On 21 May 2024, the Commercial and Industrial Property Tax Reform Bill 2024 received Royal Assent, becoming an Act of Parliament (Act). The Act, while not a complete overhaul to stamp duty in Victoria, goes some way in implementing long advocated reforms by progressively replacing stamp duty on commercial and industrial property with an annual property tax (CIPT Reform).
Overview of the CIPT Reform
The Act provides that where commercial or industrial property is transacted after 1 July 2024, stamp duty will be paid one final time (in most cases), with the Victorian Government offering eligible taxpayers a 10-year loan to assist in funding the stamp duty liability. Provided the property continues to be used for a commercial or industrial purposes, stamp duty will not (in most cases) ever apply again on future transactions of the same property. Instead, after 10 years, an annual commercial and industrial property tax (CIPT) will be imposed at a rate of 1 per cent (0.5 per cent for eligible build-to-rent properties) of the unimproved value of the land.
How is land scoped into the CIPT Reform?
From 1 July 2024, land enters the CIPT Reform, becoming ‘tax reform scheme land’, if:
- There is an ‘entry transaction’, ‘entry consolidation’ or ‘entry subdivision’; and
- On the date of the transaction, the land has a ‘qualifying use’ and is used solely or primarily for that use.
The term ‘qualifying use’ is broad, but includes land that has been allocated an Australian Valuation Property Classification Code (AVPCC) in its latest valuation that is in the following ranges:
- 200 – 499: Commercial property
- 600 – 699: Industrial property
In addition, premises used for student accommodation is also specifically included as a ‘qualifying use’.
Only transactions or agreements for transactions entered into post-1 July 2024 can fall within the scope of the CIPT Reform.
Entry Transaction
The most common type of transaction that will be captured by the CIPT Reform is an ‘entry transaction’. An ‘entry transaction’ occurs if there is:
- A direct transfer of the land (i.e. a ‘qualifying dutiable transaction’); or
- An acquisition of shares or units in an entity that holds land (i.e. a ‘qualifying landholder transaction’); and
- At least a 50 per cent interest in the land is transacted, whether in isolation or when aggregated with other interests (i.e. a ‘qualifying interest’).
Importantly, a transaction is not an ‘entry transaction’ if it is eligible for an exemption from stamp duty or qualifies for corporate reconstruction/consolidation relief as a transfer between members of a corporate group.
Entry Consolidation and Entry Subdivision
Similar to the concept of an ‘entry transaction’, an ‘entry consolidation’ occurs when ‘tax reform scheme land’ is consolidated with land that has not yet entered the CIPT Reform and at least 50 per cent of the area of the consolidated land is ‘tax reform scheme land’. The effect of this is that the 10-year transition period commences on the earliest date on which any of the parcels of land that are consolidated became ‘tax reform scheme land’.
An ‘entry subdivision’ occurs when there is a subdivision of land that is ‘tax reform scheme land’. The effect of this is that the 10-year transition period for the child lots commence on the date on which the parent lot became ‘tax reform scheme land’.
The 'final round' of stamp duty
The ‘entry transaction’ (or ‘entry consolidation’ / ‘entry subdivision’) is subject to a final round of stamp duty calculated at the standard rates (up to 6.5 per cent for land with a value of $2m or more). However, if the ‘qualifying interest’ is less than 100 per cent, future transactions of that ‘tax reform scheme land’ can be subject to stamp duty if transacted within 3 years of the ‘entry transaction’ until a total 100 per cent interest is transacted. After the 3-year period, no transactions of the ‘tax reform scheme land’ should be subject to stamp duty even if the initial ‘qualifying interest’ was less than 100 per cent.
‘Change of use’ duty
The Act contains provisions to account for any change in use of land in the 10-year transition period. For example, an investor might acquire land that is already ‘tax reform scheme land’ (i.e. land on which the ‘final round’ of stamp duty has already been paid) and then convert that land into residential premises.
In this case, the investor would gain an advantage because they do not pay any stamp duty and are only subject to the CIPT 10 years after the original ‘entry transaction’. However, the ‘change of use’ duty provisions in the Act would operate to assess the land owner for duty at the point in which the use of the land changes to residential. The amount of duty calculated is reduced by 10 per cent for each calendar year that has elapsed since the date the investor originally acquired the land (i.e. the date of the dutiable transaction or relevant acquisition).
How is CIPT imposed?
Ten years after an ‘entry transaction’, ‘entry consolidation’ or ‘entry subdivision’, the land becomes ‘CIPT taxable land’. This means that on 31 December of that same year (the taxing date), the owner of the land will be subject to CIPT for the following calendar year provided the land still had a ‘qualifying use’ as at midnight on the taxing date.
CIPT is payable in addition to land tax, and unpaid CIPT is a first charge on the land.
Further changes to the Act flagged
While the Act has passed both Houses of Victorian Parliament without amendment, the Government has already flagged future amendments to the CIPT Reform later this year.
In the Legislative Council’s third reading of the Act, Attorney-General Jaclyn Symes indicated that the Act, as written, does not provide a duty exemption for certain complex transactions of properties that have entered the CIPT Reform such as economic entitlements and transfers of dutiable fixtures and goods used or held in connection with ‘tax reform scheme land’. It is expected that future amendments to the CIPT Reform will address these anomalies.
We’re here to help
The CIPT Reform is highly complex and its impact far-reaching. While land brought within the CIPT Reform can enhance opportunities for future sales of the land, it can also result in increased holding costs where it is purchased as a long-term investment.
As this guidance intended to be a summary only, please contact a member of the Grant Thornton team if you have any queries in relation to the CIPT Reform and how it might impact your current and planned investments.
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