Victoria’s significant expansion of vacant residential land tax (VRLT) kicks in on 1 January 2025. VRLT is not a new tax, but has now become a must-consider impost on landowners across the whole State – particularly those with holiday homes.
Owners of holiday homes in their own name, or held by companies or trusts prior to 28 November 2023, should consider whether VRLT applies, and where available, should apply for an exemption from VRLT for property used and occupied for at least 4 weeks per year.
You must notify the State Revenue Office (SRO) in writing by 15 January each year if you are the owner of vacant residential land – including if an exemption from VRLT applies. Failure to do so may result in a penalty tax of 25% to 75% of the tax shortfall.
Vacant Residential Land Tax
The VRLT is a surcharge that applies to taxable residential land that is vacant for more than 6 months of a year, unless an exemption applies.
VRLT is charged in addition to ordinary land tax and levied at 1% of the land’s capital improved value. This can be significantly more than ordinary land tax, which is calculated on the unimproved value. The rate of VRLT will increase by 1% for each year that the property remains subject to VRLT, up to a maximum of 3% after three years of vacancy.
For example, this means that owners of a property worth $2,000,000 will face an annual tax liability of $20,000 in the first year, up to $60,000 for the third year that the property is charged VRLT, in addition to their existing land tax bill (for which rates also increased from 2024).
An owner of vacant residential land is required to notify the SRO in writing by 15 January each year, whether or not an exemption applies, which can be done via the SRO website.
What land is subject to VRLT?
The concept of “residential land” is broad, and captures any land that is used, or capable of being used, solely or primarily for residential purposes. This can also include residential land that is under construction or being renovated (provided that a building permit has been issued), or premises that are uninhabitable.
Previously, VRLT only applied to residential land that was situated in specific council areas around inner and middle Melbourne. From 1 January 2025, VRLT will instead apply to all residential land in Victoria. The expanded geographic range will capture properties outside of Melbourne not previously subject to the VRLT, including popular holiday destinations such as the Mornington Peninsula and Surf Coast.
Land that is otherwise exempt from land tax, such as principal places of residence (PPR) or primary production land, is also exempt from VRLT, regardless of whether it is vacant for six months.
When is land “vacant”?
For VRLT purposes, most land is “vacant” if it has not been used and occupied for more than 6 months of the year (continuous or aggregate), by either the owner of the land or a permitted occupant as their PPR, or a tenant under a bona fide lease (including short-term leases).
The concept of being “used and occupied” is given its ordinary meaning and can be understood as time that a home is “lived in”. It is not enough just to list the property on a short-term rental website; the land must be actually used and occupied for more than six months. And, if you allow friends and family to stay at the property, it must be as their PPR.
Different tests for determining whether land is “vacant” apply to land under construction or renovation, or that is uninhabitable. Broadly, landowners will have two years from the date of issue of the building permit to complete construction before the land is considered vacant, or two years from the date a residence becomes “uninhabitable”.
And if there are delays that are outside of your control? Consistent with existing law, the SRO will have discretion to extend the period of non-application if there are acceptable reasons for not improving the land, such as genuine delays outside the owner’s control.
The use of the land is assessed by reference to the year immediately before the relevant land tax year, on 31 December each year. This means that an owner’s use of a property in 2024 determines whether VRLT applies for the 2025 year.
Holiday homes and VRLT
An important exemption from VRLT is for holiday homes, which applies when the SRO is satisfied that a property is used and occupied by the owner as a genuine holiday home for at least 4 weeks of the year (continuously or in aggregate).
For the exemption to apply, the owner must be a natural person, and have their PPR elsewhere in Australia.
And if you have more than one holiday home? Choose wisely: the exemption will only apply to one property per calendar year.
Holiday homes held in a company or trust
Previously, the holiday home exemption only applied to properties owned by a natural person or vested beneficiary of a trust. This meant that properties held by a company or by a trustee, which is common for asset protection reasons, did not qualify for the exemption.
On 4 June 2024, further amendments received Royal Assent that expanded the holiday home exemption to apply to existing trust or company-owned properties used and occupied as a holiday home by a “specified person” or their relative.
A “specified person” means:
- a natural person shareholder with at least 50% of the shares in the company;
- a unit holder or a beneficiary of a fixed trust with at least 50% of the beneficial interest in the unit trust or fixed trust; or
- a “specified beneficiary” of a discretionary trust, being a beneficiary “specifically named in the trust deed or specifically declared in writing pursuant to the trust deed”,
who uses and occupies the property as their holiday home for the requisite 4-week period, and uses and occupies other land in Australia as their PPR.
These provisions are ‘grandfathered’, meaning that to qualify for the exemption the company or trustee must have owned, or entered into a contract to purchase, the land on 28 November 2023 (being the day that the VRLT expansion was announced), and continuously held the land since that time without change in beneficial ownership.
It is critical for those looking to purchase holiday homes, and their advisors, to be aware that the holiday home exemption will not apply to properties purchased within discretionary trust or company structures after that date. And those with holiday homes already in existing trust structures must ensure that the relevant trust deed is sufficiently drafted for the exemption to apply.
The holiday home exemption will only apply to one property per calendar year.
Undeveloped land
VRLT did not previously apply to unimproved land, i.e. vacant land without any residence on it. It has been announced that from 1 January 2026, the definition of “vacant” residential land will be expanded to include undeveloped land in metropolitan Melbourne that has been unimproved for 5 years or more.
Additional VRLT exemptions
Existing exemptions
The Act does not make any changes to the existing exemptions from VRLT, which include:
- land that is used and occupied by the owner for the purposes of attending work or business, for at least 140 days (however, also limited to land owned by a natural person);
- land that changed ownership in the preceding year; and
- land that becomes residential land in the preceding year (up to a maximum of 3 years where the land is not used or occupied and ownership does not change).
New exemptions
The Act introduces two new exemptions from vacant residential land tax for
- land contiguous to PPR land, and
- land that cannot be used or developed for residential purposes.
How to comply with the Victorian VRLT requirements
An owner of vacant residential land in Victoria must notify the SRO in writing by 15 January 2025, including if they are the owners of land that is subject to an exemption – such as a holiday home. This can be done online through the SRO website.
Failure to notify the SRO will result in a “notification default” which is subject to base penalty tax of 25% of any unpaid tax liability. The amount of penalty can be reduced or increased depending on culpability and whether the taxpayer has pro-actively approached the SRO.
Contact our team
Please contact our Tax team if you are concerned how these changes might impact you.
