The Victorian Commercial and Industrial Property Tax Reform Act (Act) has now received Royal Assent on 21 May 2024 following the initial announcement last year as part of the Victorian government's 2023–24 Budget.
The Act implements the Commercial and Industrial Property Tax (CIPT) that is part of the Victorian government's reform of the Victoria's tax system for relevant commercial and industrial properties. The CIPT will commence from 1 July 2024 and will be a consideration for both buyers and sellers of land that falls into this new regime.
Summary of 1 July 2024 Changes
Under the Act, commercial and industrial property will be transitioned over time from being subject to stamp duty on changes of ownership, to being subject to an annual property tax of 1 percent p.a. (the CIPT). Please be aware that CIPT will apply in addition to any land tax ordinarily payable.
From 1 July 2024, commercial and industrial property will be subject to only one final round of stamp duty. Once that stamp duty is paid, property will become part of the new tax system (referred to in the Act as the “tax reform scheme”) and no stamp duty should apply for future transactions (provided it remains commercial or industrial). Instead, the CIPT will become payable annually from the 31 December after the tenth anniversary of the final stamp duty payment.
What types of properties will the reform apply to?
The CIPT regime will apply to Victorian land that has a qualifying commercial or industrial use. The coding by the Valuer-General (as commercial, industrial, etc.) is the key factor. For properties with a mixed use, a “sole or primary use” test will be applied. The “primary” use will be determined by the Victorian Commissioner, looking at factors such as land or floor area of each use, relative intensity, economic and financial significance of each use, and the length of time of each use. If the property is determined to be solely or primarily for commercial or industrial use, the entire property will enter the new system (including the nonqualifying portions).
Once a parcel of land has entered the new tax reform scheme, the subdivision of that land will not change that qualification. The subdivided parcels will be able to be transacted without stamp duty being payable and will retain the same CIPT commencement date as the original parcel.
Lots that are consolidated into a larger parcel will be part of the new system if 50 percent or more of the total land area of the new parent property is made up of land that had already entered the new system.
When will properties come within the new system?
Land will enter the new tax reform scheme and be subject to CIPT when:
- A contract for sale is entered into on or after 1 July 2024 (i.e., both signing and completion need to occur on or after 1 July 2024); or
- There is a 50 percent or more change in ownership of the property — via either a direct dealing in the property itself (such as a transfer or a declaration of trust) or indirectly via a dealing in shares or units of the entity that “owns” the property. (Again, both signing and completion need to occur on or after 1 July 2024.)
Land will not enter the new tax reform scheme if:
- The transaction is pursuant to an agreement or arrangement entered into before 1 July 2024.
- The transaction is exempt from duty such as deceased estates, charitable institutions or transfers between spouses.
- The duty is triggered under an excluded/complex arrangement such as where a corporate reconstruction concession is granted.
No passing on of CIPT
The Act prohibits land owners from passing on CIPT to renters and tenants, which may be important when considering the impact of CIPT for a purchaser on future transactions.
What happens once the property is in the new tax reform scheme?
Once a property has become part of the new tax reform scheme, any subsequent dealings (including direct or indirect dealings) should not be subject to stamp duty whilst the property remains classified as commercial or industrial property.
From the 31 December after the tenth anniversary of the original transaction where the last stamp duty payment was made, the CIPT will apply annually. CIPT will be calculated at 1 per cent of the property's unimproved land value per annum with no tax free threshold. CIPT will be charged separately from land tax (or if applicable, the absentee owner surcharge for foreign persons) which will continue to apply in the same way that it currently does. However, any existing land tax exemptions will also apply to the CIPT.
Build to rent concessional rate
Whilst the CIPT rate is 1 percent, a lower rate of 0.5 percent applies to build to rent land, that being land that is eligible for a BTR benefit within the meaning of the Victorian Land Tax Act 2005.
Unimproved value of land
The change from stamp duty to CIPT involves a shift from the market (unencumbered) value at the time of the transaction to the unimproved (just the land and no buildings/fixed assets) value that is calculated annually. As CIPT is imposed annually, the unimproved value may shift from year to year and can be difficult to predict in practice.
The unimproved value used for land tax and CIPT utilises the concept of comparative sales. This means that any recent sales of land/property that is viewed as being comparative to the land in question are reviewed and used to determine any changes in its unimproved value. Since vendors tend to sell land for more than they paid for it, there is a general tendency for the unimproved value to trend upward over time. Further, in the past some taxpayers have faced situations where the unimproved land value has increased by a significant percentage (up to 40 percent) from the previous year. Whilst taxpayers can object to the valuation within the statutory time frame, the use of comparative sales can in practice make it challenging to successfully object to.
Consideration of CIPT for you
Accordingly, it is important for taxpayers to understand how CIPT may impact their ongoing annual costs when looking to purchase Victorian commercial and industrial property from 1 July 2024. It may be worthwhile to consider what future property developments or rezoning may occur in the local area as well as what commercial and industrial property sales have recently been completed (or will occur in the near future). These may allow you to anticipate the potential shift in value or the degree of any upward trend in value to make the best informed decision when looking to buy Victorian commercial and industrial property.
Originally Published 24 May 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.