Regional Victoria Wins; Foreigners, Developers and Others Lose – Tax Measures In Victorian 2019/20 State Budget

The Victorian 2019/20 State Budget was announced on Monday, with positive wins for Regional Victoria. The proposed measures contain an increase in taxes for foreigners holding property in Victoria, as well as measures broadening the application of land transfer (stamp) duty.

In particular, the measures contain a controversial expansion of the economic entitlement provisions and introduces duty on fixtures only with a value of over $2m.

Whilst the budget has responded to the softening of the property market by making stamp duty write downs, the proposed measures contain a mix of positive and negative measures for taxpayers.

Regional Victoria concessions – payroll tax and land transfer duty

In a bid to encourage growth in regional Victoria, the budget announcement introduced:

  • Further payroll tax cuts for regional businesses, from a payroll tax rate of 2.425% further down to 1.2125% by 2022-23, which should be the lowest payroll tax rate in the nation. We had previously unravelled how regional businesses can save on payroll tax here and note that the eligibility requirements will be expanded to remove the restriction that the regional employer must have a registered business address in regional Victoria.

  • Discounts on land transfer duty for the purchaser of commercial and industrial properties in regional Victoria. The concession should start at 10% from 1 July 2019 and increase by 10% annually to eventually provide a 50% discount by 1 July 2023.

Payroll tax threshold increase

There will be an increase in the payroll tax-free threshold from $650,000 to $700,000 by 2022-23. It is anticipated that 1,400 businesses may benefit from this measure.

Changes to the corporate reconstruction exemption

On a negative note the corporate reconstruction provisions will no longer be a full exemption from duty. Instead, the provisions will provide a concession from duty by imposing duty at a rate of 10% of duty otherwise payable from 1 July 2019.

On the positive side, improvements to the accessibility of the concessions have been provided such as:

  • Removing the post association requirement.

  • Inclusion in the definition of ‘eligible transaction’, dutiable lease arrangements and an application to transfer a motor vehicle registration.

  • Removing the restriction of the corporate consolidation exemption from applying only to newly created income tax consolidated groups and expanding the availability of the concession to apply to interposition of head companies to existing consolidated groups.

Duty on fixtures

The definition of dutiable property will be amended to include an interest in fixtures. The new provisions are targeted to the acquisition of fixtures with significant value only, with a phasing-in of duty to apply to fixtures valued between $2m to $3m, with full duty payable for fixtures valued over $3m.

Controversial expansion of the economic entitlement provisions

The Victorian government has announced that the economic entitlement provisions, contained in the Duties Act 2000 (Vic), will be amended to overcome the Supreme Court’s decision in BPG Caulfield Village Pty Ltd v Commissioner of State Revenue [2016] VSC 172 (BPG Caulfield).  However, the new provisions go much further than the issues raised in BPG Caulfield and potentially attack all property development arrangements with a value of $1 million or more.

The decision in BPG Caulfield, had previously cemented the fact that because the economic entitlement provisions were introduced under the landholder duty provisions as an integrity measure – it should therefore operate within the scope of these provisions. We have previously outlined how the provisions work here. The current provisions are effectively confined to land held by private landholders and only apply where 50% or more of economic entitlements are acquired.

Rather than amend the existing economic entitlement provisions as they apply to landholdings held by a landholding, the amendments would provide for the imposition of duty on all economic entitlement acquisitions with reference to any land that has a value of $1m or more. This is regardless of who holds the land and the percentage of economic entitlements acquired.

This will no doubt be a controversial expansion of the Duties Act that will create an additional head of duty. The new economic entitlement provisions are to apply from the day after royal assent is received.

Increase in foreigner duty and land tax surcharges

There will be an increase in the foreign purchaser duty surcharge on Victorian properties from 7% to 8% from 1 July 2019. Foreign owners will also face an increase in the land tax absentee surcharge from 1.5% to 2% from 1 January 2020.

Removal of the principal place of residence exemption for neighbouring vacant land

The availability for a principal place of residence exemption from land tax to contiguous vacant land in metropolitan Melbourne areas will be removed.

Increasing the value of heritage listed land (to increase land tax)

The Valuation of Land Act 1960 (Vic) will be amended to remove special provisions for calculating the value of land on which a heritage building is situated or the removal of such a building is prohibited in response to the Victorian Civil and Administrative Tribunal decision in ISPT Pty Ltd v Melbourne City Council [2018] VCAT 1470 (GPO Building Case). This would allow the site value of heritage properties to be determined according to their highest and best use, taking into account the effects of the heritage status.

Gold royalty

There will an introduction of a 2.75% gold royalty from 1 January 2020 with exemptions for small miners.

Things to consider

Tax practitioners should take note of the proposed legislative changes and in particular should:

  • Ensure any contemplated transactions that are eligible for a corporate reconstruction or consolidation exemptions are effected and settled prior to 1 July 2019, keeping in mind that post 1 July 2019, there is an extended scope for a corporate consolidation concession to apply where an interposition of a head company on an existing consolidated group is contemplated.

  • Consider the controversial expansion of the application of the economic entitlement provisions to any profit sharing or development agreements.

  • Be wary of changes to broaden the scope of duty in relation to fixtures only with a value of $2m or more.

  • Consider future commercial and business structuring and acquisitions in light of the proposed regional payroll tax and duty benefits.

If you have any questions, please contact one of the members of our specialist team:

Denise Tan
Senior Associate
T +61 3 9611 0160  | M +61 438 714 965

Phil Broderick
T +61 3 9611 0163  l M +61 419 512 801   

Laura Spencer
Senior Associate
T +61 3 9611 0110