Following a year of significant tax concessions and stimulus spending in response to COVID-19, the 2021/2022 Victorian State Budget (Budget) adopts a clear revenue-raising focus.
In particular, three property duty/tax measures have been announced with the aim of 'Budget repair':
- a new 'premium' stamp duty rate for property transactions with a value over $2 million, which is applicable to contracts entered into on or after 1 July 2021;
- higher land tax rates for landholdings with a taxable value of more than $1.8 million; and
- a new 'windfall gains tax' in respect of rezoned land.
These measures have come as a surprise to the property industry, and are in contrast to the New South Wales (NSW) Government's proposal to create wholesale changes to its property tax regime, including its plans to gradually abolish stamp duty. Only minor concessions have been granted to offset these changes, including a temporary widening of the 'off-the-plan' duty concession and the introduction of duty concessions for new properties purchased in the City of Melbourne.
The Budget also proposes a number of payroll tax changes, including a new payroll tax surcharge to fund Victoria's mental health system, as well as a minor increase to the payroll tax-free threshold and regional payroll taxes. These new measures (other than the 'windfall gains tax') are contained in the State Taxation and Mental Health Acts Amendment Bill 2021 (Bill), which was introduced into the Victorian Parliament on 20 May 2021.
Further detail on each of these Budget measures is set out below.
New 6.5% 'premium' stamp duty rate for properties above $2 million
Property transactions with a dutiable value above $2 million are proposed to be subject to a new 'premium' stamp duty rate. Unlike the 'premium' duty regime in NSW, this measure will apply not only to residential land, but to all types of land (including commercial and industrial land). The regime will also apply to all entity acquisitions that attract Victorian landholder duty.
Rather than the flat 5.5% rate that currently applies to property related transactions above $2 million, a taxpayer entering into a contract to acquire land (or who acquires a Victorian landholder entity) on or after 1 July 2021 will need to pay:
- a 5.5% duty rate on the first $2 million of dutiable value or land value (i.e. $110,000);
- plus 6.5% of any excess dutiable value or land value over $2 million (i.e. a 1 percentage point increase in respect of such excess).
The Victorian Government estimates that this measure will impact less than 4% of transactions. However, potential broader impacts have been the subject of animated debate since the Treasurer's pre-Budget press release of the proposed measure was issued.
Typically, an increase in the duty rate will reduce the price that a purchaser is willing to pay. Further, the property industry, led by the Property Council of Australia (PCA), considers that the measure (together with other measures outlined below) will place a hand-brake on investment and development activity. The PCA and others have also noted that stamp duty is a key cost for developers that will often need to be passed on to purchasers of subdivided lots. This results in end purchasers economically bearing the developer's additional duty liability, notwithstanding that subdivided lots are generally priced at significantly less than $2 million.
Land tax rate increases for land with a taxable value above $1.8 million
Land tax is an annual tax imposed on Victorian land, by reference to the unimproved value of the land (referred to as the 'taxable value'). Land tax is subject to various exemptions including for principal places of residence and primary production land
For the 2022 land tax year onwards, increased land tax rates are proposed to apply in respect of land with a taxable value exceeding $1.8 million as follows:
||Current land tax rate*
||Proposed new land tax rate*
|$1,800,000 to <$3,000,000
||$9,375 plus 1.3% of taxable value in excess of $1.8 million
||$9,375 plus 1.55% of taxable value in excess of $1.8 million
||$24,975 plus 2.25% of taxable value in excess of $3 million
||$27,975 plus 2.55% of taxable value in excess of $3 million
* Excludes trust surcharges, absentee owner surcharges and vacant residential land tax (as applicable).
While the Victorian Government has suggested that these measures should only impact 'top-end' property owners, the following important consequences are likely to arise:
- landlords may be able to shift the burden of land tax increases to their tenants, depending on the nature of the lease and the wording of relevant outgoings clauses;
- given that land tax is a key holding cost for developers, developers may seek to pass on increased land tax costs in the form of increased prices for developed lots; and
- owner-occupiers that hold taxable land may be 'asset rich' but 'cash poor', and therefore may not have the cash to meet increased land tax liabilities (noting that unpaid land tax can form a first charge on the land).
As an aside, the above land tax increases will be keenly noted by industry players in the 'build-to-rent' (BTR) sector. In last year's Budget, the Victorian Government confirmed its intention to introduce a 50% land tax discount (and an exemption from the 'absentee owner surcharge') for eligible BTR projects with effect from the 2022 land tax year. However, the criteria to qualify for this exemption are yet to be announced.
New 'windfall gains' tax
The Victorian Government also proposes a new tax in respect of 'windfall gains' made by landowners that arise due to a rezoning of land that occurs on or after 1 July 2022.
The tax will apply by reference to the increase in land value resulting from a rezoning. In particular, it will apply to 'windfall gains' above $100,000, with a top tax rate of 50% applying with respect to windfall gains above $500,000.
Land subject to the current Growth Areas Infrastructure Contribution (GAIC) regime will be exempt from this tax, meaning that land subject to rezoning decisions in key growth areas such as Casey, Hume and Melton will not be affected. Further, the tax will only apply to rezoning between zone types rather than between zone sub-categories.
No further detail on the windfall gains tax was revealed in the Budget announcements or the Bill. We expect that this will be the subject of intense debate and consultation in the coming weeks, prior to a separate bill being introduced into Parliament.
Key open questions include:
- whether there will be transitional provisions to exempt pre-existing projects from the windfall gains tax;
- whether the 'windfall gain' calculation will take into account holding costs and costs incurred in achieving the rezoning;
- the precise circumstances in which payment of the windfall gains tax can be deferred (e.g. until sale of the land post development in order to ensure the landowner has the cash to pay the tax);
- whether a windfall gains tax liability will be registered on title (in a similar fashion to GAIC liabilities); and
- how the tax will interact with income tax/capital gains tax calculations. We expect that the windfall gains tax would generally either be deductible or otherwise be included in the CGT cost base of the land, depending on the facts and circumstances of the owner.
The PCA and other industry bodies have described the windfall gains tax as a 'tax on investment' that will discourage growth in the regions, worsen housing affordability and put a dampener on employment in the property sector.
Mental Health and Wellbeing Levy for businesses with national payroll above $10 million
A new Mental Health and Wellbeing Levy is set to be implemented with effect from 1 January 2022. The levy will be imposed by way of a payroll tax surcharge on wages paid in Victoria by businesses with national payrolls above $10 million per year. A rate of 0.5% will apply for businesses with national payrolls above $10 million, with an additional 0.5% applying for businesses with national payrolls above $100 million.
The Victorian Government has announced that revenue from the surcharge will be directed solely towards mental health spending, allowing for the implementation of reforms recommended by the Royal Commission into Mental Health.
Organisations that are exempt from payroll tax, such as private schools, hospitals, charities and local councils, will not be required to pay the levy.
Temporary stamp duty concession for new residential properties in the City of Melbourne
In an attempt to drive activity in the inner-city Melbourne property market, a temporary concession worth up to 100% of the stamp duty otherwise payable is proposed for purchasers of new residential property in the City of Melbourne local government area.
Broadly, where a newly built residential property in the City of Melbourne with a dutiable value of less than $1 million is sold:
- 12 months or more after the issue of an occupancy permit, the purchaser will be entitled to a 100% stamp duty exemption (for contracts entered into on or after 21 May 2021, but before 1 July 2022); or
- prior to (or less than 12 months after) the issue of an occupancy permit, the purchaser will be entitled to a 50% stamp duty concession (for contracts entered into on or after 1 July 2021 but before 1 July 2022).
These concessions do not apply to 'foreign purchaser additional duty'.
Temporary expansion of the off-the-plan stamp duty concession
The 'off-the-plan' stamp duty concession (OTP Concession) can provide significant stamp duty savings for eligible purchasers, particularly those who sign contracts that are prior to (or in the early stages of) construction. In recent years, the OTP Concession has been restricted to purchasers that acquire property for their principal place of residence.
The Victorian Government has proposed a temporary but significant widening of the OTP Concession. While the principal place of residence requirement remains in place, the applicable dutiable value thresholds (currently $750,000 for first home buyers and $550,000 for other home buyers) will be increased to $1 million. Broadly, 'dutiable value' for the purposes of the OTP concession is determined by reference to the contract price after subtracting construction costs to be incurred on the relevant land on or after the contract date.
This measure is proposed to only be available for contracts entered into between 1 July 2021 and 30 June 2023.
The Victorian Government has also proposed a number of other changes. These measures include:
- extending the vacant residential land tax exemption for new developments, such that it is available for up to two years after the land becomes residential land;
- increasing the tax-free land tax threshold from $250,000 to $300,000, therefore lowering the land tax liability for low value landholdings (although the tax-free threshold that is generally applicable to trusts will remain at $25,000);
- removing land tax concessions for gender-exclusive clubs, with effect from the 2022 land tax year;
- changes to the land tax treatment of land held through partnerships;
- bringing forward to 1 July 2021 the previously announced increase to the tax-free payroll tax threshold from $650,000 to $700,000;
- reducing the payroll tax rate for regional employers from 2.02% to 1.2125% from 1 July 2021;
- removing the indexation freeze on fee and penalty units, resulting in a 10% increase in fines and penalties from 1 July 2021;
- increasing the rate of the wagering and betting tax from 8% to 10%, with funds directed back into the Victorian racing industry; and
- changing the consumption tax treatment of products supplied to Victorian consumers by Keno operators from 15 April 2022.
Please contact us if you have any questions regarding how these changes might impact you, your business, or your investments.