The Victorian Government has followed the NSW Government’s lead by announcing a 50% land tax discount and exemption from the Absentee Owner Surcharge for eligible new build-to-rent developments, from 1 January 2022 until 1 January 2040. The measure is expected to boost the Victorian housing supply by an estimated 5,000 homes.
What are the rules?
As part of the Victorian Government’s response to the coronavirus pandemic and its Big Housing Build package, the Treasurer has announced a 50% land tax discount together with a full exemption from the Absentee Owner Surcharge (“AOS”) (currently 2%) for eligible new build-to-rent (“BTR”) developments. This relief measure is intended to remain in place until 2040.
What are the changes trying to achieve?
This measure has been introduced in an attempt to attract more investment into the BTR sector by property developers. One of the barriers to that investment has been the significant holdings costs (including land tax) associated with holding and operating a BTR development on an ongoing basis.
Who do the changes apply to?
Further details around the eligibility criteria for the 50% BTR land tax discount and AOS exemption are expected to be known once the State Taxation Amendment Bill 2020 is tabled in Parliament, tomorrow.
It remains to be seen whether the eligibility criteria for the 50% BTR land tax discount and AOS exemption will mirror the eligibility criteria for the equivalent discount enacted by the NSW Government earlier this year.
The eligibility criteria for the NSW 50% BTR land tax discount are quite onerous, requiring the BTR development to provide at least 50 units in metropolitan areas that are ‘purpose-built’ rental units. The units must be under one, unified ownership structure and tenants must have options for longer leases. In addition, the NSW Chief Commissioner must be satisfied that a significant proportion of the labour force hours spent on the construction of the BTR building involves work performed by apprentices and trainees, long-term unemployed workers, workers requiring upskilling, workers with barriers to employment (such as persons with a disability), Aboriginal jobseekers, or graduates. The BTR land must also be acquired and held by an Australian corporation and the construction of the BTR development must be carried out by that corporation or a related body corporate.
Lastly, the Chief Commissioner may claw back any discounted land tax if, within 15 years, the BTR land is subdivided or the ownership of the land is otherwise divided.
Our initial views
It remains to be seen whether the land tax discount will be sufficient to attract developers to the BTR sector, particularly where the eligibility criteria provide little flexibility around how the development may be structured and where the cost of complying with the eligibility criteria could outweigh any land tax saving.
Nevertheless, this announcement could be welcome news for foreign developers, who may seek to take advantage of the AOS exemption being granted in respect of BTR projects over a 20-year period.
What is an example of how the changes will operate?
Under the current rules, a foreign developer would be required to pay $382,475 in land tax per year, including AOS, in respect of BTR property with a land value of $10m. If the BTR development is eligible for the 50% land tax discount, together with an exemption from the AOS, the land tax payable would be discounted to $91,237 per annum. If the developer holds the BTR for 15 years (and assuming for illustration purposes only that the land value does not change over that period), the developer will pay approximately $4.3m less in land tax over 15 years than if the 50% discount was not available.
When do the changes apply from?
The 50% land tax discount and AOS exemption for BTR developments will apply from 1 January 2022 until 1 January 2040.
Currently, a land tax concession is granted in respect of land (or part of land) owned and occupied by a club, which reduces the rate of tax payable by the club to no more than 0.357% of the land’s taxable value. The club must be carried on exclusively for the social, cultural, recreational, literary, or educational interests of its members, or for promoting or controlling horse racing, pony racing, or harness racing in Victoria.
From 1 January 2021, the land tax concession for eligible clubs will be replaced with a full land tax exemption.
What are the next steps?
Contact your Pitcher Partners representative if you have any queries concerning the Victorian Budget 2020-21 measures.