If you’re someone who owns land apart from their primary residence in Victoria, you might be eligible to pay a land tax on the property. This tax can be confusing for many, and getting the calculations right is a must. Whether you’re buying a new property or investing in land for your business, this article will help you understand land tax in Victoria, with focus on the changes under the Victorian Budget 2023.
What is Land Tax?
Land Tax is a property tax and owned land that owners must pay to the state and territory governments. It makes a significant portion of the state’s revenue and is essential for many places like Victoria. However, the tax differs from state to state, and we’ll take a look at what land tax in Victoria is like.
Land Tax and the 2023 Victorian Budget
The 2023-24 Victorian Budget 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.
pertinent land tax measures:
- The general land tax exemption threshold will be reduced from $300,000 to $50,000, which will subject more properties and property owners to land tax.
- For general taxpayers with total landholdings between $50,000 and $100,000, a temporary fixed charge of $500 will be assessed.
- For general taxpayers with total landholdings between $100,000 and $300,000, a temporary fixed charge of $975 will be assessed.
- Land tax rates will rise by $975 + 0.1% of the taxable value of landholdings for general (non-trust) taxpayers with total landholdings above $300,000 and trust taxpayers with total landholdings over $250,000.
*Please note that further information needs to be addressed on any temporary fixed costs imposed on trust taxpayers (as opposed to regular taxpayers).
The aforementioned adjustments will take effect on January 1, 2024, which is the start of the 2024 land tax year, and will last until June 30, 2033.
Existing land tax exemptions, such as those for primary residences, agricultural land, and land used for charitable purposes, should be maintained as long as the property and its owner continue to meet the necessary criteria.
The aforementioned information will be subject to the specifics outlined in the applicable amending law, which is subject to change once the precise information is available.
Rates for the Absentee Owner Surcharge are rising
The rate of the Victorian Absentee Owner Surcharge (“AOS”), also known as the foreign land tax surcharge, will rise from 2% to 4% as of January 1, 2024. It is important to note that New South Wales currently has the highest foreign land tax surcharge rate, despite the fact that this adjustment has been justified as a move to equalize the rate with New South Wales. There are currently much lower rates of either 2% or 0.75% in other jurisdictions where a foreign land tax surcharge is levied (namely Victoria, Queensland, Tasmania, and the Australian Capital Territory).
In addition, although the Budget materials claim that the initiative will align the rates in Victoria and New South Wales, Victoria actually has a higher overall level of property taxes (including lower land tax-free thresholds and higher 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 go into effect on July 1, 2023). Therefore, compared to other jurisdictions, such as New South Wales, the rate rise actually pushes Victoria more out of alignment overall.
Along with the adjustments to the minimum threshold for land tax stated above, there will also be a reduction in the minimum land holdings threshold for non-trust absentee owners from $300,000 to $50,000 for the AOS to be applicable.
Beginning on January 1, 2024, the Commissioner of State Revenue will have the discretion to add an additional two years to the land tax exemption for new construction or renovations of a primary residence when additional time is needed to finish the work because of builder insolvency. Given recent developments involving home builders, this move is both welcome and appropriate.
The following properties will also be eligible for new land tax exemptions starting on January 1, 2024:
1. Homes used by an individual qualified to be a beneficiary of a Special Disability Trust and owned by a member of their immediate family, even in cases where no such trust has been created;
2. Houses covered by a Trust for Nature conservation covenant
Despite the Treasurer’s claims to the contrary that homes and small companies would be shielded from the modifications made as part of the levy, the new land tax measures will affect a variety of property owners, both small and large.
For instance, under the existing schedule of land tax rates, a couple that owns two properties in Victoria, one of which is their house and the other of which is an investment apartment with a site value of $120,000, would not be paying any land tax.
According to the new land tax measures, they would be subject to a set land tax charge of $975 per year in regard to the apartment starting with the 2024 land tax year (based on property ownership as of 31 December 2023), on top of ongoing expenses (such council rates and insurance).
It is expected that landlords who experience an increase in land tax on their properties as a result of the reduction in the tax-free threshold and the increase in rates would transfer the additional expenses to renters in whichever way they can. Therefore, tenants will be impacted by the new land tax policies.
While the more beneficial land tax measures for beneficiaries of special disability trusts, land protected by conservation covenants with Trust for Nature, and homes delayed from construction or renovation due to builder bankruptcy are welcome, it is unfortunate that those measures are overshadowed by the more significant land tax measures, which are anticipated to increase holding costs for various property owners. We worry that Victoria would solidify its title as the state with the highest taxes, especially in light of other Budget announcements, other economic factors, and other factors. Additionally, it is the most difficult Australian state for investors, business owners, and tenants to reside in.
Land eligible for taxation
It is important to note that not all of the land in Victoria is taxed. You will have to pay tax on the following types of land, whether owned individually or co-owned:
- Investment properties of any kind (this includes residential rental properties)
- Properties used for commercial purposes like shops, factories, and offices
- Vacant land that is not being made use of
- Holiday homes that are not the primary residence of the owner or co-owner
Who is Considered a Landowner?
Another essential thing to identify is who is eligible to be considered a landowner. A land owner can be a trustee, company, organization, or individual who:
- Is a beneficiary or unitholder of specific trusts
- It is a life tenant
- Is managing a title-based, time-shared scheme
- Holding a lease of Crown land
- Holding the freehold title of any land
- Holding a Crown license that gives them the absolute right to a land
In some cases, when land is being sold, both the original owner and the future owner are considered co-owners of the land. Similarly, a person managing the estate of a deceased person can be considered a landowner for as long as he is managing estates.
Land tax exemption
It is important to note that exempt land is excluded from the overall taxable value of your land ownership. The tax rate you are required to pay is determined by the total taxable value of all the land classified as taxable.
It is crucial to distinguish between a land tax and a vacant residential land tax, as the latter applies specifically to residences located in inner and middle Melbourne that remain unoccupied for a duration surpassing six months within a calendar year.
All exemptions listed below are referenced in Part 4 of the Land Tax Act 2005. The more common land tax exemptions include those for:
- your principal place of residence (PPR)
- primary production land (PPL)
- rooming houses
Land that is exempt from land tax is also exempt from the vacant residential land tax, with four other specific exemptions.
Other land tax exemptions relate to:
- Crown land
- Municipal and public land
- Public statutory authority
- Armed services personnel
- Friendly societies
- Sporting, outdoor recreation or outdoor cultural activities land owned by not for profit organisations
- Land leased for outdoor sporting, recreational or cultural activities by members of the publicHealth centres and services (not commercially operated businesses)
- Residential care facilities and supported residential services
- Residential services for people with disabilities
- Retirement villages
- Caravan parks
- Agricultural shows and farm field machinery days
- Not-for-profit clubs (excluding horse and harness racing clubs and private gender-exclusive and gender-restrictive clubs)
A concessional tax rate is available for clubs promoting horse and harness racing. There is also a land tax concession and absentee owner surcharge exemption for build-to-rent developments.
Land tax concessions
There are two distinct cases in which a land tax is charged at a concessional rate. Here is a brief overview of those cases and how to apply for a concession:
Concession for Racing Clubs
Land tax is charged at a concessional rate for non-profit clubs using that land to control or promote horse, harness, or pony racing. To be eligible for the concession, the land has to be solely occupied by the club and owned by it.
If the tax is applicable, it is limited to a maximum of 0.357 cents for every dollar of the determined taxable value.
To claim the concession, write to the concerned department with the following information:
- the unique identification number assigned to the customer associated with the property
- the complete address of the property in question
- information about how the property is utilized and how each area is allocated
- the date when the property was initially used for its intended purposes
- the club’s memorandum and articles of association
- the rules of association that govern the club’s activities and its objectives
- a copy of the club’s most recent financial statement
Concession for Build-to-Rent Developments
Like racing clubs, build-to-rent developments are also taxed at a concessional rate if they meet certain requirements. These properties can get up to a 50% concession on the tax for as long as 30 years. During the time of this concession, they aren’t liable to pay the absence of owner surcharge either.
To be eligible, build-to-rent developments must:
- Be a new or renovated building that can hold 50 individual dwellings
- Have a unified ownership of the property
- Be managed by a single entity
Along with these initial requirements, there are further rental and technical requirements that may be applicable. If your development is being built in stages, you can add each new stage to the existing exemption as soon as it’s ready to be rented out.
The provision of land tax concession and exemption from Additional Owner Duty (AOS) is contingent upon the satisfaction of eligibility criteria for a continuous period of no less than 15 years, commencing from the issuance of the occupancy permit for the dwellings, hereafter referred to as the “occupancy date.” It should be noted that a Build-to-Rent (BTR) development can have multiple occupancy dates.
In the event that a change in circumstances occurs, causing the land or a portion thereof to no longer meet the eligibility criteria within the aforementioned 15-year period, a one-time tax liability known as BTR special land tax shall be triggered for the affected land or portion thereof. The primary objective of the BTR special land tax is to recover the financial advantage previously conferred on the land through the utilization of BTR tax benefits. The individual who owns the land at the time of the change in circumstances shall assume liability for the BTR special land tax.
The land owner must fulfill their obligation to notify the Commissioner in writing within 30 days following any change in circumstances. Failure to comply with this notification requirement shall constitute a notification default, which may result in the imposition of penalty tax in addition to the BTR special land tax.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.