In the 2023-2024 State Budget, the Victorian Government announced its intention to progressively abolish stamp duty on commercial and industrial properties and replace it with an annual property tax. Following consultation with business and industry groups, the government has now released further details regarding the final design of the new tax and how it is intended to operate.
In this article we discuss the key details of the new Commercial and Industrial Property Tax (CIPT) and what it means for your business.
What is changing?
From 1 July 2024, commercial and industrial properties will transition to the CIPT regime as they are sold. The first annual CIPT liability will become payable 10 years after the final stamp duty payment, regardless of whether the property is on sold during that period. Once stamp duty has been paid one final time, all subsequent transactions of that property will be exempt from duty if it continues to have a qualifying commercial or industrial use.
The final stamp duty liability on the transfer of a commercial or industrial property can be paid as an upfront lump sum or, for purchasers who meet certain eligibility criteria, through fixed instalments over 10 years via a government-facilitated transitional loan which is subject to interest.
At the end of the 10 year transition period the property will be subject to an annual CIPT equal to 1% of the unimproved value of the property.
Why is the CIPT being introduced?
Stamp duty is commonly criticised as being an inefficient tax because it taxes transactions rather than activity, and can be a barrier to businesses looking to invest, expand or relocate. In contrast, the Government believes that a smaller annual charge is less likely to impact property investment decisions and should free up capital for businesses to use elsewhere. The CIPT is also expected to provide a more reliable and consistent revenue source for the government on an ongoing basis.
When will the new regime commence?
The new tax regime will apply to commercial and industrial property transactions with both a contract date and settlement date on or after 1 July 2024.
Which properties will be subject to the CIPT?
A property will enter the new regime if the following conditions are met:
- 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; and
- The property has a qualifying commercial or industrial use.
Qualifying commercial or industrial use
A property will have a qualifying commercial or industrial use if it meets one of the following conditions at the settlement date of a transaction:
- The property is allocated an Australian Valuation Property Classification Code (AVPCC) that represents commercial, industrial, extractive industries infrastructure and utilities. These are included in the 200s, 300s, 400s and 600s AVPCC categories (AVPCC codes); or
- The property is qualifying student accommodation. Qualifying student accommodation is land which is solely or primarily used as commercial residential premises and that is used solely or primarily for providing accommodation to tertiary students, excluding accommodation provided in connection with a university such as university colleges.
Properties excluded from the new regime
A property will be excluded from the CIPT regime if:
- it is purchased prior to July 2024;
- it is coded by the Valuer-General as having residential, primary production, community service or sport, heritage and cultural purposes;
- it receives a stamp duty exemption, for example a transfer to a charity, from a deceased estate or between spouses; or
- the duty is triggered under a complex arrangement such as the corporate consolidation concession, lease duty, economic entitlement or sub-sale provisions.
How can I determine the classification of my property?
A property owner can determine the classification of a property by referring the allocated AVPCC code set out in the annual rates and valuation notice issued for the property. The APVCC code ascribed to land is based on its existing use. However, it is not uncommon for properties used for identical purposes to be allocated different codes in different council areas. As the AVPCC is treated as part of the valuation, property owners can dispute the classification of their property by lodging an objection with the relevant local council.
Will an acquisition of a fractional interest trigger CIPT?
Where less than a 100% interest in a property is transacted, the transaction will be referred to as a ‘fractional interest transaction’. A fractional interest transaction of 50% ownership or more will cause the entire property to enter the new regime.
For example, the sale of 50% of the shares in a company that owns a qualifying commercial or industrial property on or after 1 July 2024 will trigger a landholder duty liability, and that transaction will result in the entire property entering the CIPT regime. The first annual CIPT charge in respect of the property will be payable 10 years after the landholder duty payment.
Subdivisions and consolidations
If a property has entered the CIPT regime, the subdivision of that property into child lots will not alter that status. The subdivided parcels will be exempt from duty when they are transacted and will retain the same CIPT commencement date as the parent property.
Similarly, lots that are consolidated into a larger parcel will be subject to the CIPT if 50% or more of the total land area of the new parent property is made up of land that had already entered the CIPT regime.
Concessions and exemptions
The Victorian Government has indicated that existing stamp duty concessions and exemptions will continue to apply when the new regime commences. For example, this means that properties which are currently eligible for the regional commercial and industrial duty concession should continue to be entitled to a 50% reduction in the amount of the final duty liability when they are transacted on or after 1 July 2024.
In addition, existing land tax exemptions will also apply to the properties within the CIPT regime.
How will the CIPT apply to mixed use sites?
A sole or primary use test will be implemented to determine if a property comprising a mixture of qualifying and non-qualifying uses will enter the CIPT regime when it is transacted on or after 1 July 2024.
Determining the sole or primary use
The Government has indicated that the sole or primary use of a property may be determined with reference to factors such as:
- Land or floor area of each use;
- Relative intensity, economic and financial significance of each use; or
- Length of time of each use.
At this stage it is unclear whether taxpayers will be able to self-assess the primary use of their mixed use properties or whether it will be necessary to make an application to the State Revenue Office for a ruling or similar determination.
If the primary use of a mixed use property is determined to be a qualifying use, the CIPT will apply to the entire property, not just the portion that has a qualifying use. However, any available concession or exemption may still apply to a portion of the property. Alternatively, if the primary use is determined to be a non-qualifying use, then the CIPT regime will not apply to the property and it will continue to be subject to the current duty regime.
What happens if there is a change in use?
The Government has anticipated that the use of a property may change over time.
If the use of a property that has entered the CIPT regime changes to a non-qualifying use (e.g. residential), the taxpayer must notify the Commissioner of State Revenue within 30 days of the change of use. The property will not be liable for the CIPT in future years while it continues to have a non-qualifying use. However, stamp duty will be payable if the property is then sold with a non-qualifying use.
If a property that has entered the CIPT regime is sold a second or subsequent time with a qualifying commercial or industrial use, stamp duty will not be payable on that transaction. However, if the property is subsequently converted to a non-qualifying use, a change in use duty will apply.
The change in use duty amount will be calculated based on the stamp duty that would have been payable when the property was transacted, reduced by 10% for every 31 December that has passed since that transaction up to a maximum of 100%.
Any subsequent return of a property to a qualifying use will result in the CIPT becoming payable after the original 10 year transition period has concluded. However, there will be no ability to get a refund of change of use duty if a property returns to a qualifying use.
The following example is based on our understanding of how the CIPT regime is intended to operate according to the information that has been released by the Government to date. The outcomes referred to in the example are subject to confirmation based on the wording of the legislation that will be introduced into Parliament in coming months.
Company A enters into a contract to purchase a leased commercial property in October 2024, which settles in December 2024. They retain it as a rental property until June 2027, when it is rezoned for residential development. In June 2027 Company A enters into a contract to sell the property to Company B subject to the existing lease. That transaction settles in September 2027. Company B then obtains a planning permit for a residential development, terminates the commercial lease in January 2029 and commences the re-development of the property into apartments. The apartment sales settle in late 2031 and early 2032.
Company A will have a duty liability on the transfer of the property to them in December 2024. At that point the property will enter the CIPT regime. However, the first annual CIPT liability in respect of the property will not be payable until December 2034, being 10 years after the duty payment.
Before the first annual CIPT liability becomes payable, Company A on-sells the property to Company B as a leased commercial property. As the property is now within the CIPT regime the transfer of the property to Company B should be exempt from duty.
When Company B changes the use of the property to a residential development, that will be a non-qualifying use for the purpose of the CIPT regime. Company B must notify the Commissioner of the change in use within 30 days of the date it occurs.
Company B will also become liable for change in use duty under the CIPT regime because its acquisition of the property from Company A was exempt from duty and it is changing the use of the property to a non-qualifying use. The starting point for the change in use duty liability is the amount of duty that would have been payable at the time Company B acquired the property had that transaction been subject to duty. That amount will then be reduced by 10% for each 31 December that has passed since the property was transferred to Company B. In the present case, 2 Decembers pass between the date the property is transferred to Company B (September 2027) and the date the use of the property changes to a non-qualifying use (January 2029). Company B should therefore be entitled to a 20% reduction in the amount of duty that would have been payable on its acquisition of the property. The reduced amount will then become the change in use duty liability that is payable by Company B to the State Revenue Office.
How will the CIPT be assessed?
The CIPT will be levied annually at the rate of 1% of a property’s unimproved land value, with no tax-free threshold. It will be assessed based on land ownership as at 31 December and can be paid in a single lump sum payment or by instalments.
Information on whether a property has entered the CIPT regime will be included in the Property Clearance Certificate that is issued by the State Revenue Office to property purchasers.
Similar to land tax, landowners will not be able to pass on the cost of the CIPT to specific retail tenants identified in the Retail Leases Act 2023 (Vic).
Purchasers of a qualifying property from 1 July 2024 may be able to access a government-facilitated transition loan to finance the upfront duty liability on their acquisition, allowing them to spread the duty cost over a 10 year period.
Who is eligible for the government transitional loan scheme?
A purchaser of a qualifying property will be eligible for a government-facilitated loan to pay the final duty liability where:
- they are an Australian citizen, permanent resident or an Australian business;
- they are the first purchaser of a commercial or industrial property where settlement occurs for contracts entered into on or after 1 July 2024;
- the purchase price of the property does not exceed $30 million; and
- they are approved for finance from an Authorised Deposit-taking Institution or other approved lender for the subject property.
Features of the loan
The loan will be issued by Treasury Corporation of Victoria at a commercial interest rate (Treasury bond rate plus a margin to be determined) fixed over the 10 year term of the loan. The interest will be calculated upfront and the aggregate amount comprising the stamp duty and interest will be repayable in 10 annual instalments. The first payment will be due 12 months after settlement of the property transaction.
Early repayments will be allowed, however a break fee will apply.
If the property is sold within the 10 year term, or the use of the property changes to a non-qualifying use, the borrower will be required to repay the outstanding balance of the loan. The loan cannot be novated or transferred to a subsequent purchaser. It is currently unclear whether a break fee will apply where the property is sold, or there is a change in use which triggers early repayment.
Is the CIPT regime intended to replace land tax?
No, the CIPT will apply in addition to land tax in respect of commercial and industrial properties that are subject to land tax.
However, unlike land tax which includes an absentee owner surcharge of 4% where the property is held by a foreign owner, no foreign surcharge will be applied on top of the standard CIPT.
What are the next steps?
We recommend that clients looking to acquire commercial or industrial properties consider the costs and benefits associated with the CIPT regime, including in situations where the relevant property may be subject to a future change in use.
Within the 10 year period between the date a property transacts on or after 1 July 2024 and the date the first annual CIPT charge becomes payable, those properties that have entered the CIPT regime may be more attractive to prospective purchasers because they can be transacted without stamp duty being payable. This could create a two-tier market as between properties that are within the CIPT regime and those that are not.
For clients looking to invest in commercial or industrial properties long-term, they should consider making the acquisition prior to 1 July 2024 in order to avoid the additional annual property tax that will be applied should they hold the land for longer than 10 years. For those clients looking to invest for a shorter period, the opportunity to access a government-facilitated loan to pay their duty liability could be beneficial from a cashflow perspective.
Please contact your Pitcher Partners representative for further details.