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Vacant Residential Land Tax: Developers beware
Technical article

Vacant Residential Land Tax: Developers beware

Developers with residential projects in inner and middle Melbourne that are undergoing lengthy construction periods should consider the application of the VRLT to their projects, especially where the land was residential in nature before construction commenced.

Developers whose projects are nearing completion should be mindful of the potential VRLT consequences of holding completed residences and of delayed settlements.

What is the VRLT?

The Vacant Residential Land Tax (“VRLT”) is a tax on residential premises in Melbourne’s inner and middle suburbs, which were vacant for more than six months in the preceding calendar year. The VRLT is an annual tax charged at the rate of 1% of the capital improved value of the land.

Why was the tax introduced?

The Victorian Government introduced the tax from 1 January 2018 in response to its concerns “about the number of properties being left vacant across Melbourne’s inner and middle suburbs…the tax is intended to encourage landowners to make residential properties available for purchase or rent so that Melbourne’s current housing stock is used as efficiently as possible.”

How might the VRLT affect me as a developer?

While VRLT is not initially imposed on land on which one or more residences is under construction, developers who own the land should be aware that they may be liable for VRLT if either the construction of the residence(s) goes beyond or the sale of the completed residence(s) exceeds a prescribed time period.  For large residential development projects such as multi-level apartment buildings, residences will need to be completed and sold in a timely manner if VRLT is to be avoided.

The application of the VRLT provisions depends upon which of the following categories the land falls under:

1. Land on which the residence is being constructed (“Category 1 Land”) that:

a) was capable of being used for residential purposes prior to construction (e.g. land on which there was an existing habitable residence which was subsequently demolished); or

b) had a residence that was uninhabitable prior to construction (e.g. land on which there was a dilapidated residence incapable of being inhabited).

2. Land which was vacant or commercial land prior to construction commencing and in respect of which an occupancy permit has now been issued but has not yet been sold (“Category 2 Land”).

3. Land on which there is a residence that is uninhabitable, and no new residence is being constructed (“Category 3 Land”).

Category 1 Land

The first two years

VRLT is not imposed on the land for two tax years following the tax year in which a building permit for the construction of the residence on the land has been issued.

After the first two years

VRLT will be imposed on the land in the third tax year following the calendar year in which the building permit was issued if the construction of the residence has not been completed by 31 December of that year.

Example

If a building permit was issued in August 2018 and construction of the residence is not completed by 31 December 2020, VRLT will not be imposed in the 2019 and 2020 tax years.  The land will be considered vacant and VRLT will be imposed on the land for the 2021 tax year because as at 31 December 2020, more than 2 years will have elapsed since the building permit was issued, and construction is yet to be completed.

There is, however, some respite for developers.  The VRLT may not be imposed in the third tax year (and possibly in further tax years) if the Commissioner is satisfied that there is an acceptable reason for the construction not being completed within the prescribed time limit.  Acceptable reasons may include, for example, protracted worker’s strikes, or council delays.

Category 2 Land

While the residence is being constructed

VRLT will not be imposed on the land while the residence is being constructed and will be exempt from VRLT in the tax year following the year in which the residence is completed (i.e. the year in which an occupancy permit is issued).

After the residence is completed

VRLT will be imposed in the tax year following the final year in which property is exempted (i.e. in the second tax year following the year in which an occupancy permit is issued), where the property remains unsold as at 31 December of the preceding year.

Completed residences which are actively being marketed but have not yet been sold will still be considered “vacant” and therefore, subject to the VRLT.  Developers should therefore be mindful of the potential VRLT consequences of holding completed residences and of delayed settlements.

Example

If the occupancy permits for an apartment development were issued in August 2018, VRLT will be not be imposed in the 2019 tax year.  However, VRLT will be imposed in the 2020 tax year on all apartments yet to be settled as at 31 December 2019.

Category 3 Land

The first two years

VRLT is not imposed on the land for two tax years following the tax year in which the residence became uninhabitable.

After the first two years

VRLT will be imposed on the land in the third tax year following the calendar year in which the residence became uninhabitable.

Example

If land on which there is a residence became uninhabitable in August 2018 and no construction activity has commenced, VRLT will not be imposed in the 2019 and 2020 tax years.  However, the land will be considered vacant and VRLT will be imposed in the 2021 tax year.  This is because as at 31 December 2020, more than 2 years will have elapsed since the residence became uninhabitable and construction of a new residence has not commenced on the land.

What are my notification requirements?

Where a VRLT liability arises, the land owner is required to notify the State Revenue Office (“SRO”) by 15 January of the year following the calendar year in which the property was vacant.  For example, the SRO must be notified by 15 January 2021 in respect of land that is vacant during the 2020 calendar year.

It is important to keep in mind that land owners are also required to lodge a notification where they may have no VRLT liability as a result of claiming an exemption.  In such cases, the landowner must notify the SRO that the land is vacant and advise the SRO of the applicable exemption category.

If a notification is not made by the deadline and the SRO subsequently determines through its compliance activities that land is subject to the VRLT, the SRO may retrospectively assess for any outstanding VRLT and impose penalty tax in addition to any VRLT assessed.

The SRO conducts monitoring and compliance activities to ensure that vacant residences are being declared.  We understand the SRO is able to obtain information on vacant properties through data matching with other state and federal agencies.  Given the government’s focus on housing accessibility, we expect to see the SRO ramp up its compliance activities this year.

What do you need to do?

Developers with residential projects in inner and middle Melbourne that are undergoing lengthy construction periods should consider the application of the VRLT to their projects, especially where the land was residential in nature before construction commenced.

Developers whose projects are nearing completion should be mindful of the potential VRLT consequences of holding completed residences and of delayed settlements.

Where a VRLT liability has arisen (or where land is vacant but a VRLT exemption applies), the SRO should be notified by 15 January of the year following the calendar year in which the property was vacant.

How can we help?

Our tax experts at Pitcher Partners are able to assist with advising on your VRLT position, lodging your VRLT notification, and advising where a VRLT liability (or exemption) is present.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.
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