Prohibition on apportionment of Land Tax and Windfall Gains Tax
Land Tax
Currently, a typical Contract of Sale of land provides that Land Tax is adjusted as between the vendor and the purchaser on the settlement date, such that the vendor is liable for Land Tax up to the settlement date and the purchaser is liable for the remainder of the relevant calendar year.
If the Bill is passed, it will be an offence for a vendor to enter into a Contract of Sale which provides for adjustment of Land Tax. This prohibition is not only limited to the sale of residential property - it applies to the sale of all real property. Accordingly the vendor will be required to bear a full year of Land Tax even if settlement occurs during the calendar year.
Any contrary Contract of Sale provision will be void. Penalties will apply for a breach of these provisions – approximately AUD 11,000.00 for individuals and AUD 58,000.00 for bodies corporate for FY24.
The Victorian Treasurer indicated the rationale for the changes is consumer protection, notwithstanding that they will apply to all vendors and purchasers, including individuals, companies and trusts and to all classes of real estate. For high value commercial assets and large residential developments, the quantum of Land Tax can be significant. In practice, we may see vendors seeking to recover this additional holding cost via a higher sales price. This in turn will have adverse stamp duty consequences for purchasers.
Windfall Gains Tax
The Bill proposes a prohibition against adjusting Windfall Gains Tax effective from 1 January 2024. This only applies to Windfall Gains Tax assessments which have been issued, meaning apportionment of Windfall Gains Tax can occur where a notice of assessment has not been served at the time the Contract of Sale is entered into. On that basis the prohibition is not expected to apply to any options or Contracts of Sale that require a purchaser to pay or contribute to a future (as yet unassessed) Windfall Gains Tax liability.
Penalties apply for non-compliance at the same rate as noted above for Land Tax.
No transitional provisions
The changes to both Land Tax and Windfall Gains Tax are proposed to be effective 1 January 2024. Significantly, the Bill does not contain any transitional provisions. It is uncertain whether an adjustment clause in a Contract of Sale for Land Tax and/or Windfall Gains Tax entered into before 1 January 2024 would be caught by the new changes and be unenforceable where settlement occurs post 1 January 2024. Further guidance will be required on this point.
Expansion of Vacant Residential Land Tax
Currently, vacant residential land tax (VRLT) applies to homes empty for at least six months of the preceding year and is limited to a specific geographic area, generally being Melbourne's inner and middle council areas. The VRLT is an annual tax imposed at the rate of 1% of the capital improved value of the land. From 1 January 2025, the Bill will expand the scope to all vacant residential land in Victoria.
It will also extend to include certain unimproved land (generally land which has been unimproved for five years or more) in Metropolitan Melbourne from 1 January 2026.
The impact is that all residential property in Victoria which is vacant for over six months in the prior year will be subject to VRLT. Holidays homes and properties under renovation will remain exempt. New exemptions will be introduced for land contiguous to a principal place of residence and for land that is incapable of being used or developed for residential purposes.
Currently, capital improved value is calculated by reference to the land and anything that constitutes a fixture at law. Given common law tests apply when determining whether something is a fixture or not, there is often uncertainty in how a particular item should be characterised, leading to dispute. For example, the Victorian Supreme Court (Court of Appeal) upheld the decision that relevant plant and equipment assets, which were utilised as part of a wind farm, were not fixtures (see AWF Prop Co 2 Pty Ltd v Ararat Rural City Council [2020] VSC 853). This had a material beneficial impact on the calculation of fire services levy for the taxpayer as the value of those assets were not counted.
The Bill proposes to deem all items affixed to land as fixtures (regardless of who owns the item and whether the item is a fixture for common law purposes), with the value of those fixtures to be included in determining the capital improved value of the land. The amendment aims to remove the need to apply a common law test to assets on the land (and effectively minimise any dispute on characterisation). This will impact numerous taxes which are calculated by reference to capital improved value including council rates, fire services levy, VRLT and Windfall Gains Tax. These amendments will impact wind farm and other renewable energy operators who have to date (following the decision of the Ararat case) paid these taxes without factoring in the value of all fixed assets.
This change will come into effect from the day after Royal Assent.
New duty concessions for sub-sales
Currently when a corporate group reorganizes its business structure in a corporate reconstruction and transfers property between members of a corporate group, a 90% corporate reconstruction concession or 100% exemption may apply to the duty otherwise payable.
The Bill proposes to extend this concession and exemption regime to 'sub-sale' transactions. For instance, 'sub-sale' transactions occur where a subsequent purchaser is taken to have acquired from the first purchaser property as a result of a nomination or option arrangement and there has been additional consideration provided or land development. Under the proposed expansion, concessional duty should apply for the subsequent purchaser if the first and subsequent purchasers are members of the same corporate group. A full exemption may be available for the subsequent purchaser in scenarios where the vendor, first purchaser and subsequent purchaser are members of the same corporate group.
This change will come into effect from the day after Royal Assent.
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Prepared with assistance from Sabrina Warwick-Smith, Graduate at Law.
