Victorian Tax Reform – An update on the proposed transition to Property Tax

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The Victorian Government has released details of the proposed Commercial and Industrial Property Tax Reform announced in the most recent Victorian Budget. Further details and legislation on these reforms will likely be introduced to Parliament next year.

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13 December 2023

In Brief

On 11 December 2023, the Victorian Government announced details of the final design of the Commercial and Industrial Property Tax Reform which will see the abolition of transfer duties on certain property from 1 July 2024, to be ultimately replaced with an annual property tax. This follows an announcement in the 2023-24 Victorian Budget and subsequent consultation with business and industry representatives. The proposed legislation and further guidance are still to come in 2024 but the most recent announcement provides a much clearer picture of how the proposed reform is intended to operate.

In Detail

Under the proposed reforms, commercial and industrial property will be transitioned over time from being subject to stamp duty on changes of ownership, to being subject to an annual property tax of 1% p.a (referred to as the Commercial and Industrial Property Tax (CIPT)). This CIPT will apply in addition to any land tax ordinarily payable.

From 1 July 2024, commercial and industrial property should only be subject to one final round of stamp duty. Once that duty is paid, property will become part of the new tax system and no further duty should apply (provided it remains commercial / industrial). Instead, the CIPT will become payable annually from the 31 December after the tenth anniversary of the final stamp duty payment.

What types of properties will the reform apply to?

This reform will apply to Victorian land that has a qualifying commercial or industrial use – being land that has been coded by the Valuer-General as commercial, industrial, extractive industries or infrastructure and utilities.
It will not apply to land that has been coded by the Valuer-General as residential, primary production, community services, sport or heritage and culture.
For mixed use properties, a “sole or primary use” test will be applied. The “primary” use will be determined by the Victorian Commissioner, looking at 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 property is determined to be solely or primarily for commercial or industrial use, the entire property will enter the new system (including the non-qualifying portions).
Student accommodation will generally be considered to be commercial property provided that it is not provided in connection with a university (such as university colleges).
Once a parcel of land has entered the new system, the subdivision of that land will not change that qualification – the subdivided parcels will be able to be transacted without duty and will retain the same property tax commencement date as the original parcel.
Lots that are consolidated into a larger parcel will be part of the new system if 50% or more of the total land area of the new parent property is made up of land that had already entered the new system.

When will properties come within the new system?

Entry into the new system will occur when:

a contract for sale is entered into on or after 1 July 2024 (i.e. both signing and completion need to occur on or after 1 July 2024);
there is a 50% or more change in ownership of the property – via either a dealing in the property itself or indirectly via a dealing in shares or units; and
there is a relevant “positive duty liability” – that is, duty needs to be paid under an eligible type of transaction (including where certain concessions apply, such as the 50% regional commercial and industrial concession). This can include either transfer duty or landholder duty.

The property will not enter into the new system if:

The transaction is exempt from duty – e.g. under an exemption for deceased estates, charitable institutions, or transfers between spouses.
The duty is triggered under an excluded / complex arrangement – e.g. corporate reconstruction concessions, dutiable leases, economic entitlement provisions or subsale provisions.

In addition, anti-avoidance provisions will be put in place to support the integrity of the reform. Details of these measures are yet to be released.

What happens once the property is in the new system?

Once a property has become part of the new system, any subsequent dealings (including direct or indirect dealings), should not be subject to stamp duty, as long as the property continues to be classified as commercial or industrial property.

From the 31 December after the tenth anniversary of the last duty payable (e.g. settlement of the transfer), the CIPT will apply annually. This tax is set at 1 per cent of the property’s unimproved land value per annum with no tax free threshold.

This tax will be separate to land tax which will continue to apply in the same way that it currently does. However, it will be administered in a similar way to land tax and share many common features, including:

existing land tax exemptions will also apply to the CIPT;
the CIPT will not be allowed to be passed through by landowners to specific retail tenants identified under the Retail Leases Act 2003 (VIC);
the CIPT will be able to be paid in a single annual payment or by instalments.

There will be no additional surcharge as part of the CIPT system for foreign persons. However, it will not displace the land tax surcharge that already exists.

Information on whether a property is in the new system will be included in a Property Clearance Certificate issued by the State Revenue Office.

What happens if the classification of the property changes?

If a commercial or industrial property that has become part of the new system subsequently converts to a non-qualifying use (e.g. residential purposes):

the property will not be subject to the CIPT while it is used for that non-qualifying purpose (even where it has reached the tenth anniversary after the entry into the system and the CIPT has started to apply);
any dealings in the property will be subject to duty, while it has the non-qualifying use;
if there has been a dealing in the property in the 10 years before the change in use, a “change-of-use duty” may apply.

The “change-of-use” duty will be calculated based on the stamp duty that would have been payable when the property was transacted (including any relevant concessions) less 10 per cent for every 31 December that has passed since the transaction occurred (up to a maximum of 100%). Property owners will need to notify the SRO within 30 days of a change of use occurring.

If the property subsequently returns to a “qualifying” / commercial and industrial use, there will not be any refund of the “change of use” duty, and whether or not the annual property tax is payable will be determined based on the original 10 year period (that is, it will apply based on the timing of the original entry into the new system, rather than having the clock reset).

New loan scheme for upfront duty payment

In addition to the new system set out above, the Victorian Government has announced a new Government-facilitated loan scheme that will be offered to certain purchasers of commercial and industrial land as an alternative to self-financing the upfront duty amount.

This effectively gives eligible purchasers the ability to choose whether to transition to an annual payment arrangement (via loan repayments) from the time of the purchase instead of an upfront sum.

This scheme will be available to eligible applicants, who are:

Australian citizens / permanent residents or an Australian business;
the first purchaser of a commercial or industrial property where the contract is entered into, and settlement occurs, on or after 1 July 2024;
purchasing property with a purchase price of up to $30 million; and
approved for finance from an Authorised Deposit taking institution or other approved lender for the subject property.

The loan will be issued by the Treasury Corporation of Victoria with a fixed market-based interest rate equal to the Treasury Corporation of Victoria’s bond rate plus a credit risk margin (to be finalised and published in 2024).

The interest will be calculated upfront, and a total amount, comprising the stamp duty and total interest will be required to be repaid over ten annual payments, commencing one year after settlement. Early repayment will be possible, but a break fee will apply.

A first ranking statutory charge will be registered on title and the total loan amount will need to be repaid if the property is subsequently sold or converts to a non-qualifying use. The loan cannot be transferred or novated to a subsequent purchaser.

Foreign owners will not be eligible for the loan scheme.

What’s next?

The latest announcements provide a lot more clarity regarding how the proposed reforms and new Commercial and Industrial Property Tax system are intended to operate.

However, this continues to be an area to monitor, with further details and the legislation required to facilitate this reform expected to be introduced to the Victorian Parliament in 2024.