Amendments to state property taxes (LAND TAX, WGT AND VRT)
After its surprising introduction as a Bill in October last year, the State Taxation Acts and Other Acts Amendment Act 2023 (Vic) (the Act) became law on 12 December 2023.
The Act introduces, amongst other things, the following two key changes to the property tax in Victoria:
- prohibiting the apportionment of land tax and windfall gains tax (WGT) between the vendor and a purchaser as part of a contract of sale of land and, in respect of WGT, also in relation to an option to enter into a contract of sale of land; and
- extending the existing vacant residential land tax (VRT) to apply to all vacant residential land in Victoria and introducing a new tax for certain unimproved land in metropolitan Melbourne.
These changes are part of the Victorian Government’s efforts to address housing affordability and for developers, this reform poses both challenges and opportunities.
Prohibition on adjustments for land tax and WRT (Commenced 2024)
From 1 January 2024, it will be an offence for a vendor to enter into a contract of sale or grant an option that seeks to apportion any land tax or existing WGT liability to a purchaser if the contract price is less than the threshold amount.
For contracts entered into during the 2024 calendar year, the threshold amount is $10 million (with this amount indexed annually with the CPI).
Importantly, the penalty for such an offence will carry a fine of up to 60 penalty units ($11,540) for an individual and 300 penalty units ($57,700) for companies – penalties that are in line with the new Unfair Contracts regime that took effect from November 2023.
While the new laws are aimed at consumer protection, they affect all land sale contracts and not just contracts for residential land.
It should be noted though that the prohibition of WGT adjustments relate only to WGT liabilities for which a notice of assessment has been served on a person at the time the contract was entered into or the option granted (as the case may be).
The new law does not affect contracts entered into before 1 January 2024 however it does mean that existing contracts prepared but not yet signed will need amendment – particularly for existing off-the-plan developments.
Current VRT Regime
Under the current law (as amended in January 2023), for the 2018 land tax year onwards, “residential land” that is “vacant” in the inner and middle suburbs of Melbourne will be subject to an annual tax of 1% of the property’s capital improved value (CIV). Note that the CIV is a higher value than ordinary land tax, which is calculated on a property’s site value (under which the value of any improvements to the land are ignored). The law currently only applies to properties in the following 16 Councils: Banyule, Bayside, Boroondara, Darebin, Glen Eira, Hobsons Bay, Manningham, Maribyrnong, Melbourne, Monash, Moonee Valley, Moreland, Port Phillip, Stonnington, Whitehorse and Yarra.
For the purposes of the VRT, ‘residential land’ is land that is capable of being used solely or primarily for ‘residential purposes’, but does not include commercial residential premises, residential care facilities or land used for supported residential services or retirement village services.
A property will be considered “vacant” if it has not been “used and occupied” in the preceding year for a period of more than 6 months . Relevantly for developers, land on which a residence is being constructed or renovated will, in certain circumstances, be considered “vacant” in a tax year if, on 31 December of the preceding year, more than two years has passed since the construction or renovation commenced.
VRT extended to all land in Victoria (Commences 2025)
From 1 January 2025, VRT will apply to all vacant residential land in Victoria if the land has not been used and occupied for a period of more than 6 months (whether continuously or in aggregate) by the owner or occupier as its principal place of residence or under a lease or short-term letting.
From 1 January 2025, VRT will be imposed at different rates based on the number of consecutive tax years the land has been liable for VRT:
- if the land was not liable for VRT in the preceding tax year, the rate will be 1%
- if the land was liable for VRT in the preceding tax year but not the tax year preceding that tax year, the rate will be 2%
- if the land was liable for VRT in the last two preceding tax years, the rate will be 3%
Given the above changes will take effect from the 2025 calendar year, how owners and developers use their “residential land” in the 2024 calendar year will be particularly relevant for whether VRT will apply.
Further, the Act extends the definition of “residential land” from 1 January 2026 to include, generally, land that meets each of the following criteria for a continuous period of at least 5 years (in the same ownership) ending on 31 December immediately prior to the relevant land tax year:
- located in the previously listed 16 Councils with the addition of Brimbank, Cardinia, Casey, Greater Dandenong, Frankston, Hume, Kingston, Knox, Maroondah, Melton, Mornington Peninsula, Nillumbik, Whittlesea, Wyndham and Yarra Ranges.
- is not in a “non-residential zone” – a list “non-residential zone” in Schedule 2C of the Act and includes most of the usual zones in development sites, including Farming Zone, Comprehensive Development Zone, Public Use Zone and Urban Growth Zone; and
- is “not solely or primarily used for or under development for a non-residential use”.
Implications for developers
For developers holding large parcels of land or high-value properties, the increased land tax rates can significantly raise the holding costs. This may affect cash flow and the feasibility of long-term development projects. It may also influence developers’ strategies for land acquisition. Higher taxes on undeveloped land could deter the purchase of land for speculative development, potentially leading to a more cautious investment approach.
On the other hand, for some developers, these changes could encourage a pivot towards affordable housing projects, which may benefit from certain tax exemptions or concessions. This shift could align with government objectives and offer new opportunities in the housing market.
The Government’s reasoning for these changes is “to incentivise the development of empty blocks in metropolitan Melbourne and increase the supply of housing”. The Commissioner will have the discretion to determine whether land is not residential land if he is satisfied that the land is intended to be solely or primarily used or developed for a non-residential use and there is an acceptable reason for the land not yet being used or developed in that way (e.g. due to delays outside of the owner’s control or due to other steps being taken for non-residential use such as remediation works).
Our team are ready to assist with strategies, advices and preparing these submissions to the Commissioner as and when required.