The State Taxation Acts Amendment Act 2017 (Vic) received Royal Assent on 27 June 2017. Among other things, it amends the Land Tax Act 2005 (Vic) in order to implement the VRT. Given that the VRT is new, its precise scope remains unclear and some owners (or purchasers) might be caught off guard. Critically, developers of residential property, especially apartments, will need to consider the impact that the VRT may have, not only on unsold stock, but also on sites under construction.

Victorian Vacant Residential Land Tax

For the purposes of the 2018 land tax year onward, 'residential land' that is 'vacant' in the inner and middle suburbs of Melbourne will be subject to an annual tax of 1% of the property’s capital improved value. Accordingly, the VRT is imposed on a higher value than ordinary land tax, which is calculated on a property's site value (under which the value of any improvements to the land are ignored).

Importantly, the use of relevant land in 2017 will determine whether a VRT liability exists for the 2018 land tax year.

Properties in the following council areas will be affected: Banyule, Bayside, Boroondara, Darebin, Glen Eira, Hobsons Bay, Manningham, Maribyrnong, Melbourne, Monash, Moonee Valley, Moreland, Port Phillip, Stonnington, Whitehorse and Yarra.

For the purposes of the VRT, 'residential land' is land that is capable of being used solely or primarily for 'residential purposes', but does not include commercial residential premises, residential care facilities or land used for supported residential services or retirement village services. Neither 'capable of being used', nor 'residential purposes', are statutorily defined and therefore the scope of the VRT is at this stage unclear. While some guidance has been provided by the Victorian State Revenue Office (SRO), there may be instances where a taxpayer will need to seek advice (either from their advisor, or from the SRO in the form of a ruling) in order to determine whether the VRT will apply to their property.

A property will be considered 'vacant' for the purposes of a land tax year if it has not been 'used and occupied' in the preceding year for a period of more than 6 months (whether continuously or in aggregate) by:

• the owner of the residential land, as the principal place of residence of the owner; or
• the owner's permitted occupant, as a the principal place of residence of the occupant; or
• a natural person under a lease or short-term letting arrangement, provided that the arrangement is not made for the purpose of avoiding the payment of the VRT.

Land on which a residence is being constructed or renovated will, in certain circumstances, be considered 'vacant' in a tax year if, on 31 December of the preceding year, more than two years has elapsed since the construction or renovation commenced (noting that construction or renovation is deemed to commence on the date of issue of the relevant building permit).

Importantly, affected land owners are required to notify the Commissioner of State Revenue of any vacant residential land owned by 15 January of the relevant land tax year (e.g. notification for the purposes of the 2018 land tax year must be made by 15 January 2018). The SRO has advised that an online notification 'portal' will be made available in December 2017 for this purpose.

VRT assessments will be issued separately from ordinary land tax assessments.

The Land Tax Act contains various exemptions to the VRT, including holiday homes, properties used as a base for the purposes of attending the owner's place of business or employment, and land that was either transferred or became residential in the year preceding the relevant land tax year.

Transitional arrangements will be in place for the 2018 land tax year. In particular, all residential land has been deemed to be 'not vacant' from January to April 2017 (inclusive) in order to allow property owners sufficient time to consider their options.

Suggested actions for land owners

In order to mitigate the effects of the VRT, landowners should consider whether it is possible to:

• ensure that the property is occupied as a principal place of residence, or otherwise leased to a natural person, for at least 2 months in the period from May to December 2017 (e.g. bring forward pre-existing plans for leases or short-term letting arrangements, noting that such arrangements cannot simply be entered into for the purpose of avoiding VRT);
• for any relevant land that is the subject of a contract of sale, bring forward the settlement date to before 31 December 2017, in which case no VRT liability will arise for the 2018 land tax year; or
• seek clarification as to whether any exemptions are applicable to their land; or
• if relevant, seek clarification from the SRO as to whether their land is 'capable of being used for residential purposes'.

Developers of residential property should consider whether any of the above mitigation strategies are feasible in respect of unsold stock. Developers should also seek advice in respect of sites on which construction is proposed or has already commenced.

Finally, we note that taxpayers should also have regard to the separate federal 'annual vacancy charge' that is proposed to apply to foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months each year. This measure, which will be administered by the ATO, is intended to apply to properties acquired by foreign investors pursuant to contracts entered into after 7.30pm on 9 May 2017. A Bill to implement the measure is currently before Parliament.

Please contact us if you have any questions regarding how these changes might impact you or your business.