Commercial and Industrial Property Tax: Victorian Duty Reforms

By Jinny Chaimungkalanont and Mark Peters

On 21 March 2024, the Victorian Government released the Commercial and Industrial Property Tax Bill (the Bill), which introduces the new regime for the Commercial and Industrial Property Tax (CIPT) which is to replace stamp duty for commercial and industrial property from 1 July 2024.

The Bill now provides answers to how the new CIPT will operate and the circumstances when property will become subject to the CIPT. However, there remains many questions and uncertainties as to how the regime will play out.

Key takeaways

• Where a qualifying dutiable transaction or relevant acquisition (e.g. share or unit transactions in landholding entities) occurs after 1 July 2024 which relates to an interest of 50% or more in commercial or industrial land (based on AVPCC codes), stamp duty will be payable for a final time on the land. The CIPT will become payable 10 years later at a rate of 1% (0.5% for BTR Land) of the taxable value of land (usually the land tax site value).
• Land will also enter the new system if there is a subdivision or consolidation of titles where, respectively, the parent title is subject to CIPT or 50% or more of the land comprising the new title were subject to CIPT.
• Subsequent transactions in the same land will not be chargeable with duty provided:
  • the original transaction which brought the land into the CIPT regime related to 100% of the land; or
  • the transaction occurs at least 3 years after the original transaction.

Where the original transaction did not relate to 100% of the land, duty will remain payable if there is a subsequent transaction within 3 years or until 100% of the land has transacted.

• The CIPT will not apply to transactions that occur pursuant to an agreement or arrangement entered into prior to 1 July 2024 or where the transaction would be eligible for a duty exemption (including corporate reconstruction and consolidation relief).
• Duty will remain payable on leases and the acquisition of economic entitlements (synthetic interests in land, often arising under development agreements) in the same way as presently applies (including if the land is subject to CIPT). Duty will also remain payable on property which does not have a qualifying commercial or industrial use (including foreign surcharge duty if residential).
• If a property enters the CIPT regime and later ceases to be used for qualifying commercial and industrial purposes as at 31 December of a year, the owner will not be liable for CIPT in the following year. However, change of use duty will be imposed which is calculated based on the duty which would have been payable on the previous transaction reduced by 10% for every calendar year that has passed since that transaction.
• Landholder duty thresholds will take into account land subject to CIPT, but landholder duty will not be charged on that land (but will remain chargeable on landholdings other than CIPT land). Lodgement of an acquisition statement appears to remain a requirement, even where the entity only holds CIPT land (i.e. no duty payable).

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 (unless the transaction occurs pursuant to a pre 1 July 2024 agreement or arrangement). A property will enter the new regime in one of the following ways:

Qualifying Dutiable Transactions

• a dutiable transaction (other than certain leases or an economic entitlement acquisition) occurs on or after 1 July 2024;
• the dutiable transaction is in respect of a prescribed interest in land (relevantly, an estate in fee-simple) which has a “qualifying use” when the dutiable transaction occurs;
• the dutiable transaction relates to a “qualifying interest” in land, being an interest of 50% or more in the land (including when aggregating certain associated transactions); and
• the dutiable transaction is not eligible for an exemption from duty under the Duties Act 2000 (Vic) (Duties Act) or eligible for an intragroup transaction concession.

Qualifying Landholder Transaction

• a relevant acquisition (generally, a 50% acquisition in a private corporation and a 20% interest in a private trust) occurs in respect of a landholder who holds prescribed interests in land (relevantly, an estate in fee-simple) which have a “qualifying use” when the relevant acquisition occurs;
• the relevant acquisition relates to a relates to a “qualifying interest” in land, being an indirect interest of 50% or more in the land (including when aggregating certain associated transactions); and
• the relevant acquisition is not eligible for an exemption from duty under the Duties Act or eligible for an intragroup transaction concession

Subdivision or Consolidation

Land will also enter the new system if there is a subdivision or consolidation of titles where the parent title is subject to CIPT or 50% or more of the land comprising the new title were subject to CIPT respectively.

Qualifying Use

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 and aged care facilities 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).

Subsequent transactions in the same land will not be chargeable with duty provided:

• the original transaction which brought the land into the CIPT regime related to 100% of the land; or
• the transaction occurs at least 3 years after the original transaction.

Where the original transaction did not relate to 100% of the land, duty will remain payable if there is a subsequent transaction within 3 years or until 100% of the land has transacted.

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 (0.5% for BTR), 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. It will not be possible to pass on the CIPT liability under a contract for sale (i.e. the same rules which now apply for land tax).

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 Bill provides that a sole or primary use test will apply 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. This is also true for corporate reconstruction and consolidation relief.

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.

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 calendar year 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.

The Bill does not contain the criteria for eligibility (this will be subject to guidelines to be released by the Treasurer). However, based on previous announcements, this loan should 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.