The State Taxation and Treasury Legislation Amendment Bill 2022 (Bill) was introduced into Parliament on 11 May 2022.
It contains a number of proposed changes to Victoria’s tax regime, the most significant of which relates to land tax. The Bill also contains proposed amendments to the new windfall gains tax, stamp duty and the state taxation administration rules.
1. New Principal Place of Residence Land Tax Exemption
What is this exemption trying to achieve?
A new principal place of residence (PPR) land tax exemption is set to be introduced into the Land Tax Act 2005 (Vic), which will give landowners an opportunity to apply for an exemption from land tax while a residence is being constructed or renovated on the land (Unoccupied Land PPR Exemption). This exemption will replace the current regime which allows landowners to claim a refund of land tax previously paid in similar circumstances (Unoccupied Land PPR Refund).
At first glance, the amendment appears to be a positive one as it provides for an upfront exemption rather than a retrospective refund. There are, however, a number of important requirements that need to be met, including 30-day notification timelines that must be observed in order to avoid notification defaults that could attract penalty tax. And in some circumstances we anticipate that a landowner could be worse off under the new exemption provision as they could miss out obtaining the exemption for an extra year in relation to another property.
What are the key requirements?
For the new PPR exemption to apply, the key requirements are:
- As at 31 December in the year preceding the land tax year, a ‘qualifying person’ in relation to the land did not use and occupy the land as their PPR because a residence was being constructed or renovated on the land. A qualifying person can be a landowner who is a natural person, but can also include a natural person who does not own the land but has a right to reside on the land due to it being granted to them in the will/testament of the person previously occupying the land, or a vested beneficiary of a trust that owns the land;
- As at 31 December in the year preceding the land tax year, a qualifying person in relation to the land intends to use and occupy the land as their PPR for at least 6 months commencing on or before the ‘qualifying occupation date’, being the earlier of 6 months after the ‘works finish date’ for the construction or renovation and 4 years after the ‘works start date’ for the construction or renovation;
- The owner of the land did not derive any income from the land in the preceding year; and
- The owner was not entitled to a PPR exemption in respect of any other land.
The above exemption is only available for a maximum of four tax years after the year the residence construction works commence.
What happens if an owner fails to comply with the requirements?
As noted above, a landowner who is granted the Unoccupied Land PPR Exemption upfront needs to comply with various obligations, including providing the Commissioner of State Revenue with a written notice and accompanying evidence within 30 days of any of the following events:
- The completion of construction or renovation if a building permit concerning the construction or renovation was not issued;
- The construction or renovation was not completed within four years of the works start date;
- The qualifying person failed to start using and occupying the land as their PPR on or before the relevant qualifying occupation date;
- The qualifying person failed to continuously use and occupy the land as their PPR for at least 6 months commencing on or before the qualifying occupation date;
- The landowner intends to cease to be the owner of the land before a qualifying person completes at least 6 months’ continuous use and occupation of the land as the qualifying person’s PPR commencing on or before the qualifying occupation date.
Failing to satisfy the relevant notification obligations results in a notification default, which generally attracts penalty tax. In addition, the Commissioner may revoke an Unoccupied Land PPR Exemption if the requirements for the exemption are not met and may make an assessment or reassessment of land tax to give effect to the revocation
What are the key takeaways from the proposed exemption?
Whilst we think that there is some merit to the new exemption rules, we expect that in practice, it could be even more onerous for a landowner to claim and retain a PPR exemption under the new rules than obtain a refund of land tax paid under the existing rules. Further, under the current Unoccupied Land PPR Refund provisions, a landowner may be able to access a PPR exemption from land in relation to more than one property (for one land tax year only) in some circumstances. Based on our reading of the proposed new provisions, our view is that this benefit will no longer be available.
When does the proposed exemption apply from?
The new land tax provisions, if passed by the Victorian Parliament, will take effect from 1 July 2022. There are some transitional provisions that apply, including in relation to an owner who was assessed for land tax in respect of land on which construction or renovation of a residence is completed before 1 July 2022 – in that situation, the Unoccupied Land PPR Refund provisions will apply. As for land on which construction or renovation of a residence started before 1 July 2022 but which completes after that date, the Unoccupied Land PPR Exemption may apply if the Commissioner is satisfied that the requirements of the exemption are met.
To illustrate the application of the Unoccupied Land PPR Exemption, take the following example:
Rachael acquires land on 1 March 2022. She plans to build her new family home on the land. A building permit for the construction is issued on 1 September 2022 and the construction process commences shortly thereafter. Upon completion of the build, an occupancy permit is issued on 1 November 2025. Rachael moves into the new home with her family on 15 November 2025, and they continue to occupy the home for the next 10 years.
In these circumstances, the Unoccupied Land PPR Exemption would apply in respect of the 2023, 2024 and 2025 land tax years. The usual PPR exemption should then apply in respect of the 2026 and future land tax years whilst Rachael continues to occupy the home as her PPR.
2. Joint Ownership Assessing Rules for New Principal Place of Residence Land Tax Exemption
What are these assessing rules trying to achieve?
In light of the new land tax exemption, special assessing rules for joint ownerships of such land are also set to be introduced. The new assessing rules largely mirror the existing rules concerning joint owners of PPR land where not all of the joint owners reside on the land. The new assessing rules will apply to land that is subject to the above new PPR land tax exemption where at least one, but not all, of the joint owners fail to satisfy certain requirements of the new PPR exemption.
When do the assessing rules apply?
The new assessing rules would apply in one of the following circumstances:
- Some but not all of the joint owners do not come within the scope of the new Unoccupied Land PPR Exemption;
- Some but not all of the qualifying persons do not intend to continuously use and occupy the land as their PPR for a period of at least 6 months following completion of the construction or renovation works; or
- One or more, but not all, of the joint owners did not meet the residence requirement of using and occupying the land as their PPR for at least 6 months.
What are the new assessing rules?
In general, where land is jointly owned, a two-level assessing approach applies whereby the joint owners are jointly assessed for land tax as if the land is owned by a single person, and each joint owner is then separately assessed on their interest in the land with a corresponding deduction to avoid double taxation.
However, should the new assessing rules apply, the following will occur:
- The joint owners will not be assessed for land tax at the joint ownership level; and
- For each of the joint owners who did not meet the relevant exemption requirements (as identified above), their share in the land will be included in their individual land tax assessment.
Consider the following example to illustrate the new assessing rules.
James and Jane are joint owners of land that is subject to the new PPR exemption. In July 2023, upon completion of the construction process, James and Jane commence occupying the home within the required time. In September 2023, James decides to move into a different property as it is closer to his workplace, while Jane continues to live at the existing home that is subject to the new PPR exemption.
As James failed to meet the residence requirement of using and occupying the subject land as his PPR for at least 6 months, James will be assessed on his share in the subject land, which will be included in his individual land tax assessment.
3. New Limitation on Out of Time Objections
A new limitation on out of time objections is set to be introduced. An objection is considered to be out of time if it is not lodged within 60 days after the date of service of a notice of assessment or decision on the taxpayer. The current regime provides the taxpayer with an opportunity to lodge an out of time objection if the Commissioner permits the taxpayer to do so. The new limitation will impose a statutory time limit of 5 years after the date of service of a notice of assessment or decision on the taxpayer to lodge an out of time objection. If 5 years has passed, the taxpayer will not be able to lodge an objection in relation to that notice of assessment or decision.
4. Payroll tax amendment to employment agency provisions
The Bill includes technical amendments to correct an anomaly in the Payroll Tax Act 2007 (PRT Act). These amendments target certain wages paid under an employment agency and other arrangements.
Currently, an exemption is available under the PRT Act for payments made to a service provider (on-hired worker) under an employment agency contract if the wages would have been exempt had the client of the employment agent paid the service provider directly as an employee. This could apply, for example, where an employment agent provides a service provider to a charity which is exempt from payroll tax. To apply the exemption, the client must provide a declaration to the employment agent to that effect.
However, the exemption currently does not apply if the service provider is a common law employee of the employment agent.
The amendments make it clear that where a service provider, who is a common law employee of the employment agent, is on-hired to a client, the wages paid to the service provider will be exempt in circumstances where the wages would have been exempt had the client paid the service provider directly as an employee. The exemption will apply if the client provides a declaration to the employment agent to that effect.
If passed, the amendments will come into effect on the day after the Act receives Royal Assent.
5. Windfall Gains Tax Exemption for Universities
The new windfall gains tax will commence on 1 July 2023.
The Bill includes a new windfall gains tax exemption for universities. To be entitled to this exemption, the land must be owned by a university, the university must be a charity, and the Commissioner must be satisfied that any land revenue (including sales proceeds and rental income) from the land will be used to further the university’s charitable purposes. The exemption will not apply if the university intends to use land revenue generated from the land for non-charitable purposes.
6. Motor Vehicle Duty Exemption on Wheelchair Accessible Motor Vehicles
The only stamp duty change in the Bill is a positive one, being the introduction of an exemption from motor vehicle duty on an application for registration or transfer of registration of certain wheelchair accessible motor vehicles.
What are the next steps?
If you have any questions concerning the new amendments presented in the Bill and how they may impact your businesses or personal endeavours please contact your Pitcher Partners expert.