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Is your property affected? A breakdown of Victoria's property tax reforms

Property & Development, Taxation
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The first step in Victoria’s transition from stamp duty to property tax will commence on 1 July 2024. The new regime will only apply to qualifying commercial and industrial properties.

As announced in its 2023/24 State Budget, the Victorian Government will introduce the “Commercial and Industrial Property Tax” (CIPT) as part of its long-term plan to replace stamp duty with an annual property tax. 

Introduction of new reforms for commercial and industrial properties

On 20 March 2024, the Victorian Government introduced the Commercial and Industrial Property Tax Reform Bill 2024 (Bill). The Bill mirrors the announcements and information issued by the Victorian Government last year.

Qualifying commercial or industrial property that is sold on or after 1 July 2024 will enter the new CIPT system.  At the time of settlement, the purchaser can choose to either:

  1. pay the property’s final stamp duty liability as an upfront lump sum, or
  2. pay an annual payment for 10 years, equivalent to the property’s final upfront stamp duty liability plus interest, through a “transitional loan” scheme available to eligible purchasers.

The property is then subject to a 10-year transitional period, after which the property will become liable for the new tax as “CIPT taxable land”.  Transactions which are exempt from duty or eligible for the corporate reconstruction or consolidation concession do not enter the new system.

The same applies to land owned by landholding companies or trusts in which there is a relevant acquisition.

How will this affect purchasers?

The effect of the system is that the first purchaser of qualifying commercial or industrial property on or after 1 July 2024 will be the last purchaser to pay stamp duty in respect of that property, i.e. duty will not apply to any subsequent transactions of that property provided that the property continues to be used for commercial and industrial purposes.

Relevant stamp duty concessions will continue to apply to the first post-30 June 2024 purchase provided that other requisite conditions are met.  For example, regional commercial or industrial land that enters the reform will receive a 50% reduction on the final stamp duty payment in line with existing concessional duty treatment. 

CIPT will be charged annually with the rate currently set at 1% of the unimproved value (site value) of the land with no tax-free threshold.  However, land qualifying for Victorian build-to-rent concessions will only be charged 0.5%. 

The CIPT is separate and charged in addition to land tax.  Any unpaid CIPT will be secured by a statutory first charge on the relevant land, and is recoverable from a lessee, mortgagee or occupier of the land in the event of default.

Administrative arrangements for the CIPT will largely align with those already in place for land tax, including adoption of the land tax assessment date (31 December of the preceding year), the ability to pay CIPT as a single annual payment or in instalments, and a prohibition on landowners passing on the cost of CIPT to commercial tenants under the Retail Tenancies Act 2003 (Vic).

General anti-avoidance provisions will apply to schemes intended to either avoid the entry of land into the tax reform scheme or avoid liability for CIPT.

The finer details of the new regime

What classifies a property for a commercial or industrial use?

The new regime only applies to qualifying commercial and industrial properties.

A property has a qualifying commercial or industrial use if, at the date of settlement, it is allocated an Australian Valuation Property Classification Code (AVPCC) between 200-499 and 600-699 (find out more about the APVCC codes here), or is qualifying student accommodation. 

Mixed-use properties will need to satisfy the sole or primary use test to determine whether or not CIPT will apply. The “primary” use of land as determined by the Commissioner of State Revenue will consider factors such as land or floor area of each use, relative intensity, economic and financial significance of each use and the length of time of each use.

If the primary use of the property is determined to be non-qualifying (e.g. residential), then CIPT will not apply to the property.  Future transactions of mixed-use property already in the system will not pay stamp duty provided that it retains a qualifying sole or primary use.

Indirect transfers and fractional interests

Direct transfers of 100% interests in a property are clearly caught by the new provisions. In addition, fractional or part interests in land are also captured where 50% ownership or more is transacted (with the result that the whole property would enter the system). Certain indirect transactions, such as landholder acquisitions are also caught.

This means that a minority part-owner of land, who has held their interest since before 1 July 2024 and would not otherwise pay CIPT, can be unwillingly drawn into the CIPT system if their majority co‑owner decides to sell their interest.

Subdivision and consolidation

If a property that is in the CIPT system is subdivided, the child lots will continue in the system, remain exempt from duty for subsequent transactions, and inherit the 10-year transition start date of the parent property. 

If a property that is in the CIPT system is consolidated with another, the consolidated property will be subject to the CIPT if 50% or more of the total land area of the parent properties had entered the new system. The transition period will start on the earliest date that any parcel of consolidated qualifying land entered the system.

Foreign ownership

Unlike land tax and stamp duty, no foreign owner surcharge currently applies under the new regime. However, foreign owners will not be eligible to apply for the transitional loan.

Transitional loan

The transitional loan, which allows a purchaser to pay the final upfront duty over 10 years, with interest, will be issued by the Treasury Corporation of Victoria. Although detail was not included in the Bill, according to other government announcements, these loans will incur interest fixed at the time the loan is given and calculated as the treasury bond rate plus a credit risk premium. That is, the rate is not expected to change as general rate conditions change over that decade.

The loan will be available to “eligible” applicants, who are:

  1. Australian citizens/permanent residents or an “Australian business”
  2. purchasing property up to a maximum purchase price of $30 million, and
  3. approved for finance from an Authorised Deposit-taking Institution or other approved lender for the subject property.

The first repayment will be due 12 months after settlement. If the property is sold or a change of use occurs (see Change-of-use Duty), the whole outstanding balance must be repaid. Voluntary early repayments will be allowed but will incur a break fee.

The outstanding loan balance will be secured by a statutory first charge over the property in favour of the Treasury Corporation.

Change-of-use Duty

CIPT is only payable on property with a qualifying use. If land that has entered the new system changes to a non-qualifying use, and the property continues to be used for that use as at 31 December, the property will cease to be liable for CIPT for that year. 

However, if the land is converted to a non-qualifying use, and a duty exemption or partial exemption was given on a subsequent dealing because the land was CIPT land, then a “change of use duty” applies, essentially to reverse the exemption. The amount of change of use duty is reduced by 10% for each calendar year since the exempt transaction so that, after 10 years from acquiring the CIPT land exempt from duty, there will be no duty to pay on a change of use.

If a converted property later returns to a qualifying commercial or industrial use, CIPT will be payable at the end of the original 10-year transition period, without a refund on any change-of-use duty. 

Property owners must notify the SRO of any change of use of a property within 30 days. 

How we can help

If you have any questions about how these changes might impact you, your business, your investments or your clients, please contact our team of experts below.

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