The Victorian Government has announced a 'once in a generation' transition from stamp duty for commercial and industrial properties from 1 July 2024. We summarise this and other key tax announcements outlined in the Victorian Budget handed down on 23 May 2023.
Commercial and industrial property – 1 July 2024 transition from stamp duty
In the same week that the new Government of New South Wales introduced legislation to repeal the last vestiges of its predecessor's attempts to transition its tax base away from stamp duty, Victoria has moved in the opposite direction.
While the finer details of an 'annual property tax' regime are to be confirmed (with the Victorian Government undertaking to consult with industry on the legislative design of the regime), it is proposed that:
- The new regime will apply to commercial and industrial properties acquired on or after 1 July 2024 (existing owners of properties purchased before 1 July 2024 will not be affected).
- There will be a transition period where the first purchaser of a commercial or industrial property on or after 1 July 2024 will be able to choose to either:
a. pay the property’s final stamp duty liability as an upfront lump sum; or
b. use a government-facilitated 'transition loan' to pay fixed instalments of that stamp duty liability (plus interest) over a 10 year period.
- Once a property enters the new system:
a. the annual property tax will be payable at a flat 1% of the property’s unimproved land value (it appears that the first post 30 June 2024 purchaser or any subsequent purchaser will commence paying this tax 10 years after the first post 30 June 2024 acquisition of the property, regardless of whether the stamp duty liability on that acquisition has been paid upfront or by instalments); and
b. stamp duty will never again be payable on a transaction relating to the property (i.e. the annual property tax will apply for all subsequent purchasers).
Obviously the impact that the regime will have on the total taxes paid by a particular purchaser on a particular property will depend on the final design of the regime and the purchaser's specific facts.
Key issues where we will have to wait for detail include:
- the definitions of 'commercial' and 'industrial' property, in particular noting that 'residential' property will not be impacted - for example, it is an open question as to whether build-to-rent complexes, retirement villages, aged care facilities and commercial residential premises (such as hotels, motels and hostels) will fall within the new regime;
- whether a post transaction change in use of a property (e.g. from farmland or residential to commercial or industrial) will result in the annual property tax applying;
- whether transactions which occur on or after 1 July 2024 pursuant to a contract, option or other arrangement entered into prior to that date will be impacted;
- whether an indirect acquisition of a commercial or industrial property interest (e.g. through the acquisition of a landholding entity, partnership or economic entitlements) will bring a property into the new regime;
- the implications arising where a post 30 June 2024 purchaser elects to pay fixed instalments of stamp duty but then on-sells the property prior to all of those payments being made; and
- whether a post 30 June 2024 transaction that is exempt from stamp duty or subject to a stamp duty concession (e.g. corporate reconstruction concession) will mean the property is brought into the new regime such that the property will become subject to the annual property tax after the subsequent 10 year period.
COVID debt levy – payroll tax and land tax increases
The Government has announced a 'COVID Debt Repayment Plan' which is projected to assist in paying down $31.5 billion of COVID debt over the next 10 years. This plan includes the following tax increases which are expected to apply for a period of 10 years:
From 1 July 2023
An increase in the payroll tax rate by 0.5% for businesses with national payrolls over $10 million, plus an additional 0.5% for businesses with national payrolls over $100 million. Certain payroll tax exemptions will continue to apply (e.g. for hospitals, charities, local councils and wages paid for parental and volunteer leave).
From 1 January 2024
An increase to land tax rates by 0.1% for owners holding land with a taxable value over $300,000 (if the land is not held in a trust) or $250,000 (generally if the land is held in a trust). There are also proposed additional fixed charges (of $500 for landholdings with a taxable value between $50,000 and $100,000 and $975 for landholdings with a taxable value above $100,000) and a decrease in the tax-free threshold for general (non-trust) land tax rates (from $300,000 to $50,000) which will result in significantly higher land tax assessments for investors with relatively low value landholdings (e.g. individuals and SMSFs). Some investors who previously paid no land tax will begin paying land tax for the first time.
Doubling of absentee owner land tax surcharge
With effect from the 2024 land tax year (i.e. having regard to properties owned as at midnight on 31 December 2023), the Government proposes to increase the absentee owner surcharge land tax rate (AOS) from 2% to 4%.
The Government states that this change is to ‘harmonise’ the rate with the New South Wales foreign owner land tax surcharge and is to 'help ensure overseas property investors contribute towards the provision of government services and infrastructure in Victoria.'
- This change effectively doubles the cost of the surcharge for 'absentee owners' of land (and for some taxpayers, the impact may be more than double given that the threshold above which the surcharge is payable by non-trust owners of land is proposed to be reduced from $300,000 to $50,000). Importantly, absentee owners can include Australian entities which are owned directly or indirectly by foreign investors; and
- unlike the New South Wales foreign owner surcharge, the Victorian AOS is not limited to residential land – it applies to all types of taxable land including commercial and industrial land.
There appears to be no proposal to amend the criteria for AOS exemptions and concessions. Accordingly, the value of these exemptions and concessions (under the Treasurer’s Guidelines for relief, as well as the ‘build to rent’ land tax concessions) will increase for qualifying taxpayers going forward.
A series of other tax measures that were announced include:
- the abolition of business insurance duty over a 10 year period (reducing by 1 percentage point each year from the current rate of 10%);
- an increase in payroll tax-free thresholds (from $700,000 to $900,000 from 1 July 2024 and to $1,000,000 from 1 July 2025), though the benefit of these thresholds will be reduced for businesses with wages between $3 million and $5 million (with no tax-free threshold for businesses with wages in excess of $5 million);
- changes to the land tax exemption provisions applicable for principal places of residence under construction or renovation when a builder goes into liquidation;
- a new land tax exemption for land protected by a conservation covenant with Trust for Nature;
- increased duty and land tax concessions for special disability trusts; and
- an increase in the wagering and betting tax rate from 10% to 15% of net wagering revenue.
The Government has announced that the annual property tax design and consultation phase will occur over the coming months and we look forward to providing you with further details on the new regime as they become available. In the meantime, we recommend you start to consider what impact there will be on, and what steps you should take to prepare, your asset portfolio in relation to the introduction of the annual property tax.
Please contact us for advice if you have any questions regarding how these changes might impact you, your business, or your investments.