The State Taxation Amendment Bill 2024 was released on 14 May 2024, a week after the Victorian Budget for 2024-25 and is therefore referred to by some as the Budget Bill. The Bill includes keenly awaited amendments to the Land Tax Act 2005 (Vic) in respect of the exemption of holiday homes owned by trusts and companies from the Vacant Residential Land Tax where relevant requirements are met.
In our update on significant Victorian property tax changes, published late last year, the Government had committed to the Property Council of Australia to extend the holiday home exemption from the Vacant Residential Land Tax (VRLT) to holiday homes held via a trust or in a company as of 28 November 2023. The draft legislation to effect this has just been released. This article outlines the details of the proposed new exemption for holiday homes held in trusts and companies.
Background – current rules and issues
The VRLT is a tax imposed yearly on residential properties in Victoria that are vacant for more than six months in a calendar year.
The VRLT is assessed at the current rate of 1% of the capital improved value of the land and is payable to the Victorian State Revenue Office. The tax applies separately to any land tax, any absentee (foreign) owner surcharge and the federal annual vacancy fee payable to the Australian Taxation Office.
Following an expansion of the VRLT rules late last year, an owner of residential property anywhere in the State of Victoria that is vacant for more than six months between 1 January 2024 and 31 December 2024 is liable for the VRLT for the 2025 land tax year, unless an exemption applies.
As we wrote last year, one of the biggest impacts of the expansion is on holiday homes.
While there is currently an exemption from the VRLT for holiday homes, it largely applies only where the owner is an individual person who used and occupied other land in Australia as a principal place of residence and other requirements are met. Accordingly, trusts and companies that own holiday homes do not qualify for the exemption as it currently stands.
This creates a problem for many holiday homeowners, who hold their holiday homes in vehicles such as discretionary trusts.
While there may be solutions involving the transfer of the ownership of the holiday home to an individual, often a transfer of ownership involves significant tax and other complications and therefore is not always feasible.
Proposed changes – extension of holiday home exemption to land held in trusts and companies
The Bill introduces new provisions to section 88A of the Land Tax Act 2005 (which contains the holiday home exemption). The new provisions provide that land is exempt from VRLT if all of the following requirements are met:
- Landowner Requirement: The owner of the land is a company or trustee of a trust (other than a trust with a vested beneficiary)
- Date Requirement: The owner of land owned the land continuously since 28 November 2023 or after that date but pursuant to a contract for the purchase of the land that was entered into on or before 28 November 2023.
- Restriction on changes in Landowner Requirement: Any changes in shareholdings (in the case of a company), unit holdings (in the case of a unit trust), beneficial interests (in the case of a fixed trust) or specified beneficiaries (in the case of a discretionary trust) has been between persons who are relatives.
- Interest in Landowner Threshold and PPR Requirement: There must be a minimum ownership interest of 50% in the landowner (in the case of companies, unit trusts and fixed trusts) by one or more individual persons who must have used and occupied other land (i.e. other than the holiday home in question) in Australia as a principal place of residence (“PPR”) or in the case of discretionary trusts, a specified beneficiary of a discretionary trust who is a natural person or a relative of that person must have used and occupied other land in Australia as a PPR.
- Use and Occupation Requirement: the land must be used and occupied as a holiday home for at least four weeks in total in a calendar year by an individual person referred to in the ‘Interest in Landowner Threshold and PPR Requirement’ (see above) or their relative.
- Commissioner’s Satisfaction Requirement: The Commissioner of State Revenue is satisfied that the land was used and occupied as a holiday home, taking into account the following:
- location of the land; and
- the distance between the location of the land and the PPR of the shareholder, unitholder, beneficiary or specified beneficiary (as the case requires); and
- the nature and frequency of the use of the land.
Proposed changes – extension of holiday home exemption to contiguous land
The current VRLT rules provide that an owner is not entitled to the holiday home exemption on more than one property.
The Bill provides an exception to the above and allows separately titled land that has been unimproved/undeveloped for five years or more to be exempt from the VRLT (which otherwise applies from the 2026 land tax year) if it is contiguous to land that is exempt under the holiday home exemption. For such land to be exempt from the VRLT, the land must:
- be contiguous with the holiday home land or separated from the holiday home land only by a road or railway or other similar area across or around which movement is reasonably possible; and
- be owned by the same owner of the exempt holiday home; and
- enhance the holiday home land; and
- be used solely for the private benefit and enjoyment of the person who uses and occupies the holiday home land.
When do the proposed changes apply from?
The Bill provides that the changes are to apply from 1 January 2025.
What are the next steps?
The proposed measures outlined above are subject to the passing of the Bill in its current form. However, as there is only approximately seven months left before 31 December 2024 and VRLT may apply in the next land tax assessment cycle where residential land is vacant for more than six months in the current calendar year, owners of residential land should urgently consider the impact of the recent changes in the VRLT rules, the proposed expansion to the holiday home exemption, and what appropriate action may be required.
For further analysis of the Victorian State Budget 2024-25 handed down on 7 May click here.
Please contact your Pitcher Partners representative if you would like assistance with reviewing your circumstances.
