The 2023-24 Victorian Budget delivered on 23 May 2023 includes various land tax changes, including increases to land tax and absentee (foreign) surcharge rates that will increase holding costs for a range of property owners.
The Budget also introduces some land tax concessions that may assist a proportion of homeowners and home buyers.
COVID Debt Levy – changes to land tax rates
As part of the Victorian 2023-24 State Budget the Treasurer has introduced a new COVID Debt Repayment Plan to help manage the COVID debt and increase revenue collected by the Victorian government. The Plan involves a “COVID Debt Levy” to be shouldered by businesses and landowners for 10 years to 30 June 2033. The levy comprises the following two components:
Increased land tax on taxable landholdings; and
Increased payroll tax for businesses with annual Australia-wide taxable wages above $10m
This article covers the first of the two components, which involves various land tax measures. For detail on the second component, please see our article. The relevant land tax measures announced today are as follows:
- The tax-free threshold for general land tax rates will be cut from $300,000 to $50,000 (therefore subjecting more properties and property owners to land tax)
- A temporary fixed charge of $500 will be levied on general taxpayers with total landholdings between $50,000 and $100,000*
- A temporary fixed charge of $975 will be levied on general taxpayers with total landholdings between $100,000 and $300,000*
- For general (non-trust) taxpayers with total landholdings above $300,000 and trust taxpayers with total landholdings above $250,000, land tax rates will increase by $975 plus 0.1% of the taxable value of their landholdings
*Note: the detail regarding any temporary fixed charges on trust taxpayers (i.e. not general taxpayers) is yet to be clarified.
The above changes will commence from 1 January 2024 (i.e., the 2024 land tax year) and will apply until 30 June 2033.
Existing land tax exemptions, including for principal places of residence, primary production land and land used by charities, should continue to apply provided the property and the owner continue to satisfy the relevant eligibility requirements.
The above information will be subject to the detail set out in the relevant amending legislation (which has not yet been made public at the time of writing) and is subject to change once the final details are available.
Increase of Absentee Owner Surcharge Rates
From 1 January 2024, the Victorian Absentee Owner Surcharge (“AOS”) (i.e., foreign land tax surcharge) rate will increase from 2% to 4%. Whilst this change has been presented as a measure to harmonise the rate with New South Wales, it is worth noting that New South Wales currently has the highest foreign land tax surcharge rate. Other jurisdictions where a foreign land tax surcharge is imposed (being Victoria, Queensland, Tasmania and the Australian Capital Territory) currently have significantly lower rates of either 2% or 0.75%.
Further, while the Budget materials state that the initiative will align the Victorian and New South Wales rates, Victoria overall has a higher or greater extent of property taxes (including lower land tax-free‑ thresholds and higher land tax rates, a Vacant Residential Land Tax for properties in inner and middle Melbourne that are vacant for more than six months in a year and the Windfall Gains Tax which will commence from 1 July 2023). Therefore, the rate increase actually leaves Victoria further out of alignment across the board compared to other jurisdictions, including
New South Wales.
There will also be a decrease in the minimum land holdings threshold for non-trust absentee owners from $300,000 to $50,000 for the AOS to apply, which is consistent with the changes to the minimum threshold for land tax discussed above.
From 1 January 2024, the Commissioner of State Revenue will have discretion to extend the land tax exemption for the construction or renovation of a principal place of residence for up to an additional two years where additional time is required to complete the construction or renovation due to builder insolvency. This measure is welcome and timely, given recent events involving home builders.
New land tax exemptions will also be introduced on 1 January 2024 for the following properties:
- Properties owned by an immediate family member and used as the home of an individual eligible to be a beneficiary of a Special Disability Trust, including where no such trust has been established;
- Properties protected by a conservation covenant with Trust for Nature
Expected impact of the land tax changes and examples
The new land tax measures will impact a range of property owners, small and large, despite any statements to the contrary by the Treasurer indicating that households and small businesses would be protected from the changes introduced as part of the levy.
For example, a couple who owns two properties in Victoria, one being their home and another being an investment apartment with a site value of $120,000 would not be paying any land tax under the current schedule of land tax rates.
Under the new land tax measures, from the 2024 land tax year (based on property ownership as at 31 December 2023), they would become subject to a fixed land tax charge of $975 per year in relation to the apartment, which would apply on top of existing costs (such as council rates and insurance).
Landlords who face an increase in land tax on their properties as a result of the cut in the tax-free threshold and increase in rates are expected to pass the increased costs on to tenants one way or another where they can. Therefore, the new land tax measures will also impact tenants.
By way of a further example, a Victorian property builder looking to build homes for various families and first home buyers on a parcel of land with an overall site value of $5m would currently pay $78,975 in land tax. Under the announced land tax measures as we understand them, from the 2024 land tax year the builder is expected to face an increase in land tax of more than $5,000 per year (subject to movements in the site value of the land). This further adds to cost pressures on the builder and potentially risks the financial position of the builder, which could lead to broader adverse consequences for the various families and first home buyers who may have contracted with them.
Whilst the more positive land tax measures for beneficiaries of a special disability trust, land protected by a conservation covenant with Trust for Nature and delayed construction or renovation of homes due to builder insolvency are welcome, it is unfortunate that those measures are overshadowed by the more significant land tax measures which are expected to increase holding costs for various property owners. Together with other measures announced in the Budget and the broader economic circumstances, we fear that Victoria may cement its position as the highest-taxing state. Not only that, but also the hardest state in Australia to do business, invest, and for the renters to live in.
What are the next steps?
Prospective buyers as well as current owners of property should consider the impact of announced changes in their circumstances.
Contact your Pitcher Partners representative if you have any queries or require assistance with reviewing your arrangements and determining what action may be required in light of the announced changes.