When does the new regime apply?
On 11 December 2023, the Victorian State Government released details available here (including a useful information sheet available here) on the design of the new annual commercial and industrial property tax set to eventually replace land transfer (stamp) duty (stamp duty) for qualifying properties.
As previously announced in the Victorian State Budget on 23 May 2023 and initially reported here, the new regime will apply to commercial and industrial properties that are transacted from 1 July 2024 and is subject to the introduction and passage of legislation expected in the first half of this year.
What properties fall under the new regime?
For land purchased under a contract of sale, the contract and settlement must both occur after 1 July 2024. This includes part interests in a property (with at least 50 per cent or more of the property transacting after 1 July 2024).
According to the information sheet, a property will have a “qualifying commercial or industrial use” if at settlement:
the property has an Australian Valuation Property Classification Code (AVPCC) for commercial, industrial, extractive industries, or infrastructure and utilities land (AVPCCs within the 200s, 300s, 400s or 600s); or
the property is “qualifying student accommodation”.
Qualifying student accommodation is defined as:
Land which is solely or primarily used as commercial residential premises and that is used solely or primarily for providing accommodation to tertiary students will be considered commercial property. This is consistent with the definition of a commercial residential premises in the A New Tax System (Goods and Services Tax) Act 1999. This definition will exclude accommodation provided in connection with a university, such as university colleges.
Mixed-use properties which have a mix of qualifying and non-qualifying AVPCC will be captured by the new regime, based on a “sole or primary” use test. If a mixed-use property has a sole or primary use of commercial or industrial based on factors such as land or floor area of each use or relative intensity or economic and financial significance – then the whole property will be within the new system.
How will the new regime apply?
Land transfer (stamp) duty is still applicable for the first transaction relating to a qualifying property after 1 July 2024. After that first transaction, stamp duty does not apply to any further transaction.
Instead, the new “commercial and industrial property tax” (set at 1 per cent p.a. of the unimproved land value) will apply after a 10-year transition period. This is in addition to the usual land tax (currently payable at rates up to 2.65 per cent). Similar to land tax, the new tax will apply annually to land held at 31 December of the year before.
As an example – if a commercial property is acquired on 31 October 2024 under a contract dated 1 October 2024 – stamp duty at rates up to 6.5 per cent should apply to the purchase. After that, any further sale of the property should not be subject to stamp duty (provided the property remains used for a qualifying purpose on the sole or primary test).
From 1 January 2035, the 1 per cent annual commercial and industrial property tax will become payable on the unimproved land value of the property by the owner of the property at 31 December 2034. In addition, the standard land tax will continue to be payable on such properties.
Loan for payment of stamp duty
An optional transition loan is available for the payment of the stamp duty amount, which is limited to individual Australian citizens or permanent residents or Australian businesses who are:
the first purchaser of a commercial or industrial property where settlement occurs for contracts entered into on or after 1 July 2024;
purchasing property up to a maximum purchase price of $30 million; and
approved for finance from an Authorised Deposit-taking Institution or other approved lender for the purchase.
The loan will be at a fixed interest rate equal to the Treasury Corporation of Victoria’s bond rate plus a credit risk margin. The first of 10 annual repayments of the loan will be due 12 months after settlement. Once the 10 loan repayments are made, the first annual payment of the new tax will be due (with the assessment issued shortly after the start of the next calendar year).
The information sheet states the following:
Early repayment will be allowed but a break fee will apply.
If the property is subsequently sold or the property changes to a non-qualifying use the borrower will be obliged to repay the outstanding balance on the loan. The loan cannot be novated or transferred to a subsequent purchaser.
Treasury Corporation of Victoria will have a first ranking statutory charge over the interest in the land in relation to the loan. This will be registered on title to inform prospective purchasers.
An eligible taxpayer can choose not to take out the transition loan. Any non-eligible taxpayer will be liable for the full upfront duty amount.
Change of Use Duty
If a property enters the new regime and subsequently transacts again, the second and subsequent transactions should not be subject to stamp duty. However, if there is a change of use to a non-qualifying use (i.e. from commercial to residential), the stamp duty saved can become subject to a clawback.
The change of use duty is the duty otherwise saved, but reduced by 10 per cent for each 31 December passed since the property was purchased.
Landholder duty and other indirect transactions
Transfers of shares in companies or units in unit trusts that own commercial property will result in a property becoming subject to the new regime if a 50 per cent or more interest in the property is transacted.
Are taxpayers better off under the new regime?
The replacement of stamp duty with a land tax has long been called for by economists. This was on the basis that the large one-off costs of stamp duty was seen as a disincentive for persons to transfer properties as compared to an annual land tax system. That is, it is supposed to encourage people to buy and sell properties more often as it suits their needs.
In the end, whether the taxpayer or revenue “wins” after, the transitional period, depends on the capital improved value of the property, the unimproved value of the land and how long the property is held.
For example, if a $10 million property has an unimproved value land value, the duty savings is $630,000 while the additional land tax value is $50,000 a year. Therefore, in that example, in gross terms, if the land is held for less than 12 years the taxpayer is “better off”, whereas if the land is sold after 13 years, the revenue “wins”.
That of course is not the only factor. Under recent Victorian rules, land tax generally cannot be passed on to tenants, so in the above example, the landowner (assuming it owns no other properties) would pay normal land tax of $84,650 and now an additional $50,000 of land tax for a total of $134,650 each year. This will obviously seriously eat into the rental yield received from the property.
From a tax perspective, the additional land tax should be deductible as compared to stamp duty which is generally not (i.e. it forms part of the cost base of the asset).
Ultimately, time will tell whether investors agree they are better under the new regime or not. As we have seen with the ACT’s move away from stamp duty to increased land tax, the economic theories do not always play out in practice (especially when landowners start getting those increased land tax bills each year).
Action required
Investors, including SMSF trustees, that invest in commercial and industrial property should:
consider whether existing or planned acquisitions (or divestments) of commercial or industrial property will be impacted by the 1 July 2024 changes;
review any planned restructuring within existing corporate or family groups to determine if it will be impacted by the changes; and
seek advice from their State Tax advisors as required.
We will continue to monitor the release of further details on the proposed changes and introduction of the commercial and industrial property tax. Please contact us with any questions in relation to these proposed changes or any other State Tax issues.
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au
Nicholas Clifton
Principal Lawyer
T +61 3 9611 0154 | M +61 401 150 955
E nclifton@sladen.com.au
