.g. CIPT liabilities charged in the 'build to rent' or 'mixed use' contexts).
- Exemptions: existing land tax exemptions will apply to the CIPT (for example, a principal place of residence exemption may apply in respect of the residential portion of a mixed-use property that contains a home but is nonetheless treated as 'commercial' or 'industrial').
- Valuation objections: the Bill proposes amendments to the Valuation of Land Act 1960 (Vic) to ensure that CIPT taxpayers can object to a CIPT taxable value in the same way that they can currently object to land tax taxable values.
- Default: similar to the land tax regime, if an owner fails to pay a CIPT liability, the Commissioner may seek to recover the amount owing from a lessee, mortgagee or occupier (in which case the person who pays the liability would be entitled to recover the relevant amount from the owner or set it off against any amount it owes to the owner).
Payment of final stamp duty liability
The first purchaser of a qualifying commercial or industrial property on or after 1 July 2024 is liable to pay what will generally be the final stamp duty liability in respect of the property.
Eligible first purchasers will have a choice of paying the final stamp duty in respect of the property by:
- paying upfront (i.e. the standard approach under the current stamp duty regime); or
- using a government-facilitated transition loan with a 10 year repayment term (Transition Loan).
The Bill proposes amendments to the Treasury Corporation of Victoria Act 1992 (Vic) to facilitate Transition Loans. While eligibility criteria are yet to be confirmed, based on previously released guidance it is expected that a Transition Loan will only be available to an eligible first purchaser of a qualifying commercial or industrial property who is:
- an Australian citizen or permanent resident or an Australian business (foreign owners will not be eligible);
- purchasing the property for a price which does not exceed $30 million; and
- approved for finance for the property by an authorised deposit-taking institution or other approved lender.
Transition Loans will be provided by the Treasury Corporation of Victoria (TCV) and are expected to have the following key features:
- fixed, commercial (market-based) interest rate equal to the TCV's bond rate plus a credit risk margin which is calculated at the start of the loan;
- annual loan repayments set upfront and which, in aggregate, equal the stamp duty liability plus interest over the 10 year period;
- early repayment permitted but break fees will apply (details on break fees are to be confirmed);
- the loan will not be able to be novated or transferred to a subsequent purchaser. The borrower will be required to repay the outstanding balance on the loan in the event of a subsequent sale of the property or change to a non-qualifying use within the 10 year period; and
- TCV will have a first ranking statutory charge over the land by reference to the Transition Loan, which will be registered on title.
New 'change-of-use' duty
Where a property that has entered the CIPT regime is converted to a non-qualifying use (e.g. residential) and the property continues to be used for that non-qualifying use as at 31 December in a given year, the owner will not be liable for the CIPT on that property for the following tax year. Rather, duty (either transfer duty or landholder duty as applicable) will apply to any sale of the property (or relevant landholder duty event) while it has a non-qualifying use. This outcome is consistent with the treatment of non-commercial and non-industrial properties once the CIPT regime commences.
Where the change to a non-qualifying use follows a second or subsequent post 30 June 2024 transaction of the property (such that no transfer duty or landholder duty would have been paid in respect of the property), the owner (or acquirer of interests in the landholder, as applicable) may be liable to pay 'change-of-use duty'. This duty is calculated based on the duty that would have been payable when the relevant historical dutiable transaction or landholder duty event occurred (taking account of any applicable duty concessions), and reduced by 10% for each calendar year that has passed since that transaction.
If a property returns to a qualifying commercial or industrial use after converting to a non-qualifying use, the CIPT will become payable immediately after the original 10 year transition period concludes and there will not be a refund of any change-of-use duty.
Property owners will have an obligation to notify the Commissioner of State Revenue of any relevant change of use within 30 days.
Subdivisions and consolidations
The Bill confirms the following:
- Subdivided properties: If a property already within the CIPT regime is subdivided, stamp duty will not apply to the child lots if they transact. Rather, CIPT will apply to each child lot (commencing 10 years after the initial transaction of the parent lot).
- Consolidated properties: Properties that are consolidated will be subject to the CIPT if 50% or more of the total land area of the original properties had already entered the CIPT regime. In such circumstances, the consolidated property will be taken to have entered into the CIPT regime from the first date that any relevant pre-consolidation land entered into the regime.
New requirements for sales of land
Consistent with recent Victorian land tax changes which prohibit recovery of land tax from a purchaser under a contract of sale (where the sale price is below a threshold amount, currently $10m), the Bill seeks to prohibit adjustments on account of CIPT in the same circumstances. Consequential changes to the general sale conditions set out in the Property Law Act 1958 (Vic) are also proposed.
Further, and importantly for conveyancers and real estate law practitioners, it is proposed that 'section 32 statements' must disclose:
- a statement as to whether or not the land has entered the CIPT regime (and if so, the date of entry into the regime); and
- the AVPCC most recently allocated to the land.
We will monitor the progress of the Bill and provide a further update in due course.
If you have not already done so, we recommend that you start to consider what impact the CIPT regime may have on valuations and rental returns for your existing portfolio (and those of potential target properties).
Whether the new regime will cause a flurry of pre 1 July 2024 contracts of sale remains to be seen. However it is worth noting that the imposition of the annual CIPT may effectively be delayed if intending purchasers enter into an agreement or arrangement to acquire land with a qualifying commercial or industrial use before 1 July 2024.
Please contact us for advice if you have any questions regarding how these changes might impact you, your business, or your investments.