Introduction
The Commercial and Industrial Property Tax Reform Bill 2024 (Vic) (Bill) was published today and read a second time in the Victorian legislative assembly. After today, Parliament is in recess until 1 May 2024.
The Bill establishes a tax reform scheme for eligible commercial and industrial property commencing on 1 July 2024 (CIPT regime).
The CIPT regime applies to land in Victoria that has been allocated with a qualifying use under the Australian Valuation Property Classification Code, as well as certain land used for student accommodation (qualifying use).
Land with a qualifying use enters the CIPT regime on the occurrence of certain dutiable transactions or relevant acquisitions under the Duties Act 2000 in respect of that land and on certain subdivisions and consolidations of land already in the CIPT regime.
Generally, a property will enter the CIPT regime if 50% or more of the property is sold. The sale of a 50% or greater interest, directly or indirectly, on or after 1 July 2024, will cause the entire property to be subject to CIPT after 10 years.
Once land has transitioned into the CIPT regime, exemptions from land transfer duty and landholder duty will apply to eligible subsequent transactions in respect of the land, if it still has a qualifying use.
Where a property has transitioned into the CIPT regime and there is a change in use in the property (e.g. change in use from commercial to residential), land transfer duty (or, if relevant, landholder duty) will apply to subsequent sales of the property. A change in use may also attract a separate “change in use” duty charge.
For mixed use properties, a sole or primary use test will determine whether the property has a qualifying use. If the sole or primary use test indicates that the property has a qualifying use, then CIPT will apply to the entire mixed use property.
The rate of CIPT will be a flat rate of 1% of the taxable value of the land for land tax purposes (which is usually the site value). Land that is eligible for a BTR benefit under the Land Tax Act 2005 attracts a concessional CIPT rate of 0.5%.
Start date
The Bill confirms the previously announced start date of 1 July 2024.
The CIPT regime will not apply to transactions that occur pursuant to an agreement or arrangement entered into prior to 1 July 2024. This is broader than the original guidance, which only addressed contracts of sale entered into before 1 July 2024.
Transfer duty on first sale on or after 1 July 2024
When a property is first transacted on or after 1 July 2024, land transfer duty will be paid one final time.
CIPT will start being payable 10 years after the land enters into the CIPT regime.
A property will be taken to have been transacted (and enter the CIPT regime) if 50% or more of the property is sold. Fractional interest transactions of 50% ownership or more will cause the entire property to be subject to CIPT after 10 years.
There are rules that aggregate transactions for the purposes of determining whether a 50% or greater interest has been transacted.
The Bill gives the following example:
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.
Landholder duty on first transaction on or after 1 July 2024
It is not just direct transactions of land that can trigger a transition. A “qualifying landholder transaction” can also trigger a transition.
A transaction is a “qualifying landholder transaction” if:
- the transaction is a relevant acquisition in a landholder;
- at the time of the relevant acquisition, the landholder holds freehold interests in land[1];
- the relevant acquisition is not exempt from duty; and
- the relevant acquisition is not eligible for a corporate reconstruction concession or a corporate consolidation concession.
Broadly, the underlying landholdings of the landholder will be taken to enter the CIPT regime if a 50% or greater interest in those underlying landholdings is transacted.
There are rules which require the aggregation of interests which occur within a 3 year period.
The Bill gives the following example:
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.
Rate of tax
The rate of CIPT will be a flat rate of 1% of the taxable value of the land for land tax purposes (which is usually the site value). A concessional rate of 0.5% applies to land that is eligible for a BTR benefit under the Land Tax Act 2005.
Foreign owners will be liable for CIPT. There is no absentee surcharge on CIPT.
The CIPT is separate and in addition to the existing land tax system.
Option for up front duty or a transitional loan
In some circumstances, the first purchaser of a property on or after 1 July 2024 may choose to finance the final duty liability through a government facilitated transitional loan over 10 years, equal to the property’s final upfront duty liability plus interest.
The Bill contains amendments to the Treasury Corporation of Victoria Act 1992 to facilitate the treasury loan program. The eligibility criteria for transitional loans is determined by the Treasurer. The Bill does not contain details of the eligibility criteria, although the government has previously announced that transitional loans would only be available to eligible applicants who are purchasing property up to a maximum purchase price of $30 million. There are also other eligibility criteria to be satisfied.
Subsequent sales
Previous guidance indicated that, if a property was sold after it had entered the CIPT 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 CIPT 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.
The Bill gives 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.
Classification of property
A property will be taken to have a qualifying use if either:
- the property is allocated an Australian Valuation Property Classification Code that represents commercial, industrial, extractive industries or infrastructure and utilities land; or
- the property is qualifying student accommodation.
For mixed use properties, a sole or primary use test will apply to determine the treatment of the property. If the sole or primary use test indicates that the property has a qualifying then CIPT will apply to the entire mixed use property.
Changes in use
Whether a property has a qualifying use will be determined when it is first transacted on or after 1 July 2024. This will generally be the date of settlement.
If a property enters the CIPT regime and later ceases to have a qualifying use, the owner will not be liable for CIPT. Liability for CIPT is determined based on the use of land at 31 December each year. This aligns with the liability date for land tax.
If a property is transacted while it has a non-qualifying use, the existing duty rules will apply.
If a property that has entered the CIPT regime is transacted again with a qualifying use, and duty has not been paid on that transaction, subsequently converting the property to a non-qualifying use will attract “change of use duty”.
Change in use duty will be calculated based on the duty that would have been payable when the property was transacted but reduced by 10% for every calendar year that has passed since that transaction.
If the property returns to a qualifying use (after converting to a non-qualifying use), there is no refund of change of use duty.
Property owners will be required to notify the SRO within 30 days of any change to the use of a property.
Exclusions
The CIPT regime will not apply to:
- property with a qualifying use transacted under an agreement or arrangement entered into before 1 July 2024; or
- properties primarily used for residential, primary production, community services, sport, or heritage and culture purposes, as coded by the Valuer General.
Transactions that will not trigger entry into the CIPT regime include the grant or transfer of leases and economic entitlements. In other words, transactions which do not involve a direct transfer of land via a standard dutiable transaction (although indirect transfers subject to the landholder provisions may still trigger a transition). Transactions eligible for a corporate reconstruction or corporate consolidation concession will not trigger entry into the CIPT regime.
Anti-avoidance provisions
General anti avoidance provisions will apply to schemes intended to either avoid entry into the CIPT regime or avoid application of CIPT.
Recovery of CIPT
Unpaid CIPT, including any interest and penalty tax, is a first charge on the land for which CIPT is payable.
If a tax default occurs in relation to CIPT, the Commissioner may require a lessee, mortgagee or occupier of the land on which the CIPT is payable to pay an amount of unpaid CIPT (including any interest and penalty tax).
The Commissioner cannot require a lessee or occupier to pay an amount that is greater than the amount of rent that the lessee or occupier is required to pay the taxpayer (landowner). However, this does not apply to a lessee or occupier that is a related corporation or relative of the taxpayer. This mirrors existing provisions in the Land Tax Act 2005 for the recovery of land tax.
Certain other interests in land held by a landholder may also be relevant (e.g. Crown leasehold estates).
