Significant Victorian property tax changes – land tax, Windfall Gains Tax and various other changes

The Victorian Treasurer unexpectedly announced further significant changes for Victorian property taxes on 3 October 2023, after already introducing significant changes in May 2023 when the Victorian State Budget for 2023-24 was handed down.

In this article, we explain what the changes are, what the changes could mean for you, and what you may need to do in light of the changes, many of which are proposed to start in just over 2 months.

What are the Key Proposed Changes?

The changes are contained in a Bill before the Victorian Parliament, and broadly comprise the following:

1. Significant expansion to the Victorian Vacant Residential Land Tax rules;
2. Prohibitions of adjustments for land tax and existing Windfall Gains Tax liabilities; and
3. Various amendments, including in relation to the corporate restructure relief for duty

(1) Expansion of Vacant Residential Land Tax rules

The Victorian Vacant Residential Land Tax (“VRLT”), in its current form, is a tax imposed yearly on residential properties within specified inner suburbs in Melbourne that are vacant for more than 6 months in a calendar year.

The tax 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.

The Bill seeks to increase the scope of how VRLT is to be applied, as follows:

• The application of VRLT is proposed to apply to all residential lands in the entire state of Victoria, instead of the current limited catchment area comprising specified inner suburbs; and
• VRLT is also proposed to extend to unimproved/undeveloped lands that have been unimproved for 5 years or more in certain areas of metropolitan Melbourne, that are currently not subject to any VRLT.

VRLT applying to all residential lands in Victoria

If the Bill in its current form is passed, the proposed expansion of the geographical scope of VRLT to all residential land in the state of Victoria would mean that any residential lands outside the current specified inner suburbs of Melbourne may be exposed to a VRLT liability if left vacant for more than 6 months in a calendar year.

The changes are proposed to commence in the 2025 tax year, by reference to the use of residential lands from 1 January 2024 to 31 December 2024.

One of the biggest impacts of this proposed change is on holiday homes. The geographical limitation of the current VRLT regime meant that holiday homes, which are generally expected to be used and occupied for less than 6 months in a calendar year, would not be subject to VRLT if located outside the specified inner Melbourne suburbs. The change could potentially expose any holiday homes outside the current specified inner suburbs (such as regional Victoria) to a yearly VRLT liability at 1% of the capital improved value (noting that this rate could be subject to change in the future).

Whilst there is currently a VRLT exemption for holiday homes, the exemption is not available if the holiday home is held by a company or most types of trusts (including family/discretionary trusts).

Example

To illustrate the above, we set out the following example:

Jane and her family have long held a holiday home in regional Victoria in a family discretionary trust. The holiday home has a capital improved value of $1,200,000. Jane and her family have a longstanding tradition involving family members over multiple generations gathering and spending time together at the holiday home over the summer months between late December and early February each year. The holiday home is left vacant for the remaining period of the year given that the property is a genuine family holiday home, and there is otherwise limited rental demand for properties in that area for only a part of the year.

Currently, the holiday home is not subject to VRLT as it is not within the specified VRLT geographical area.

However, with the new proposed change, the geographical limitation no longer applies, and the holiday home is expected to subject to be subject to VRLT.

As the holiday home is held in a discretionary trust, the holiday home VRLT exemption is not available based on a technical reading of the relevant legislation.

As such, an annual VRLT liability of 1% of the capital improved value is expected to apply (i.e. $12,000 based on the current capital improved value, subject to changes in the value and any changes in the tax rate over the years). The VRLT applies in addition to the usual land tax payable on the property.

VRLT applying to certain unimproved/undeveloped Victorian lands

The second key proposed VRLT change relates to the expansion of VRLT to certain unimproved/undeveloped Victorian lands that have been undeveloped for 5 years or more in certain established areas of metropolitan Melbourne.

The changes are proposed to commence on 1 January 2026 (i.e. the 2026 tax year).

Note that this measure captures vacant unimproved/undeveloped land that remains undeveloped for 5 years or more.

The following types of land are subject to the ordinary VRLT rules (i.e. may be liable for VRLT if vacant for more than 6 months in a calendar year) and therefore the 5-year period is not the relevant test:

• Land on which a residence is being constructed or renovated for residential purposes and more than 2 years have elapsed since that construction or renovation commenced; or
• Land on which there is a residence that has been uninhabitable for two years or more.

Undeveloped Victorian land may be liable for VRLT if the land satisfies the following requirements for a continuous period of 5 years or more:

• The land is within a listed municipal district of a council in metropolitan Melbourne — the list of 31 councils includes Banyule City Council, Merri-bek City Council, Mornington Peninsula Shire Council and Wyndham City Council.
• The land is within a catchment zone that is residential or residential-adjacent in nature — please note that the Urban Growth Zone has been designated under the rules as a non-residential zone and is therefore outside the catchment area.
• The land is not solely or primarily used for or under development for a non-residential use — the non-residential uses are tied to certain Australian Valuation Property Classification Code ranges.

The Bill as currently drafted provides the Commissioner of State Revenue (“Commissioner”) with a wide range of discretionary powers. For example, the Commissioner can make a determination on the following matters:

• whether undeveloped lands are non-residential lands (and therefore should not be subject to VRLT);
• whether the lands are developed for a non-residential use (and therefore should not be subject to VRLT);
• whether any break in the continuous 5-year period requirement is to get around a VRLT liability (and therefore should be subject to VRLT).

Our key takeaways

Landowners of Victorian residential or undeveloped properties that are expected to be left vacant for more than 6 months in a calendar year may be subject to the expanded VRLT if the Bill passes in its current form and thus such landowners are expected to weigh up the expected increase in annual holding costs against the benefits of holding on to the property within the current ownership structure.

We note that whilst some of the proposed VRLT changes are expected to commence from 1 January 2025 (i.e. 2025 tax year), the activities and circumstances of the 2024 calendar year (i.e. from 1 January 2024 to 31 December 2024) are relevant in determining whether there is a VRLT liability for the 2025 tax year. Accordingly, any vacancy of properties will be counted from 1 January 2024 notwithstanding the announced commencement date of the tax from the 2025 tax year.

In our view, the Bill provides a large scope of discretionary powers to the Commissioner, which could give rise to some uncertainty as to whether a VRLT liability should be expected and potentially harsh outcomes for landowners. Whilst taxpayers may benefit from the Commissioner exercising his discretion in the taxpayers’ favour in some circumstances, the Commissioner could conversely decide to not exercise the discretions. To leave a wide range of discretionary powers with the Commissioner when there could be planning delays and other circumstances that are outside a taxpayer’s control could lead to a lot of room for subjectivity, uncertainties and disputes regarding when and how the discretionary powers should be exercised.

(2) Prohibition on Land Tax Apportionment Under a Contract of Sale of Land

The current practice of adjusting a vendor’s land tax liability at the settlement of a land contract is a well-understood and longstanding practice. The vendor’s land tax liability (if any) is apportioned between the vendor and the purchaser, calculated with reference to an agreed date (such as the date on which the purchaser becomes entitled to possession of the land).

What are the changes?

From 1 January 2024, it will be an offence for a vendor to enter into a contract of sale of land that requires the purchaser to pay any amount of the vendor’s land tax liability and/or existing Windfall Gains Tax (“WGT”) liability.

By various proposed amendments to the Sale of Land Act 1962 (Vic) and the Property Law Act 1958 (Vic) the longstanding practice of making adjustments for land tax as part of a sale of land will no longer be permitted in Victoria and a contractual provision that purports to enable a vendor to recover land tax will have no effect.

It appears that the prohibition applies to any tax arising under the Land Tax Act 2005 (Vic) (“LTA”), which includes not only ordinary land tax, but also other surcharges and taxes imposed under the LTA such as VRLT and the absentee (foreign) owner surcharge.

The prohibitions on contractual provisions and adjustments also apply in relation to any existing WGT liabilities. Further, in relation to options, it will be an offence for a person to grant an option to enter into a contract of sale of land if the option requires the purchaser of the land to pay any amount of an existing WGT liability in respect of the land, and such a provision in the option will have no effect.

The penalties for an offence against the prohibitions can be significant (approximately $58,000 or $12,000 depending on whether or not the vendor is a natural person).

Based on the Bill as currently drafted, the apportionment prohibition only applies to an existing WGT liability where a WGT notice of assessment has been issued at the time of contract and does not extend to a WGT liability that is expected to be incurred in the future. As such, the prohibition is not expected to apply to any options or contracts of sale of land that require the purchaser to pay or contribute to a future WGT liability.

When do the changes apply from?

As noted above, the changes are intended to commence from 1 January 2024.

At this stage, there appears to be no explicit transitional protection that applies to agreements or arrangements entered into prior to the commencement date of 1 January 2024 and it is unclear whether the new measures will apply to current agreements or arrangements that complete after 1 January 2024.

Who do the changes apply to and what are the changes trying to achieve?

The changes will impact all vendors and purchasers of land in Victoria from 1 January 2024. It will also impact conveyancing practitioners as they would need to change the drafting of contracts of sale and adjustment practices to ensure compliance with the new rules.

It is unclear what the changes are trying to achieve. We understand the rationale provided for the changes is consumer protection. However, the changes apply indiscriminately to all vendors and purchasers of land from 1 January 2024, including individuals, companies and trusts, and therefore apply even where the transacting parties are well-resourced, sophisticated entities equipped with their own advisors.

Issues and concerns

It is no exaggeration to describe the proposed changes to Victoria’s land tax regime as a seismic shift in the way the system currently operates, that will impact anyone who buys or sells land in Victoria moving forward.

As the intended start date of these new measures is 1 January 2024 (just over 2 months from now), many will be left scrambling to deal with the new measures in time, with the costs of getting it wrong quite significant (taking into account the penalties for offences outlined above), and to ensure that transactions do not fall over should parties dispute over the application of the new measures to their existing agreements or arrangements.

The reality is vendors will look to factor their land tax and WGT costs into sale prices as much as they are able to, which we expect would be contradictory to the consumer protection rationale, as these costs are expected to be more opaque if not completely hidden in sale prices.  This may also place upward pressure on property prices more generally, as the headline prices on properties with these costs embedded within will shape the market and negotiated prices for other properties notwithstanding that there may be lower or even no land tax and WGT costs for some vendors.

(3) Other Changes

Other changes introduced by the Bill include a mix of positive and negative changes, including:

• extension of corporate restructure duty relief to certain sub-sale transactions;
• expansion of the charitable land WGT exemption where only part of the land is charitable land;
• changes to the application of the fixed COVID-19 land tax levy where land is assessed on a single holding basis; and
• amendments to the Valuation of Land Act 1960 to provide a definition of ‘fixtures’ (which includes anything fixed to land) and stipulate that the value of fixtures is included in the capital improved value of land. The capital improved value form the taxable value for the VRLT as well as for the WGT.

What are the next steps?

Whilst the proposed measures outlined above are subject to the passing of the Bill in its current form, given the intended start date of 1 January 2024 for many of the proposed measures, it is imperative that you consider the potential impact of the measures on your circumstances. Please contact your Pitcher Partners representative if you would like assistance with reviewing your circumstances and considering what appropriate action is required.