A Wolf in Sheep’s Clothing

The Victorian Government introduced the Commercial and Industrial Property Tax Reform Bill 2024 (Bill) into Parliament in March 2024.

The Victorian Government claims that the purpose of the Bill is to enable businesses to invest, grow and expand, however, considering current Land Tax obligations, who stands to benefit?

Who does it apply to?

The Bill is targeted at properties deemed to be Commercial and Industrial, which currently account for approximately 265,000 properties in the State. It will not apply to:

1. Residential Property;
2. Primary production land or property used for community services, sport, heritage, or culture purposes.

The new regime will apply to any commercial or industrial property if a contract of sale is entered into on or after 1 July 2024.

What are the changes?

The Bill will provide for the following changes to the current Stamp Duty and Land Tax Regime:

1. If a contract of sale is entered into after 1 July 2024, Stamp Duty will still be payable on the first transfer of that property, however, the purchaser will have the option to pay stamp duty by either:

• Paying at settlement using the conventional method; or
• Entering into a government-facilitated transition loan whereby the stamp duty is paid over 10 years on a commercially modest interest rate;

2. After the 10 year period has elapsed, all Commercial and Industrial Property (that has a contract and settlement date on or after 1 July 2024) will enter the reform and become subject to the Commercial and Industrial Property Tax calculated at 1% of the unimproved land value of the property, with no tax-free threshold. Any property which is already owned at, or which has a contract for the purchase entered into before, 1 July 2024 will not enter the reform and will not be subject to the new tax.
3. The Commercial and Industrial Property Tax is in addition to the existing Land Tax Obligations.

Assuming a landholder owned one Commercial and Industrial Property with a land value of $1 million, the Land Tax and Commercial and Industrial Property Tax would be calculated at current rates at $14,650.00 as follows:

1. Land Tax – $4,650
2. Commercial and Industrial Property Tax – $10,000

Note that the above calculation assumes that the property is the only property owned by the Landholder and it is not held within a trust. Land Tax surcharges apply to properties within a trust and it is unclear whether the Commercial and Industrial Property Tax is, or eventually will be, subject to a similar Trust surcharge.

With respect to Land Tax, the trust surcharge rate is higher than the general rate of land tax and applies when the total value of taxable land held by the trust is more than $25,000 but less than $3,000,000.

When the total value of taxable land held by the trust is more than $3,000,000, there is no difference between the general and surcharge rates of land tax.

Predictions?

With reduced ‘up front’ capital required, it is arguable that the reduced acquisition costs will stimulate commercial development and activity.

However,  with reduced upfront costs for all purchasers, the proportionate affordability for all purchasers increases, meaning that the general purchase price that a purchaser is prepared to pay will increase by the amount of the ‘saving’ to be had. Not dissimilar to the first home owners grant regime.

The burden of additional holding costs and overheads is likely to present an issue to both non-retail commercial tenants and landholders in the long term.

Tenant’s in non-retail leasing scenarios are usually responsible for reimbursing the landlord for the land tax associated with the property. Will the Commercial and Industrial Land Tax also be passed on to tenants and if so, how will small businesses, and ultimately consumers, be able to absorb the additional cost? What impact will this have on net rent and by consequence, the value of the property?

Calculated at 1% of the land value per annum, it’s probable that the Commercial and Industrial Land Tax will provide more revenue to the Victorian Government in the long term. With current stamp duty rates at approximately 5.5% of the dutiable value, it won’t take long for the annual accumulation of Commercial and Industrial Land Tax to surpass the stamp duty revenue that the Victorian Government currently received from commercial properties under the current regime.

With many landholders already struggling with existing Land Tax commitments, will the Commercial and Industrial Property Tax be the straw that breaks the camel’s back?

Author & Contact

Stefan De Palma | Partner
E stefand@zervoslawyers.com.au