Victorian Commercial and Industrial Property Tax Reform

By Jinny Chaimungkalanont, Mark Peters, and Catherine Nguyen

On 11 December 2023, the Victorian Government released the Commercial and Industrial Property Tax Reform Information Sheet (the Information Sheet), a document which supplements the Government's announcement of the proposed reforms in the 2023-24 Budget. We provided a summary of the announcement of the Victorian commercial and industrial property tax reform in our 2023-24 Budget Update earlier this year: here.

The Information Sheet follows a targeted consultation process with business and industry stakeholders, and provides information on the final design features of the Commercial and Industrial Property Tax Reform. We have set out an overview of the key features of the reform below.

Overview of proposed reforms

Scope of reforms

The new reform is expected to apply from 1 July 2024 to transactions involving property on or after that date. A property will enter the new regime if a contract of sale is entered into on or after 1 July 2024, 50% or more of the property transacts, there is a positive duty liability (i.e. it is not subject to an exemption), and the property has a qualifying commercial or industrial use at the date of settlement.

Property will have a qualifying use if it is either:

• allocated an Australian Valuation Property Classification Code (AVPCC) that represents commercial, industrial, extractive industries or infrastructure and utilities land; or
• a qualifying student accommodation, which is defined as land which is used solely or primarily as commercial residential premises and for providing accommodation to tertiary students.

The reform will not apply to properties coded as having residential, primary production, community services, sport or heritage and culture purposes.

It is important to note that the AVPCC codes which are qualifying AVPCC codes (the 200s, 300s, 400s, and 600s, which can be viewed here) do not encompass properties used as commercial residential premises. This means that properties used as retirement villages, aged care facilities, boarding houses and short-term accommodation appear to be outside the proposed scope of the reform.

Entry into new system

The person who first purchases a property in a transaction that meets the above description on or after 1 July 2024 (the first purchaser) will cause the property to enter into the new system. This transaction will trigger a 10-year transition period for the property, commencing on the date of settlement.

Upon settlement, the first purchaser will be given a choice to either:

• pay the property's final stamp duty liability as an upfront sum; or
• finance the final stamp duty liability through a government-facilitated transition loan, allowing them to make annual loan repayments over 10 years (see further below).

Thereafter, any subsequent transactions of the property will not be liable to stamp duty provided the property is used for a commercial or industrial purpose, even if these transactions occur within the 10-year transition period.

After the 10-year transition period, the property will become liable for the new Commercial and Industrial Property Tax (CIPT).

The Commercial and Industrial Property Tax

The CIPT will be set at a rate of 1% of the property's unimproved land value per annum, with no tax-free threshold. This will be separate to land tax, which will continue to apply. The first annual imposition of the CIPT will be based on land ownership as at the 31 December after the 10-year transition period.

Note also that the existing land tax exemptions in Victoria will also apply to the CIPT, which can be viewed in full on the State Revenue Office website.

Mixed use properties

Certain properties may fall within the scope of the reform even if they have a mix of qualifying and non-qualifying uses, and have both qualifying and non-qualifying AVPCCs. For example, a street-level restaurant with a residential premises on an upper floor.

The Information Sheet clarifies that the approach intended to be taken is a sole or primary use test to determine whether property will enter into the reform when transacted, and whether the CIPT will apply. That is, the sole or primary use of the property must be commercial or industrial, with reference to relevant factors such as the land or floor area of each use, the relative intensity, economic and financial significance of each use, and the length of time of each use.

Stamp duty exemptions

Existing concessions and exemptions available for stamp duty on commercial and industrial property will continue to be available when the reform commences.

If transactions of commercial and industrial property attract full stamp duty exemptions (such as with deceased estates, transfers between spouses and partners, purchases by charities and Friendly Societies, and a transfer on a change of trustee), the transactions will not cause the property to enter the reform.

However, transfers of qualifying properties which are eligible for concessions, such as the Regional Commercial and Industrial Duty Concession, will enter the reform provided that the other requirements are satisfied. The reduction in the final stamp duty payment available under the concession will also apply.

Complex transactions

The Information Sheet contemplates the following treatment of transactions in addition to direct transfers of 100% of a property:

• Fractional interest transactions of 50% or more of the ownership in a property will cause the entire property to enter into the reform and be treated accordingly.
• Indirect transactions of property, including landholder acquisitions, will be captured by the reform. However, there remains significant uncertainty as to how this will apply.

Certain complex transactions concerning the property will not trigger entry into the reform. Transactions eligible for the corporate consolidation concession, dutiable leases, and economic entitlement and sub-sale transactions have been specifically named to be within this exempt category.

Properties associated with these transactions will only enter the reform if directly transferred through a standard dutiable transaction with a positive duty liability.

To support the integrity of the new regime, anti-avoidance provisions will also be put in place. Further details are expected in 2024.

Change-in-use duty

The CIPT regime only applies to properties so long as they continue the qualifying use. New duty implications will arise if a property changes in use over time from a commercial or industrial use to a non-qualifying use, such as residential use.

A new change-of-use duty is proposed, which will apply to property that:

• has already entered the reform;
• is sold a second or subsequent time with a qualifying or commercial use (i.e. no duty paid); and
• subsequently converts to a non-qualifying use.

Property owners will be required to notify the Victorian State Revenue Office within 30 days of any change of use of the property, with the following implications:

• If the property continues to be used for a non-qualifying use as at 31 December, then CIPT will not be charged with respect to the following tax year.
• The change-of-use duty will be calculated based on the stamp duty that would have been payable when the property was transacted prior to its change in use, with a reduction of 10% for every 31 December that has passed since that transaction to a maximum of 100%.

Transition loan

For those who opt not to pay the final stamp duty liability upfront, the Government will make a transition loan available to eligible persons, allowing them to spread the cost of stamp duty over time. The loan will be issued by the Treasury Corporation of Victoria with a commercial market-based interest rate calculated at the start of the loan and fixed over the 10-year term of the loan. The Treasury Corporation will also have a first-ranking statutory charge over the land.

This loan will be available to Australian citizens, permanent residents or Australian businesses who:

• purchase a commercial or industrial property where settlement occurs for contracts entered into on or after 1 July 2024;
• purchase property up to a maximum purchase price of $30 million; and
• are approved for finance from an Authorised Deposit-taking Institution or other approved lender for the property.

Next steps

The newly released Information Sheet sheds some much needed light on the reforms, but leaves significant uncertainty on whether and how it will operate in some proposed areas, including in relation to certain complex transactions (in particular landholder duty), commercial residential properties and anti-avoidance. The Victorian Government has yet to release the bill to implement the reforms but have indicated that legislation is expected to be introduced into Parliament in the first half of 2024. We will provide further updates in due course.