Victorian state taxes – significant changes to vacant residential land tax

Proposed changes to vacant residential land tax

Currently in Victoria, the vacant residential land tax (“VRLT”), assessed at one per cent of capital improved value, is only imposed on residential land in Melbourne’s inner and middle suburbs that is unoccupied for more than six months in a calendar year.

The current law does not apply to undeveloped land.

However, if passed, the Bill will:

• Remove the geographic limitation, meaning that VLRT will apply to all vacant residential land across Victoria, effective from 1 January 2025.
• Extend the VRLT to certain unimproved land in metropolitan Melbourne that has remained undeveloped for five years or more, effective from 1 January 2026. An application can be made to the Commissioner for an extension to the five-year period if there is an “acceptable reason” for the delay in development.

The change does not apply to unimproved land to be developed for a non-residential use (assessed with reference to the Australian Valuation Property Classification Code).

The proposed changes are expected to significantly impact property developers who ‘bank’ residential properties or vacant land for residential property development, and property developers should therefore plan accordingly.

Other Changes

The Bill also proposes the following notable changes to other Victorian revenue law.

Corporate reconstruction concession to apply to sub-sales

The corporate reconstruction and consolidation duty concession and exemption is proposed to be available to certain sub-sale arrangements where the parties are related group entities.

Broadly, the sub-sale provisions of the Duties Act 2000 can apply where a person obtains a transfer right between the contract date and settlement of a transfer (for example, by way of nomination) and certain conditions are satisfied (i.e. there is “land development” between the two dates or “additional consideration” is provided for the transfer right). Without careful planning, a sub-sale arrangement can result in double duty.

Windfall gains tax – exemption for charities where part of land used for charitable purposes

Currently, where land is rezoned, a tax of up to 50 per cent applies on the value uplift following the re-zoning. An exemption applies for re-zonings of certain land owned by charities and used for charitable purposes. The Bill now proposes to expand the waiver to apply to land where only part of that land that is being used as a charitable land at the time of the rezoning.

Value of tenant’s fixtures to be included in capital improved value for valuation purposes

The definition of a “fixture” under the Valuation of Land Act 1960 is proposed to be expanded to specifically capture anything owned by a tenant or any other occupier of land that constitutes a fixture at law or any other item that is “fixed to land”.

Furthermore, in determining the capital improved value of land (e.g. for council rating or fire services property levy purposes), the Bill proposes to specifically include the value of “fixtures” on the land.

This amendment is expected to adversely impact holding costs (particularly in solar farm or wind farm operations) in structures where the title to the land is held separately from the title to the assets located on the land. Evidently, the amendment seeks to effectively override the Victorian Supreme Court decision in AWF Prop Co 2 Pty Ltd v Ararat Rural City Council [2020] VSC 853, which held that tenant’s fixtures are not to be included when determining the capital improved value of land.

If the Bill is passed, this amendment should come into operation the day after receiving Royal Assent.

Prohibition of land tax and windfall gains tax apportionment

Proposed amendments to the Sale of Land Act 1962 and the Property Law Act 1958 mean that from 1 January 2024:

• The apportionment of land tax and other taxes between a vendor and purchaser under a contract of sale of land (or option to enter into a contract) will be prohibited.
• The apportionment of windfall gains tax between a vendor and purchaser under a contract of sale of land if, at the time the contract of sale (or option) is entered into, a notice of assessment has been served in respect of the windfall gains tax liability, will be prohibited.

The prohibition regarding the apportionment of land tax is significant, especially given there is very limited information regarding transitional relief. It is unclear how the prohibition will apply to land that is already under contract.

Grant Thornton will follow the progression of the Bill through Parliament closely. If you require assistance regarding how the proposed changes may affect your development plans, please get in touch with Grant Thornton’s State Taxes experts.

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