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  • HRB & Co Property Advisory

PROPERTY TAXATION CHANGES TO IMPACT VICTORIA’S PROPERTY MARKET

24th March 2023


The Andrews Labor Government announced its 2023-24 State Budget yesterday, with significant tax changes that will impact Victorian landowners, tenants and small businesses. These changes, ranging from transitioning stamp duty to an annual property tax on commercial and industrial acquisitions to land tax surcharges and decreases in land tax thresholds, are aimed at recouping funds expended during the COVID-19 pandemic however will have far wider reaching impacts on the property market and Victorian economy in the years ahead.

STAMP DUTY CHANGES ON COMMERCIAL AND INDUSTRIAL PROPERTIES

The 2023-24 State Budget introduced a significant reform to Victoria's duty regime, aiming to replace stamp duty on Commercial and Industrial properties with an annual property tax. The finer details of the new regime are yet to be finalized, as the government plans to consult with the industry before introducing the necessary legislation.

However, based on the government's media release, the following key points have been identified:

1. Transition and Payment:


Starting from July 1, 2024:

  • Commercial and industrial properties will transition to the new Stamp Duty system upon sale. The Purchaser will have the choice to pay the fixed upfront amount or a 1% annual property tax based on the land's unimproved value for a period of ten years after the sale transaction with an additional interest charge. From year 11 onwards, an annual property tax of 1% of the unimproved land value will apply.

  • Once the property enters the new system after ten years, no further duty will be payable upon sale, and the annual property tax will be applicable.

2. Exemptions:


The new regime will not apply to the current owners of commercial or industrial properties purchased before July 1, 2024.

Several issues which have not been addressed require further consideration:

  • Recovery from Tenants:

While this measure aims to provide relief to property investors, there is a concern that these new annual property tax liabilities will ultimately affect tenants that are small to medium sized business owners if the tax is recoverable from them.

  • Design and Administration Features:

It is important to determine the tax cycle and assessment process for the annual property tax, as well as the potential imposition of penalty tax and interest on defaults. The announcement refers to fixed payments and interest, but later refers to the annual property value. Considering the way values increase, a payment based on the annual land value would be substantially varied from the land value on the day that you purchased the property, so therefore the 1% per year fee plus interest appears higher than the current rate paid, even when applying a Net Present Value calculation.

  • Definition of Commercial and Industrial Property:

The government's definition of commercial and industrial property, and whether it accounts for the purchaser's intentions post-purchase remain unclear. The treatment of mixed-use properties intended for conversion to residential use under the annual property tax is also remains uncertain.

  • Sale of Property during the 10-Year Period:

The implications of disposing of a property before completing all instalment payments for duty obligations require clarification. Whether subsequent purchasers will have the same ten-year period before the annual property tax becomes applicable is another point of inquiry.

  • Scope of the new tax:

It is unknown whether commercial and industrial properties will remain outside the scope of the new property tax indefinitely until sold, and if this tax rate can or will increase over time?

  • Landholder Acquisitions:

The applicability of the new regime to indirect acquisitions of commercial and industrial properties through the acquisition of companies or unit trusts requires clarification.

We encourage the abolishment of Stamp Duty to grow the State’s economy and boost mobility however this is merely substituting it with another property tax. The complete removal of Stamp Duty in South Australia on Commercial and Industrial has proven to be a boon for the economy and its property market with investors targeting South Australia since the changes came into effect in 2016.

WHAT ARE THE POTENTIAL IMPACT'S?

  • A more 'liquid' market as buyers and sellers are potentially willing to 'trade' within the market potentially reducing the average holding periods. It may also stimulate development or refurbishment of 'idle' assets.

  • Increases in occupancy costs for tenants (small businesses) as this new charge is either directly recovered from the tenant in accordance with their lease or passed on through higher rents. This will add further inflationary pressures.

  • Potential higher holding costs associated with the new regime for landowners over the long term (i.e. >10 year hold period) which could offset the benefits of upfront duty savings under the current regime;

  • In either of the above scenarios, Victoria will be viewed as a far less attractive place to invest or do business particularly coupled with the Land Tax changes detailed further below.

Clients planning to purchase commercial and industrial properties in the next 12 months should carefully evaluate the cost and benefits of the new regime. Long term property buyers (over 10 years) should consider making this purchase prior to 1 July 2024 to avoid the potential for an additional 1% annual property tax to apply. However, for clients who are looking to invest for a shorter term (less than 10 years), the opportunity to defer payment of upfront duty could provide much needed cashflow and capital benefits.


As the legislation is discussed with industry groups and introduced into Parliament, further clarity on the new regime and its impact on future purchases will emerge, and we will be able to provide more advice on its likely impact on Commercial and Industrial asset and rental values in the Victorian market.

LAND TAX CHANGES

Significant changes were announced to the States Land Tax system which will have far reaching impacts across all asset types:

  • From 1 January 2024, the tax-free threshold for general land tax rates will temporarily decrease from $300,000 to $50,000.

  • Those who pay land tax will attract a temporary additional fixed charge:

    • Landholdings valued between $50,000 and $100,000 will incur a fixed charge of $500.

    • Landholdings exceeding $100,000 will incur a fixed charge of $975.

  • Land tax rates will temporarily increase by 0.1% for:

    • General taxpayers with holdings above $300,000 (in addition to $975 flat surcharge)

    • Trust taxpayers with holdings above $250,000 (in addition to $975 flat surcharge)

  • The absentee owner surcharge will double from 2% to 4%.

  • The minimum threshold for non-trust absentee owners will decrease from $300,000 to $50,000. (The threshold for land held by an absentee trust remains unchanged at $25,000).

WHAT ARE THE POTENTIAL IMPACT'S?

1. Broader Tax base - An estimated 860,000 Victorian investment property owners will pay $4.7 billion in extra taxes over four years. Of the 860,000 investment property owners in Victoria, 380,000 have never previously been subject to land tax.

2. Higher rents – A majority of landowners will attempt to recoup the increased costs through higher rents putting further cost of living pressures / business costs on many low-to-middle income households and businesses;

3. Reduced supply - Those with larger or multiple holdings may elect to sell their investment properties which will more likely than not be purchased by an owner occupier further exacerbating the undersupply of rental accommodation – which is at or near record lows throughout many parts of the State. At a time of record migration forecasted to be coming to Australia and with already reduced dwelling commencements due to construction sector woes at present this will put further upward pressure on rents.

4. Lower Returns - For many larger residential or commercial property owners where Land Tax is not a recoverable outgoing, paying extra tax thereby reduces their net cashflow returns for the property and will have an impact on asset values. For assets where land tax is recoverable this may put some downward pressure on rental growth as tenants battle higher occupancy costs.

5. Reduced Investment - The doubling of the absentee owner surcharge will reduce the appeal of foreign investment in Victorian real estate where Land Tax is non recoverable. In situations where an absentee owner owns or purchases an asset this could have major unintended consequences for many tenants that are liable for Land Tax under the terms of their lease. For any tenants negotiating new leases at present and moving forward where Land Tax is a recoverable expense you should seek advice from your solicitor or one our tenant advisor's.

HRB & CO Property Advisory will be following the announcements released as part of the State Budget closely over the coming weeks and months.


Please contact a member of the HRB & CO Property Advisory team if you have any queries or would like to discuss your leasing or acquisition requirements.

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