Increased land tax, stamp duty and new windfall gain tax to impact land owners and developers
Ahead of the Victorian State Budget which will be handed down this coming Thursday, Treasurer Tim Pallas has announced tax increases that are intended to raise an extra $2.7 billion over the next four years.
The key state taxes measures announced late last week comprise a new premium stamp duty rate for property transactions with a value above $2 million, increases to the land tax rates for land with a taxable value above $1.8 million and a new tax on land value uplifts as a result of rezoning, at the rate of 50% of the value uplift.
The key changes
- Property transactions with a dutiable value above $2 million will be subject to a new premium rate of duty, with the duty payable being $110,000 plus 6.5% of the dutiable value above $2 million.
- The land tax rate will increase from 1.3% to 1.55% for land with a taxable value above $1.8 million and not exceeding $3 million.
- The land tax rate will increase from 2.25% to 2.55% for land with a taxable value above $3 million.
- A new windfall gain tax of 50% of uplifts in value greater than $500,000 due to rezoning, with phasing-in of the tax on uplifts between $100,000 and $500,000. Land subject to the Growth Areas Infrastructure Contribution will not be affected.
When do the changes apply from?
The following are the expected start dates of the new measures:
Change |
Expected start date* |
|---|---|
New premium stamp duty rate |
1 July 2021 |
Increase in land tax rates |
2022 land tax year (based on ownership of land as at midnight 31 December 2021) |
New windfall gain tax |
1 July 2022 |
*Subject to confirmation once the legislation is introduced into Parliament.
How will the changes impact property developer and land owners?
Whilst the Victorian government is promoting the changes as only impacting wealthy land owners and developers, they will clearly have a more far reaching impact, particularly on home buyers.
These changes are unlikely to help home buyers break into the market as the Government claims. Instead, as land owners and developers factor the increased taxes into the land acquisition and development equations, we expect further upward pressure on house prices, making it harder for first home buyers to get their foot on the property ladder and for other Victorians to move for new jobs or other personal reasons. The windfall gain tax will also put further pressure on the supply side in regional areas as developers shy away from land parcels that are caught by the new tax.
Example 1: Property developers and home buyers
- A local developer purchases a block of vacant land on the outskirts of Ballarat in January 2022.
- The land is in a farming zone at the time of its purchase.
- The developer intends to push for the land to be rezoned as Urban Growth Zone land and to ultimately develop the land into residential lots for sale to the public.
Stamp duty
The table below compares the duty payable* by the developer under the current duty rates and the new rates from 1 July 2021 if the purchase price of the land is $2.5m, $5m and $10, respectively.
Purchase price |
Current stamp duty payable |
Stamp duty payable under new rates |
Increase |
|---|---|---|---|
$2.5m |
$137,500 |
$142,500 |
$5,000 |
$5m |
$275,000 |
$305,000 |
$30,000 |
$10m |
$550,000 |
$630,000 |
$80,000 |
The purchaser of a farming block valued at $10m will cop an additional $130,000 in duty if they purchase that block after 1 July 2021.
Foreign purchasers of residential property, which includes land intended for residential development will also be required to pay the foreign purchaser additional duty of 8% in addition to the premium rate of stamp duty. For land with a $10m price tag, the total duty payable by a foreign purchaser will be a hefty $1.43m.
Land tax
In addition, the developer will also be required to pay increased land tax while it holds the land if the land is not entitled to the primary production exemption. Assuming the unimproved value of the land is identical to its market value (purchase price), the table below compares the land tax payable under the current rates and under the new rates.
Taxable value |
Current land tax payable |
Land tax payable under new rates |
Increase |
|---|---|---|---|
$2.5m |
$18,475 |
$20,225 |
$1,750 |
$5m |
$69,975 |
$78,975 |
$9,000 |
$10m |
$182,475 |
$206,475 |
$24,000 |
* We have assumed that the land is the only land held by a company.
At the time of purchasing the land, the developer expects the land to be rezoned in early 2023, an approved Precinct Structure Plan to be issued in respect of the land in early 2025 and that the development will be completed at the end of 2027. As such, the developer expects that it will be assessed for land tax in respect of the land in the 2023 to 2027 land tax years.
Assuming the unimproved land value remains at $10m in the 2023 to 2027 land tax years, the developer would pay an additional $120,000 in land tax during those 5 years under the new rates.
Windfall gain tax
In early 2023 the land is rezoned as Urban Growth Zone land. A further 2 years later a Precinct Structure Plan is issued that covers the land. The land is not subject to the Growth Areas Infrastructure Contribution (GAIC) as it is not within a GAIC area. As a result of the rezoning, the land increases in value as follows:
Market value prior to re-zoning |
Market value after re-zoning |
Difference |
Windfall gain tax (50%) |
|---|---|---|---|
$2.5m |
$20m |
$17.5m |
$8.75m |
$5m |
$40m |
$35m |
$17.5m |
$10m |
$80m |
$70m |
$35m |
It has been reported in the media that developers will be able to defer the payment of the windfall gain tax until they start receiving proceeds from the sale of the developed land. We are awaiting further details from the government on that point. Without some form of deferral, developers such as the one in the above example would simply be unable to pay the tax.
In any case, the significance of the windfall gain tax figures in the above table could simply make the development project unfeasible from the developer’s perspective. Even if the developer can still make the project stack up, the cost of the new tax would need to be factored in as a development cost, which would result in the price of the developed lots increasing significantly. All that does is make the lots less affordable for first home buyers and others seeking to purchase a residential lot to build their home on.
Example 2: Landlords (multiple holdings) and tenants
As for the commercial property market, the increase in the land tax rates will result in significant increases to the holding costs of landlords, including those who have provided rent relief including rent waivers through the pandemic.
Where a landowner has multiple landholdings, the land tax rate increases are likely to be magnified.
For example, a commercial building consisting of 30 tenancies has an aggregate unimproved value of $30m. It is assessed for approximately $630,000 of land tax per year*. Under the leases with the tenants, land tax can be passed on as an outgoing, but only on a single holding basis which works out to be approximately $3,000 per tenant, or $90,000 per year for all 30 tenancies.
Current rates of land tax |
Current rates of land tax |
New rates of land tax |
New rates of land tax |
||
|---|---|---|---|---|---|
Tenant |
Taxable value |
Single holding land tax |
Proportional land tax |
Single holding land tax |
Proportional land tax |
Tenant 1 |
$1m |
$2,975 |
$21,082.50 |
$2,975 |
$23,882.50 |
Tenant 2 |
$1m |
$2,975 |
$21,082.50 |
$2,975 |
$23,882.50 |
Tenant 3 |
$1m |
$2,975 |
$21,082.50 |
$2,975 |
$23,882.50 |
… Tenant 30 |
$1m |
$2,975 |
$21,082.50 |
$2,975 |
$23,882.50 |
Total |
$30m |
$89,250.00 |
$632,475.00 |
$89,250.00 |
$716,475.00 |
*We have assumed the commercial building is the only land held by the company.
In the example above, the single holding tax recoverable from tenants after the new rates of land tax come into effect will remain the same because the land tax rates for properties under $1.8m will remain unchanged. On the other hand, the increased rates will cause the total land tax payable by the landlord to increase by nearly $100,000 per year, further increasing the gap between the land tax payable by the landlord and the land tax recoverable from the tenant.
The land tax increases will also have flow-on consequences for tenants, including small businesses. The increase in holding costs of landlords is likely to be passed on to business tenants by way of rental increases, which will be another kick in the guts for smaller businesses in particular who have struggled throughout the last 12-18 months during the pandemic and have had to rely on rent relief from landlords.
In our view, the changes summarised above are short-sighted policy measures that will backfire by harming housing affordability, job creation and new investment in Victoria. We are contributing to advocacy efforts to fight against these measures and their associated impacts, and hope to see other announcements in the Budget in respect of the property industry that are more positive.
Other changes
From 1 January 2022, private men-only clubs will no longer receive the land tax concession reserved for charities, clubs and associations.
From 1 July 2021, the penalty unit will increase by 10%, from $165.22 to $181.74, following the indexation freeze in 2020-21.
What are the next steps?
Stay tuned for further information and our analysis of the Victorian State Budget following its release on Thursday afternoon.
Contact your Pitcher Partners representative if you have any queries regarding the announced measures and the implications for your existing and proposed arrangements.
