Annual State Budget Land and Property Tax Announcements

Property Law: 14 June 2023

Author: Lauren Woolley - Our People

The Victorian Government has announced the 2023-24 State Budget, with a focus to boost business growth and to address the $31.5 billion COVID debt within ten years. To achieve this the Government has announced two major changes to Land Tax in Victoria set to add an estimated $50 billion to the Victorian economy and contribute $4.74 billion to repay COVID debt over just four years.

These announcements have raised more questions than answers, and this article will give an overview of the reforms and what Victorians can potentially expect the impacts to be.

Stamp Duty to Property Tax

The first reform is a landmark abolition of stamp duty for commercial and industrial property. This is to be replaced with a new annual tax with the intended commencement date of 1 July 2024.

Importantly, the reform will not apply to current owners of commercial and industrial properties, it will only apply to properties that are sold after the induction date of the new reforms. The reform also does not apply to residential property.

To help with the transition into the new reforms, after 1 July 2024 the first purchaser of a commercial or industrial property can choose to either pay the property’s final stamp duty liability as an upfront lump sum, or transition to an annual payment of fixed instalments over 10 years equal to the stamp duty amount plus interest with a government-facilitated transition loan.

After 10 years from the first transaction, the annual property tax will be payable and will be levied at a flat rate of 1 percent of the property’s unimproved land value.

The Government intends to undertake a consultation period to announce the details of the reform by the end of 2023, and whether the intended commencement date of 1 July 2024 is achievable. There are several questions we hope to have answered when these details are released:

• If the first purchaser after the induction date chooses to pay the stamp duty over 10 years what happens if the property is sold during those 10 years? Can that new purchaser chose to pay the remainder as a lump sum, or must they continue the payments?
• Will this tax impact retail and commercial leasing if landlords seek to pass this tax onto tenants?
• How will this reform affect mixed-use properties that are commercial and residential?
• Will the reform apply to properties where the Contract of Sale is signed after 1 July 2024 or that settle after 1 July 2024?

The removal of stamp duty can reduce the upfront costs for business owners (providing it doesn’t lead to a jump in property prices) hopefully enabling business to invest in other areas of their business including the employment of staff.

Temporary Land Tax Surcharge

The second introduction is a temporary land tax surcharge (‘Surcharge Tax’). The goal of the Surcharge Tax is to pay off some of the COVID debt incurred by the Victorian Government. The Surcharge Tax will apply on top of existing land tax beginning the 2024 land tax year for 10 years.

The Surcharge Tax rates are as follows:

• $500 flat surcharge will apply for taxable landholdings between $50,000 and $100,000;
• $975 flat surcharge will apply to taxable landholdings between $100,000 and $300,000;
• $975 flat surcharge will apply to taxable landholdings above $300,000, plus an increased rate of land tax by 0.10 percentage points; and
• for a trust with a taxable landholding over $250,000, a flat surcharge of $975 will apply plus an increased rate of land tax by 0.10 percentage points.

Your principal place of residence will remain exempt from any Surcharge Tax, as the purpose of this tax is to apply to holiday homes and investment properties.

The lowering of the total taxable value of land holdings threshold from $300,000 to $50,000 will impact many Victorians who previously were not required to pay land tax. For example, homeowners with an investment property with the taxable value of $200,000 will now be required to pay $975 beginning the 2024 land tax year.

The Surcharge Tax coupled with rising interest rates may significantly impact landowners, and there is also a question on whether the additional tax can or will be passed onto renters. In an already challenging rental market, it is possible that landlords may increase rent prices to mitigate the effect of rising taxes and fees on them. Not only could the cost of renting rise, but the Surcharge Tax may also drive investors away from Victoria, limiting the supply of rental properties.

Watch this space

There will be a lot of questions that need to be answered by the end of 2023 and which will no doubt continue into 2024, and business owners and property purchasers should watch this space and ensure they understand what their stamp duty and land tax obligations may be in 2024 on onwards.