In a surprising development unveiled by the Victorian Treasurer on 3 October 2023, a significant bill has been introduced to Parliament, resulting in substantial changes to existing property tax laws. Here is what you need to know.
Expanding the ‘Vacant Residential Land Tax’ (VRT) – holiday homes may now be caught
Victoria’s ‘Vacant Residential Land Tax’ regime was introduced from the 2018 land tax year aimed to increase housing supply by targeting residential properties that were left vacant for more than 6 months in Melbourne’s inner and middle suburbs. It was particularly aimed at foreign owners of real estate that left their properties vacant given the focus on inner and middle suburbs only.
Importantly, the VRT is calculated differently to land tax and is an annual tax based on 1% of the capital improved value (i.e. land and buildings).
The Victorian Government proposes significant expansion of this tax, starting from 1 January 2025.
This expansion will remove current geographic restrictions, making VRT applicable to residential land across Victoria. Additionally, the definition of ‘residential land’ will also be expanded to very broadly include empty properties in metropolitan Melbourne that has been left undeveloped for 5 years.
The broadening to include all of Victoria has significant potential implications for holiday homes as:
i) only 1 holiday home can be nominated to be exempt from VRT (provided lived in at least 4 weeks a year), and;
ii) if the holiday home is held in a family trust or company (which is commonly the case for asset protection and other tax planning purposes), then no exemption from VRT exists.
Therefore tax planning may be required to restructure the affairs of such land owners and the delay in start date is intended to allow taxpayers to consider how these new laws will impact them.
Minimising the tax burden for property nominations between related corporate group entities
When an entity acquires land and nominates another party to the contract, a double duty event may occur if either:
- property development activities has taken place or;
- the contract price has increased.
One positive amendment (albeit one may argue should always have been in place), is that there may be the ability for nominations between a relevant / same corporate group of entities to apply 90% duty relief by extending the corporate reconstruction relief provisions.
Whilst this is positive, it is still recommended in commercial practice to always where possible to seek tax planning advice before entering into a contract so that there can be the avoidance of nominations or other internal restructure events unnecessarily to avoid both tax costs, advisor costs and time delays.
Prohibiting the Passing of Windfall Gains Tax Liabilities
One of the other noteworthy changes is the prohibition on vendors passing on land tax or existing Windfall Gains Tax (WGT) liabilities to purchasers in a contract of sale.
This practice will become an offense starting from January 1, 2024. Individuals could face penalties of up to 60 penalty units (approximately $11,540), while corporate bodies may incur fines of up to 300 penalty units (approximately $57,700).
Other Proposed Changes
Several other changes are proposed, including modifications to the Windfall Gains Tax Act including in the areas of use charitable land, duty calculation corrections for public landholder entities, and clarifications in various tax-related acts.
Please contact us if you have any questions regarding how these changes might impact you or your business.