The Victorian State Government has introduced a highly anticipated bill to implement the new Commercial and Industrial Property Tax with only three months to go until the 1 July 2024 start date. Those looking to acquire commercial or industrial properties or plan restructures within existing corporate/family groups should consider the interaction of the new regime with existing taxes.
What’s happened?
On 20 March 2024, the Victorian State Government introduced the Commercial and Industrial Property Tax Reform Bill 2024 (the Bill) into the Victorian State Parliament following an announcement available here.
The Bill implements the new Commercial and Industrial Property Tax regime. This progressively abolishes land transfer (stamp) duty on commercial and industrial property from 1 July 2024.
How does the Commercial and Industrial Property Tax regime work?
Under the new regime:
the first sale of commercial and industrial property after 1 July 2024 will still be subject to standard land transfer (stamp) duty at rates up to 6.5% - this brings the property into the new tax regime;
subsequent transactions will be exempt from land transfer (stamp) duty; and
a new annual 1% Commercial and Industrial Property Tax will apply to a property’s site value (the unimproved land value) – payable from 10 years after the transaction that first brings a commercial or industrial property into the new tax regime.
A concessional rate of 0.5% will apply to qualifying build to rent properties (ie properties that qualify for a build to rent land tax concession)
A transition loan provided by the Treasury Corporation of Victoria will be available for the land transfer (stamp) duty payable on the first sale of a commercial or industrial property after 1 July 2024, where the purchase price of the property is $30 million or less.
See our earlier Sladen Legal commentary on the new system here.
On 11 December 2023, the Government released details on the design of the Commercial and Industrial Property Tax, which is covered by Sladen Legal here.
What types of transactions trigger the transition into the regime?
Most dutiable transactions over 50% or more of qualifying properties will result in such properties entering the regime.
Dutiable transactions that won’t trigger the regime include a transaction that is exempt from duty, the triggering of lease duty (i.e. on the grant, transfer, or assignment of dutiable leases), the triggering of economic entitlement duty and transactions that qualify for the corporate consolidation and reconstruction concessions.
What types of property interests are affected?
The regime only applies to dutiable transactions in relation to property interests that are estates in fee simple (i.e. “general” property interests). It does not apply to other proprietary interests such as life and remainder interests, interests under wills, interests in fixtures, interests in mortgages, etc.
What are the differences between the previous announcement and the Bill?
Previous guidance indicated that, if a property was sold after it had entered the Commercial and Industrial Property Tax regime, land transfer duty would not apply so long as the property continued to be used for commercial and industrial purposes. The Bill contains a different regime from what had previously been announced. Broadly, the effect of the provisions in the Bill is that:
where a 100% interest in the property has been transacted on or after 1 July 2024, any subsequent transaction within the 10-year transition period will not be subject to duty; and
where a less than 100% interest in the property has been transacted on or after 1 July 2024 (but 50% or more has been transacted such that the property is subject to the Commercial and Industrial Property Tax regime), a subsequent transaction which relates to a different interest in the land may be chargeable with land transfer duty under the existing provisions for a 3 year period or until full duty has been assessed on the land (whichever occurs sooner). This is new - the 3-year period was not addressed in previous guidance.
When does transfer duty on the first sale on or after 1 July 2024 apply?
When a property is first transacted on or after 1 July 2024, land transfer duty will be paid one final time. A property will be taken to have been transacted (and enter the Commercial and Industrial Property Tax regime) if 50% or more of the property is sold.
Page 9 of the Bill gives the following example of aggregate transactions for the purposes of determining whether a 50% or greater interest has been transacted.
Person A is the transferee under a transfer of land occurring on 1 July 2024 relating to a 35% interest in the land (qualifying dutiable transaction A). Person B is the transferee under a transfer of land occurring on 1 July 2026 relating to a 15% interest in the same land (qualifying dutiable transaction B). Persons A and B are associated persons. The interests they acquired in the land are aggregated and together amount to a qualifying interest. This means qualifying dutiable transaction B is the entry transaction for the land.
Where a partial interest (between 50% and 100%) occurs, and the new regime is triggered, the interest that triggered the regime will be except from duty for future transactions. A dutiable transaction in relation to the balance of the land will continue to be dutiable until, it to, enters the regime upon the next dutiable transaction. In this regard, page 30 of the Bill contains the following example.
Person A acquires a 50% interest in land under a transfer of land which occurs on 1 January 2026. This is a qualifying interest in the land and the dutiable transaction is an entry transaction. Person A acquires another 30% interest in the land on 1 January 2027 under a qualifying dutiable transaction. Person B is the beneficial owner of the remaining 20% interest in the land. On 1 July 2027, Person C purchases the land from Person A and Person B. No duty is chargeable on this tax reform scheme transaction to the extent that the interest acquired by Person C is the same, or substantially the same, as the entry interest for the land
(50%) and the further interest acquired in the land (30%). Duty is assessed on the remaining 20% interest in the land acquired by Person C.
When is the Commercial and Industrial Property Tax payable?
Commercial and Industrial Property Tax is payable within 14 days of the assessment being issued to the taxpayer.
Who is a landowner for the purposes of Commercial and Industrial Property Tax?
Like the land tax regime, Commercial and Industrial Property Tax will be issued each year to the registered proprietor of the land as at the previous 31 December.
Can transfers of shares or units in a landholder trigger a transition into the regime?
A “qualifying landholder transaction” can also trigger a transition. Broadly, the underlying landholdings of the landholder will be taken to enter the Commercial and Industrial Property Tax regime if a 50% or greater interest in those underlying landholdings is transacted.
Page 12 of the Bill gives the following example of aggregation of interests which occur within a 3-year period.
Person A obtains a 20% interest in land under a qualifying landholder transaction occurring on 1 December 2024 (qualifying landholder transaction A). Person B obtains a 40% interest in the land under a qualifying landholder transaction occurring on 1 July 2026 (qualifying landholder transaction B). Person A and Person B are associated persons. The interests Persons A and B acquired in the land are aggregated and together amount to a qualifying interest. This means qualifying landholder transaction B is the entry transaction for the land.
Once a landholder (land rich unit trust or company) holds only qualifying land and has 100% entered into the Commercial and Industrial Property Tax regime, landholder duty will no longer be triggered on future transfers of units or shares.
There are complicated rules where the landholder holds qualifying and non-qualifying land and/or has partially entered the regime.
Can Commercial and Industrial Property Tax be adjusted at settlement?
No, like the recent probation against adjusting land tax in certain circumstances, the Commercial and Industrial Property Tax cannot be adjusted at settlement. That is, the vendor will be liable for the full year of Commercial and Industrial Property Tax in the year the property is sold (assuming it has not been passed on to the tenant).
How does the Commercial and Industrial Property Tax interact with existing taxes?
This will be in addition to the standard land tax, and like land tax, the new tax will not be able to be passed on to retail and residential tenants. However, there is no prohibition against landlords passing on the new tax to non-retail/residential tenants.
Existing land transfer (stamp) duty concessions for commercial and industrial properties, including the regional concession, will all continue to be available for the final land transfer (stamp) duty payment – and existing land tax exemptions will also apply.
Is the Commercial and Industrial Property Tax going to reduce tax liabilities?
Whether the changes reduce tax liabilities following the transitional period, depends on factors including the capital improved value of the property, the unimproved value of the land, how long the property is held, and the amount of rental yield received from the property.
From a tax perspective, the additional land tax should be deductible as compared to land transfer (stamp) duty which is generally not (i.e. it forms part of the cost base of the asset).
How does the Commercial and Industrial Property Tax apply to mix use properties and changes of use?
Mixed-use properties undergo a ‘sole or primary use’ test to determine eligibility. The Commercial and Industrial Property Tax applies to an entire property only if the primary use qualifies, otherwise, it does not.
Where a property that has entered the Commercial and Industrial Property Tax regime is converted to a non-qualifying use (e.g. residential) as at 31 December on a given year, the owner will not be for the following tax year. Rather, land transfer (stamp) duty will apply to any sale of the property.
Where the change to a non-qualifying use follows a second or subsequent post 30 June 2024 transaction of the property (such that no land transfer (stamp) duty would have been paid on the acquisition of the property by the owner), the owner may be liable to pay 'change-of-use duty'.
Subdivided lots are exempt from land transfer (stamp) duty but subject to Commercial and Industrial Property Tax 10 years after the original transaction. Consolidated properties will be captured if 50% or more of the total land area enters the new regime.
What’s next?
Parliament next sits from 30 April to 2 May.
The Government has also advised that ahead of the 1 July 2024 start date, it will provide educational support on the reform to help industry and taxpayers navigate the transition to the new scheme.
Action required
Investors, including SMSF trustees, that invest in commercial and industrial property should:
consider whether existing or planned acquisitions (or divestments) of commercial or industrial property will be impacted by the 1 July 2024 changes;
review any planned restructuring within existing corporate or family groups to determine if it will be impacted by the changes; and
seek advice from their State Tax advisors as required.
Please contact us with any questions in relation to these proposed changes or any other State Tax issues.
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au
Nicholas Clifton
Principal Lawyer
T +61 3 9611 0154 | M +61 401 150 955
E nclifton@sladen.com.au
Meera Pillai
Associate
T +61 3 9611 0179
E mpillai@sladen.com.au
