The Commercial and Industrial Property Tax Reform Act 2024 (Act) has passed the Victorian Parliament. The provisions of the Act will take effect from 1 July 2024.
The purpose of the legislation is to bring in a new taxation scheme for Victorian commercial and industrial property (including student accommodation and build to rent schemes). The new tax is intended to replace stamp duty on acquisitions of Victorian commercial and industrial property. Primary production land is not subject to the scheme.
In essence, when a person acquires a 50% or more interest in a commercial or industrial property (either by way of a transfer of the land or alternatively by acquiring a 50% or more interest in a company or unit trust that holds property in Victoria) the property will become part of the new tax scheme.
The first transaction into the scheme will be subject to stamp duty. However, the person acquiring the property may opt to take a loan (at commercial interest rates) from the Victorian Government to cover their duty amount for a period of 10 years instead of paying the duty up front. If the land is sold or its use changed to a ‘non qualifying use’ (such as residential use) within the 10 year period, the borrower must repay the outstanding loan amount.
The new tax will take effect 10 years from when the property enters the scheme.
After that time, the new tax will be payable at the rate of 1% on the unimproved value of the commercial and industrial property (including student accommodation) and 0.5% on build rent schemes. This amount is in addition to general land tax that is already imposed.
Once the property is in the scheme, stamp duty is no longer payable on subsequent transfers of the property (even if the transfer occurs within the initial 10 year transition period). If duty has not been paid on the acquisition of the property because it is in the system, duty will be payable if the land is converted to, for example a residential use.
Exempt institutions that are generally exempt from stamp duty and land tax will also be exempt from the new tax.
There is a prohibition which does not allow the new tax to be passed on to people who have residential rental agreements (for example student accommodation or build to rent tenants) or to tenants subject to the Retail Leases Act 2003.
Finally, if a person initially acquired a 50% or more interest but less than a 100% interest in the commercial and industrial land (either by way of transfer or by way of an acquisition of an interest in a landholder) the balance interest acquired will still be subject to duty regardless of when this occurs.
Overall, there will be a short term gain in buyers not having to cover the large up front stamp duty payment. However, the new tax will be an ongoing liability on top of council rates and existing land tax and will increase as land values increase.
So, short term gain for long term pain? It will depend how long the property is held for.
Please contact our tax team if you have any queries.
This article was written by John Caravousanos, Partner.
