Principal Place of Residence exemption

In this Part 6 in our series of articles on land tax we examine the principal place of residence (PPR) exemption and the requirements to satisfy the exemption under the Land Tax Act 2005 (Vic) (LTA).

General principles

The PPR exemption applies to land that you own and occupy as your home. The LTA does not define the term “principal place of residence”, so the term is given its ordinary meaning and is assessed objectively in light of the circumstances relating to actual occupation of the particular dwelling.

The PPR exemption only applies if a building is affixed to the land (including a home unit) that:

is designed and constructed primarily for residential purposes; and
may lawfully be used as a place of residence.

The LTA states that in determining whether land is used or occupied as the principal place of residence of a person, account must be taken of every place of residence of the person, whether in Victoria or elsewhere.

In practical terms, what this means is that when a person possesses more than one place of residence, the various revenue offices use a number of ways to test which residence is used as the owner’s PPR. Such evidence includes utilities usages, bank statements, address listed on bank statements, electoral records, drivers license and even information sourced from social media. In addition, revenue authorities also cross-refer with each other as well as other authorities such as the Australian Taxation Office through ongoing data matching and data sharing initiatives.

PPR exemption for other land holding structures

While the most common situation where a PPR exemption applies is where a person who owns land uses and occupies the land as his or her PPR, these following situations also qualify for a PPR exemption:

Right to reside

Where a person was granted a right to reside on land in a Will or other testamentary instrument, the PPR exemption applies on the death of the person previously occupying the land which is PPR exempt. The PPR exemption applies provided that no monetary consideration was provided for the right to reside, such person is not entitled to any other PPR exemptions in any other jurisdiction and all general exemption requirements are satisfied.

It is noted that a right to reside does not include a right to occupy land as a lessee or a right to occupy land as a beneficiary of a discretionary trust or as a unitholder in a unit trust scheme.

Land owned by a trustee where land is used by a vested beneficiary

The PPR exemption also applies where land owned by a trustee of a trust is used and occupied as the principal place of residence of a vested beneficiary. A vested beneficiary is a natural person who has a vested beneficial interest in possession in the land or is the principal beneficiary of a special disability trust. In relation to a person who has a vested beneficial interest in possession in the land, this goes beyond being a member of a discretionary class or a “default beneficiary”. It requires a beneficiary who has a right to possess the land, for example, this will typically include a life tenant. It will also include beneficiaries which, under the trust rules, the beneficiary has a right to possess the land of the trust.

This PPR exemption does not apply if rent is paid for the purposes of the vested beneficiary’s use and occupation of the land. If there are number of vested beneficiaries in relation to the land, and not all of them use the land as their PPR, then the exemption only applies to the extent such of those vested beneficiaries use the land as their PPR. So, for example, if there are 3 vested beneficiaries and only 1 uses the land as her PPR, then a one third PRR exemption would be available.

Land must be the PPR since 1 July in the previous year

While land tax is measured at 31 December of each preceding tax year, the PPR exemption is only satisfied if an owner or vested beneficiary has occupied the particular land since 1 July in the year preceding the tax year.

However, if the owner or trustee only became the owner of the land on or after 1 July in the year preceding the tax year, then the land must be occupied as a principal place of residence from the date settlement is completed.

In the event an owner of land is unable to satisfy the duration requirements in section 54(2), the Commissioner may determine that land tax is not payable if it can be established that the owner or vested beneficiary intends to use and occupy the land for a period of at least 6 months from the date the land is first so used and occupied.

Partial exemption where land is also used for business

If substantial business activities are carried out on the PPR land, the PPR exemption will only partially apply to the extent that the land is used and occupied for residential purposes due to the operation of section 62.

Example

An owner uses and occupies a dwelling located on a property as a PPR residence for the purposes of a tax year. The dwelling occupies 75% of the total land area. The owner also operates a thriving and well-established milk bar business from a building located at the front of the property which occupies 25% of the total land area.

While the owner uses and occupies the land as a PPR, due to the owner operating the milk bar business on the land, under section 62 of the LTA, the exemption only applies in proportion to the area of the land (ie 75%) used for residential purposes.

Therefore, only a partial land tax exemption equivalent to 75% of the total land payable will apply to the land for the purposes of the tax year.

Land contiguous to PPR land

Historically, land that was contiguous to a PPR land was exempt from land tax provided it did not contain another residence, enhanced the PPR land and was used solely for the private benefit and enjoyment of the person using the PPR Land.

From 1 January 2020, separately titled land that is contiguous to PPR land in metropolitan Melbourne is no longer entitled to the PPR exemption.

Currently, the exemption for land contiguous to PPR land only applies to land wholly located in regional Victoria or a car space or storage cage associated with a unit or apartment in metropolitan Melbourne.

As this change is not ‘grandfathered’, if applicable, land tax will have to be paid for the 2021 land tax year onwards.

Absence from PPR land

The LTA also provides an exemption despite a person’s absence from a particular land. The maximum period for which land can be taken to be used and occupied as the PPR of a person despite the person’s absence from the land is 6 years from the date of the person’s absence.

Such land is taken to be used and occupied as a PPR if the following can be proven:

The absence from the PPR land is temporary in nature; and
The person intends to resume use or occupation of the land as his or her PPR after the absence; and
During the period of absence, no other land is exempt in Victoria or in any other jurisdiction.

Section 56 of the LTA lists the circumstances that are taken to be a valid absence as follows:

Person has lost the ability to live independently
Person resides at a hospital as a patient of the hospital
Person resides in an special disability accommodation (SDA) enrolled dwelling as an SDA resident
Person resides with another person who provides personal support to the person on a daily basis

Construction or renovation of PPR land

A PPR exemption for land where a residence is being constructed or renovated is contained in section 61. The exemption in section 61 is satisfied if the following requirements are met:

An owner was unable to occupy the land as a PPR as at 31 December in the preceding tax year because a residence was being constructed or renovated on it; and
The owner continuously uses and occupies the land as a PPR residence for at least 6 months commencing within 6 months after the date on which the construction or renovation of the residence is completed; and

An application for a refund is made before the end of the next year after the year the owner moves back into the newly built or renovated home

Therefore, while a land tax exemption under section 61 may be applicable, there is a requirement to pay the land tax upfront and then to claim it back from the State Revenue Office (SRO) after an owner has lived at the land as a PPR for at least 6 months after the construction or renovation was completed.

Section 61 of the LTA provides that an owner may be entitled to a refund of up to 2 tax years immediately preceding the year in question. However, this can be extended to up to four years if the Commissioner is satisfied there has been acceptable delays. This could include a delay due to unexpected events, planning delays, damage or other delays beyond the owner’s control.

Similar to other PPR exemption provisions, the exemption under section 61 is not met if any income is derived for the land on which a residence was being constructed or renovated.

Purchase of new PPR residence

If a person becomes the owner of a land to be used and occupied as a “new” PPR, and as at 31 December in the preceding year the person is the owner of their “old” land that is occupied as a PPR, the Commissioner will grant an exemption for the “new” land that is occupied as a PPR if the new PPR is used and occupied for at least 6 months as a PPR within 12 months after the person became the owner of the new land.

The effect of this exemption is to enable the purchaser of land to receive the PPR exemption for their old and new properties for a land tax year. That is, it is designed to enable a land owner time to sell their old residence without triggering land tax.

This PPR exemption does not apply however if any income is derived from the new PPR in the preceding tax year.

Sale of old PPR residence

Similar to the “extension” granted when a person purchases a new PPR land, the PPR exemption is likewise reciprocally “extended” to the old PPR land in the year following that the owner moves into the new PPR. This exemption applies where the owner has moved into the new PPR land in the previous year (so it is the PPR for the current year) but they still retain the old PPR in the current year.

The old PPR will receive the PPR exemption (in addition to the new PPR receiving the exemption) in the current year provided that the old PPR was used as the owner’s PPR for at least 6 months in the proceeding year. The Commissioner may revoke the exemption for the current year, if the old PPR is not sold in the current year.

Once again, the PPR exemption is not extended to the old PPR land if any income is derived from the old PPR in the preceding tax year.

Land becomes unfit for occupation

Land is also exempt under section 58 of the LTA for up to 2 years if it becomes unfit for occupation as the PPR of a person because of damage or destruction caused by an event such as fire, earthquake, storm, accident or malicious damage. That is, unless the owner uses another property during this time that receives the PPR exemption.

The Commissioner may extend this period by another 2 years if he is satisfied there has been acceptable delay.

Extension of PPR exemption upon death

Upon death, the PPR exemption on a land will continue as if that person continued to use the land as a PPR.

This extension of the PPR exemption operates until the earlier of either of the following:

The third anniversary (or further period approved by the Commissioner) of the person’s death;
When the person’s interest in the land vests in another person under a trust;
When the person’s interest in the land vests in a person (other than the person’s personal representative) under the administration of the person’s estate.

The PPR exemption is not extended if any income is derived from the land in the year preceding the tax year.

Questions

If you have any questions about how land tax should apply in your circumstance, please contact our specialist team at:

Phil Broderick
Principal
M +61 419 512 801 | T +61 3 9611 0163
E: pbroderick@sladen.com.au