Commercial and industrial stamp duty reform in Victoria

10 minute read 13.12.2023 Melinda Waduge, James Hamblin, John Riley, Nathan Deveson

Further details released for planned transition from stamp duty to an annual tax for commercial and industrial properties from 1 July 2024.

As noted in our previous update Victorian State Budget - Big stamp duty and tax changes from 2024, as part of the 2023-24 State Budget, the Victorian Government announced its intention to transition from stamp duty to an annual property tax for commercial and industrial properties in Victoria.

Following consultation with industry and professional bodies, the Government has now released further details on the proposed regime and affirmed its intention for it to commence on 1 July 2024.

While legislation is expected in the first half of 2024, this article summarises what we know so far.

Overview of the new regime

By way of an information sheet and website updates on 11 December 2023, the Victorian Government has announced that the new 'commercial and industrial property tax' (CIPT, formerly referred to as the 'annual property tax') will apply to a transaction if:

the relevant contract of sale is entered into on or after 1 July 2024;
the property has a qualifying 'commercial' or 'industrial' use at the date of settlement;
50% or more of the property transacts (either directly, or indirectly e.g. by way of share or unit sale); and
the transaction is not exempt from stamp duty.

Where the CIPT regime applies, 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 the 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).

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); or
it is qualifying student accommodation, being land which is (1) solely or primarily used as 'commercial residential premises' (as that concept is defined for GST purposes) and (2) used solely or primarily for providing accommodation to tertiary students (excluding accommodation provided in connection with a university, such as university colleges).

Exemptions from (or concessions under) the new regime

The new regime will not apply to:

commercial or industrial properties purchased before 1 July 2024 (though post 30 June 2024 transactions of fractional interests of 50% or more will generally cause the entire property to enter the regime);
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 stamp duty (or eligible for a corporate reconstruction concession) – importantly however, properties the subject of other stamp duty concessions (e.g. the regional Victoria commercial and industrial duty concession) will generally still enter the CIPT regime in the event of a post 30 June 2024 transaction; or
some non-standard transactions that can give rise to duty, e.g. the grant or transfer of a 'dutiable lease', the grant of an 'economic entitlement' and certain 'sub-sale' transactions.

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 under the new regime.

While some complex transactions have been carved out from the regime, certain indirect transactions of property (e.g. 'landholder acquisitions' that arise from a share or unit acquisition) are proposed to be captured. While a '50% or more' threshold appears to be contemplated, further detail is required in order to determine the precise interaction of the CIPT and landholder duty regimes.

Anti-avoidance provisions are proposed, however details are yet to be announced.

Assessment of and exemptions from the CIPT

While the CIPT will be separate to land tax, the two regimes will share a number of similarities:

Assessment: 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. Unlike under the land tax regime, no 'absentee owner surcharge' will be imposed on foreign owners under the CIPT regime.
Administration: the CIPT will be administered in a manner which is generally consistent with the arrangements already in place for land tax. The State Revenue Office will issue an annual assessment of CIPT, which can be paid in a single payment or by instalments (whether this will be issued together with or separate from a land tax assessment is unclear). Property clearance certificates will include information on whether a property has entered the CIPT regime and detail any unpaid amounts. We expect (though it is to be confirmed) that outstanding CIPT will form a first ranking charge on the land.
Pass-through: consistent with land tax, pass-through of the CIPT by landowners to tenants will not be permitted in the case of retail tenants identified in the Retail Leases Act 2003.
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').

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 the final stamp duty liability for 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).

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.

The Transition Loan will be provided by the Treasury Corporation of Victoria (TCV) and have the following key features:

fixed, commercial (market-based) interest rate equal to the TCV's bond rate plus a credit risk margin (to be published in 2024) 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.

There will be an application process for Transition Loans, with further details to be released in early 2024.

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.

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 on a given year, the owner will not be liable for the CIPT for the following tax year. Rather, stamp duty will apply to any sale of the property while it has a non-qualifying use (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 stamp duty would have been paid on the acquisition of the property by the owner), the owner may be liable to pay 'change-of-use duty'. This duty is calculated based on the stamp duty that would have been payable when the property was transacted (taking account of any applicable duty concessions), and reduced by 10% for every 31 December (or tax year) that has passed since that transaction (to a maximum reduction of 100% or duty liability of not less than nil).

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 Government has also indicated 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 regime.

More details of the new regime are expected in the new year, along with the release of draft legislation.

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 property transactions remains to be seen. However it is worth noting that the imposition of the annual CIPT may effectively be delayed if intending purchasers contract 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.