Inside Victorian real estate: stamp duty and land tax

Rebecca Archer
Welcome to Beyond the Numbers with Grant Thornton – a podcast exploring trends in business and the marketplace.

I’m Rebecca Archer, and today I am joined by Kristina Popova, State Taxes Partner focusing on stamp duty and land tax across all Australian jurisdictions and Bei Bei Han, Private Business Advisory Partner who provides tax and virtual CFO services to corporates and high net wealth family groups.

Today we are talking about land tax and stamp duty in Victoria. Victoria's property market is dynamic and ever evolving, but amidst the excitement of buying or selling a property, the complexities of stamp duty and land tax can often be overlooked.

Welcome Kristina and Bei Bei!

Kristina Popova
Thanks Rebecca.

Bei Bei Han
Thank you for having us, Rebecca.

Rebecca Archer
Now Kristina, Victoria is one of the most taxed states in the country. Last year, as part of the state budget, the Victorian government announced changes with respect to stamp duty. Can you tell us a bit about that?

Kristina Popova
Yes. Victoria for a long time has had the crown of being one of the most taxed states in relation to property taxes. It's also led the charge when it comes to introducing new types of property taxes.

So, for example, you might remember it was the first state to introduce a foreign stamp duty and land tax surcharge for buyers, and even more recently, it was the first state to introduce a tax on rezoning of land. So, it was pretty surprising last year when the Labor Government, they announced that stamp duty on commercial and industrial properties will be replaced over time with a new annual property tax, and what they're calling this tax is the commercial and industrial property tax. So unfortunately, we haven't seen legislation yet, but the Government has released quite a lot of detail around this tax for us to work with.

And how it will work is that from 1 July of this year, commercial and industrial property will transition to this new system and that's when the property is sold. So, it's important to recognise this new regime can't impact property unless it enters the market after 1 July. So, what happens after 1 July is that if you buy commercial and industrial property, you'll be able to choose if you want to pay the final stamp duty liability upfront as per normal, or you can pay in fixed installments over ten years.

So, after ten years, the property automatically becomes subject to this new annual property charge; and this charge, it's going to be 1 per cent. So, this means after we see that first sale after mid this year, if that property was to reenter the market once again, a buyer doesn't have to worry about stamp duty anymore. There'll just be this annual property charge that is being payable going forward.

Rebecca Archer
Now, you mentioned commercial and industrial property. What exactly is captured within that?

Kristina Popova
Whether you have a property that qualifies as commercial and industrial can depend on a couple of things. So, the simplest and most straightforward way is to see if the property has been allocated a specific Australian Valuation Property Classification Code, or we call them AVPCC code.

In Australia, we have this classification system and what it does, it ascribes a code to land based on existing use. So, if land has been ascribed a code within the industrial, commercial, or similar categories, it will be deemed to be commercial or industrial, and so, the intention here is to really exclude residential and primary production land, but another way is if the land is student accommodation. So, the State Government has indicated that student accommodation is going to be within the scope of these rules.

So, land which is solely or primarily used as commercial residential premises that is used for providing accommodation to tertiary students will be considered commercial property.

Rebecca Archer
And what about mixed use properties? So there, I'm talking about situations where land might have a residential component, but also a commercial component. For example, a tower which has a supermarket at the bottom of it.

Kristina Popova
Yeah, and that's a really common scenario. So, in these cases, it's going to be a sole or primary use test that will determine if the property enters into the reform, and how that gets determined will be based on a mixture of things. So, what they would look at is things such as land or floor area, financial significance from revenue. So quite a combination of things. So, if the primary use is, for example, an example you gave residential, the commercial and industrial property tax won't apply.

Rebecca Archer
Of course, we know, Kristina, that property use can change over time. So how would that work?

Kristina Popova
And look, this is known to happen quite a lot. For example, you might buy a warehouse, and then you might decide to later redevelop it. In that case, if a property that was purchased is classified as commercial or industrial, but then later changes to a different use, so, such as in our example, conversion to apartments, you won't be liable for the property tax that year.

However, when you do sell it, the vendor will have to pay what's called a change of use duty. And look, it's a little bit complicated, and I won't go into the detail, but how it will work is that you will have to pay stamp duty on the amount that would have been payable when the property was last transacted, with a bit of a discount of 10 per cent for each year where you would have paid the annual property tax.

Rebecca Archer
Now, Bei Bei, you work very closely with foreign owned businesses and overseas investments in Australia. What has been the reaction to this proposal?

Bei Bei Han
Thanks Rebecca. I think we all know stamp duty is considered as the extra cost of purchasing properties. Even the bank don't even finance on that amount, so it discourages businesses for investing or relocating, which can impede growth. So, in a lot of ways this new property tax is very appealing as it will allow landowners to continue to transact in the market without adding to the cost of doing business.

What was really important for the business to understand is that, as Kristina mentioned earlier, this new proposal cannot impact property unless it enters the market after 1 July. I think businesses are disappointed that they will still have to pay one final round of stamp duty, but I think this is probably necessary to allow time to transition to the new rules. However, on the other hand, because for the final round of stamp duty that is payable, businesses have the possibility to obtain a Government facilitated transitional loan. This is a big benefit.

Something else that business would need to be wary of is the rate of the new tax. Although the start date is fast approaching from 1 July, but we haven't seen the draft legislation yet and what we want to see is the tax over time is that the rate increases as at the moment the property tax will be set at 1 per cent of the capital improved value.

As this will be an annual charge, landowners will want some certainty as to how much their annual liabilities will be.

Rebecca Archer
Now this all kicks off from the 1 July. Given how fast that is approaching, do you think that that date might actually be pushed out given we haven't got all of the information quite just yet?

Kristina Popova
Look, that's a really good question, Rebecca. The devil is usually in the detail, and as I mentioned, we don't have any draft legislation. The legislation was intended to be released in December last year, and there are a lot of complexities to this proposal, and we do need time to digest these changes, make sure prospective vendors and buyers, they need to be educated, they need to know how this will impact them, and at the same time, the state revenue office does need to allocate some resources to this new tax. So sometimes we do see start times being pushed out.

We saw that with the windfall gains tax, it was pushed out by one year. So, I think we will know very, very soon if the start date will in fact be 1 July.

Rebecca Archer
So, if you buy a commercial property after the 1 July next year, you pay your final lot of stamp duty. At year ten, you start paying this annual property tax. Kristina, do you still have to pay land tax?

Kristina Popova
Unfortunately, this tax is separate to, and in addition to land tax. So, once a property enters the system, landowners will have two types of annual payments. You'll have land tax as per usual – so that's imposed on unimproved land value each year, and now you'll also have this new commercial and industrial property tax.

Rebecca Archer
And just speaking of land tax, Bei Bei, a lot of your clients would have just received their land tax assessments for the 2024 land tax year in the last few weeks. What are the trends and the feedback on this year's assessments. 

Bei Bei Han
That's right, Rebecca. Because land tax is calculated based on the ownership of the land, as at 31 December each year, the state revenue office tends to issue assessment around February in the following year, every year.

This year, because of the higher land tax rates and increased valuation being ascribed to the properties, taxpayers are seeing some substantial increases in their tax liability.

What we are saying this year is that there have been some significant increases to the land valuations. In some cases, land value have gone up by over 100 per cent. There is a few reasons why. The trend we have seen is during COVID a lot of properties were undervalued, so there has been some catch-up done by the Valuer-General Department.

Another reason why someone's land tax bill is so high this year is because last year the government also introduced the COVID debt repayment plan, which resulted in a number of temporary changes to land tax. The most significant change was there is an increase to top land tax rate by 0.1 per cent. In addition, the absentee owner surcharge, which applies to land that is owned by foreign persons, increased from 2 per cent to 4 per cent. All of the above factors in combination may explain any significant increases in the 2024 land tax assessment.

Rebecca Archer
Thank you, babe. Now, Kristina, are there any avenues for appeal for landowners?

Kristina Popova
There certainly are. So as landowners, as they're looking at the assessments this year, the first thing to consider is, well, are there any exemptions that might be applicable to them?

So, there's a range of concessions and exemptions that might be available, and these exemptions, they're not automatic, so they have to be applied for. It's important to bear in mind that land tax – it's primarily concerned with the use of land, not necessarily ownership. So, if you have land that's being leased, any activities that are carried out by the tenant on the land, that might impact your ability to get a land tax exemption.

So, the types of exemptions we often apply for on behalf of our clients is, for example, lands used by charities primary production, build to rent, retirement villages. So, as you can see, there's quite a broad range of exemptions. Another thing is that, well, if you're a foreign company or trust or just a foreign individual, you're likely paying a 4 per cent surcharge on your land tax bill this year. So, this is quite a steep rate, and it applies regardless of whether your land is residential or commercial.

Well, it might be possible to apply for an exemption if you meet certain criteria. So, if you've got a business that's Australian based, that's something that we often assist our clients with. And another ground of objection is, well, if you consider, if your land value is too high, you might have a valid objection on valuation grounds, so you can object to the land tax assessment that way. So, there's a range of both valuation and non-valuation grounds. And it's really important to keep this in mind as you're reviewing your assessment.

Rebecca Archer
And Bei Bei, something we touched on before, we know that former premier Daniel Andrews introduced new taxes. Now we have Premier Jacinta Allen. Do you think we're likely to see some big announcement in this year's budget in May?

Bei Bei Han
The current government has a significant portion of its revenue coming from state taxes. However, it's hard to predict where it may go. Already in Victoria, we have so many new taxes such as windfall gains tax; vacant land tax; and soon a levy on a short-term accommodation.

So, in terms of future announcement, Premier Jacinta Allen recently ruled out stamp duty reform for residential properties ahead of this year's Budget. The state earned 8.7b from stamp duty in FY2022/23. My prediction is that due to the need to fund essential services and repaid debts, this figure will only increase over time.

Rebecca Archer
Do you think that the idea to introduce this for commercial and industrial property is sort of almost like a litmus test ahead of going into residential property and looking at the stamp duty there?

Kristina Popova
I think because at the moment there's always concessions and exemptions that are available for first home buyers or those looking to enter the property market. Commercial industrial property is an area where we really want to make sure that there are transactions continuing in the market and that enables businesses to grow, but at the moment it's such a big impediment to the cost of doing business that the Government, at the same time they recognise they do need revenue and that's unlikely to change.

They also want to give an incentive to businesses to continue to transact to the market. I think we'll always have exemptions and concessions for residential properties, but I'd be very surprised if this gets introduced more broadly to all types of properties.

Rebecca Archer
What has the reaction been from people who are affected? People and businesses, obviously, who are affected by these changes? Are they seeing this as quite a positive step?

Bei Bei Han
I think from my client base they are more confused about shall I buy now or should I buy later? That's the biggest question I think we have been asked so far.

Rebecca Archer
And do you think that that confusion is having an impact on markets? Like are people sitting tight and just waiting to see, or does that flow on effect not really bear out?

Bei Bei Han
I think Kristina, please correct me if you have a different opinion, but I think it really depends on the purpose of your buy, the period you're going to hold the properties for Family Offices or for highlight with clients what that acquisition is positioned in your asset portfolio. So, all these factors will make some weights on making that decision?

Kristina Popova
Yeah, and we're finding with the start date so close, given there's going to be one final round of stamp duty payable, I think to the extent businesses can hold off, they will for a few months. But I think if the start date does get pushed back, there's only so long you can delay a transaction.

Rebecca Archer
For any businesses who are finding this quite a conundrum or very confusing, what's your best advice for how they could seek help?

Kristina Popova
Well, I think it's really important businesses and landowners are aware of what's happening and how this legislation might impact them. So, it's really important. We've done a very sort of simple we've gone through it at its most basic form, but there are a lot of complexities, and it is important that businesses understand how this new regime will impact them. The best way to do that is to reach out to advisors, read up about the reform, stay up to date, and that's something we can certainly assist with.

Rebecca Archer
Kristina and Bei Bei, thank you so much for your time today, and if people are wanting to get in touch with you directly, those who are perhaps listening today and are interested in hearing more or learning a little bit more about specifically what it is that you do and how you might be able to help them, how should they find you?

Kristina Popova
Best way is through the Grant Thornton website or otherwise through LinkedIn.

Bei Bei Han
And for all my Chinese clients, I'm contactable on WeChat as well.

Rebecca Archer
Thanks for listening to our latest episode on stamp duty and land tax trends in Victorian real estate. If you liked this podcast and would like to hear more, you can find and subscribe to Grant Thornton, Australia on Apple podcasts or Spotify.