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The new commercial and industrial property tax that starts in Victoria on 1 July 2024

Overview

The Victorian Government has introduced a new tax regime on commercial and industrial property (CIP) in Victoria that starts on 1 July 2024. Broadly, the new tax relies on phasing out transfer duty over a 10-year period and replacing the upfront duty on subsequent transfers with an annual commercial and industrial property tax (CIPT).

This article provides an overview of the Commercial and Industrial Property Tax Reform Act 2024 (Vic) (CIPT Act). The CIPT Act was approved by Parliament on 14 May 2024 leaving little time to adjust for this new regime that starts on 1 July 2024.

Properties subject to the CIPT

Broadly, a property will enter the CIPT regime where:

  • The transfer of property is a dutiable transaction that takes place on or after 1 July 2024.
  • The property has a Qualifying Use (as defined below).
  • The transaction relates to at least a 50% interest in the property (or that amounts to at least 50% when aggregated together with other relevant acquisitions).

We discuss these key elements below.

Are any transfers exempt?

Broadly, where a contract is signed prior to 1 July 2024, the property will not enter the CIPT regime, even if the transaction is completed after 1 July 2024. Note that closer consideration needs to be given to a contract that may have been signed before 1 July 2024 where it is subject to a condition precedent (eg, where the contract states that the contract does not come into existence until finance has been approved); a contract subject to a condition precedent regarding the formation of a contract does not become binding until that condition is satisfied. There may be an argument that this nevertheless constitutes an arrangement that is grandfathered.

Also, certain transfers of CIP after 30 June 2024 that satisfy a relevant exemption from duty (eg, upon a change of trustee) should not constitute an ‘entry transaction’. Another popular exemption involves a transfer from an ‘apparent purchaser’ to a ‘real purchaser’ who provided all the purchase moneys (eg, a transfer from a custodian holding property on bare trust for an SMSF trustee under a limited recourse borrowing arrangement (LRBA) after the SMSF pays off its borrowing).

A note of warning, however, as some transfers that may appear exempt may fail due to factors such as lack of evidence or due to a poor document trail or not having been implemented carefully. Thus, before undertaking what appears to be an exempt transfer after 30 June 2024, you should obtain expert advice and feedback as a transfer of CIP that fails to satisfy a relevant exemption will become subject to the CIPT regime.

What type of property is covered?

The CIPT will apply to CIP that is defined to include property classified as commercial, industrial, extractive industries, infrastructure or utilities under the Australian Valuation Property Classification Code (AVPCC). The CIPT will apply to properties that are allocated within the 200 – 499 and 600 – 699 ranges. Property that falls within the above AVPCC ranges is deemed to have a Qualifying Use.

Land that falls outside of the above AVPCC ranges such as residential and primary production land will not be subject to the CIPT regime.

We now examine the types of transactions that result in land entering the CIPT regime.

Entry events to the CIPT regime

The CIPT Act outlines that property will enter the CIPT regime where it has a Qualifying Use and either an entry transaction, an entry consolidation or an entry subdivision occurs from 1 July 2024.

  • An ‘entry transaction’ means a transfer of dutiable property that has a Qualifying Use. The date on which the property enters the CIPT regime will be the date on which the transfer occurs.

From 1 July 2024, when at least a 50% interest in Qualifying Use property is acquired, the property will enter the CIPT regime. Multiple transactions in relation to acquiring interests in the property will be aggregated together where the purchaser is the same person and where the purchasers are associated persons. Where aggregated transactions equal or exceed 50% in a 3-year period, the property will be deemed to enter the CIPT regime.

‘Associated persons’ has the same definition as in the Duties Act 2000 (Vic). For individuals, this broadly includes people that are related as well as those in a business partnership. For companies, this broadly includes companies where a majority shareholder (or a relative of the majority shareholder) is a majority shareholder in each company.

Similarly, an entry landholder transaction may also bring the Qualifying Use property into the CIPT regime. Broadly, property will enter the CIPT regime where a person acquires a 50% or greater interest (whether alone or with an associated person) in a landholder (eg, a unit trust or company). If a person already has a significant interest in a landholder and acquires a further interest, qualifying landholder transactions within the prior 3 year period by the same person or associated persons are aggregated. The example in s 13(1) of the CIPT Act provides:

Person A obtains a 20% interest in land under a qualifying landholder transaction occurring on 1 December 2024 (Qualifying Landholder Transaction A). Person B obtains a 40% interest in the land under a qualifying landholder transaction occurring on 1 July 2026 (Qualifying Landholder Transaction B). Person A and Person B are associated persons. The interests Persons A and B acquired in the land are aggregated and together amount to a qualifying interest. This means qualifying landholder transaction B is the entry transaction for the land.

Expert advice should be obtained before investing in a unit trust or company that is a landholder as landholder duty may be payable upfront. Broadly, landholder duty may not be payable if 100% of the land has already entered into the CIPT regime or the transaction is occurring 3 or more years after land entered the CIPT regime.

If the land held by the landholder has entered the CIPT regime, an annual 1% p.a. CIPT is payable at the end of the 10-year transition period.

  • An ‘entry consolidation’ occurs where multiple parcels of Qualifying Use property are consolidated after 1 July 2024.

The consolidated parcel of land enters the CIPT regime on the first date on which land that forms part of the consolidated land entered the regime provided that 50% or more of the area of the consolidated land is tax reform scheme land.

However, if tax reform scheme land is consolidated with land that has not entered the regime and, as a result of the consolidation, less than 50% of the area of the consolidated land is tax reform scheme land, then the consolidated land will no longer be tax reform scheme land.

For example, if 3 parcels of Qualifying Use property were being consolidated and those 3 parcels entered the CIPT regime on 1 July 2024, 2 August 2025 and 3 September 2026 respectively, then the date that the consolidated land would have entered into the CIPT regime is the earliest of those dates, ie, 1 July 2024

  • An ‘entry subdivision’ occurs where a parcel of Qualifying Use land (Parent Lot) is subdivided into multiple lots (Child Lots). The date that the Child Lots enter the CIPT regime is the date the Parent Lot entered the CIPT regime (ie, not the date that the subdivision occurred).

10-year transitioning period

The CIPT regime seeks to phase out stamp duty on Qualifying Use property after a 10-year transition period. The first time a property enters the CIPT regime, the purchaser will have a choice to either:

  • pay the stamp duty as a lump sum payment (which is consistent with the pre-1 July 2024 regime of paying duty); or
  • pay the value of the duty over a 10-year period with a government-facilitated loan (Vic Loan) plus interest.

Regardless of which option the purchaser chooses, a 10-year transition period starts and an annual CIPT will begin to be payable on the 10th anniversary of the entry transaction (whether that entry is an ‘entry transaction’, an ‘entry consolidation’ or an ‘entry subdivision’).

In a similar way of levying land tax, an owner of CIPT property will be assessed for CIPT after the 10-year transition period ends and is based on the unimproved value of that land at midnight on 31 December. CIPT will be levied at 1% p.a. of the unimproved value of the land and the owner must pay within 14 days of receiving an assessment. The owner is prohibited from passing on CIPT to a residential or retail tenant.

Subsequent transfers after entering the CIPT regime

Subsequent transfers of Qualifying Use land that is already in the regime are no longer subject to stamp duty. Advice should be sought in relation to whether landholder duty is payable on subsequent transfers of the interest in a landholder. The annual CIPT starts to be payable after the 10-year transition period has finished (starting from entering the CIPT regime).

Interestingly, if person A purchases Qualifying Use land on 1 July 2024 and pays duty upfront and subsequently sells that land to person B on 1 January 2030, person B does not pay stamp duty and person B does not start to pay the annual 1% p.a. tax until after the 10-year transition period expires. Thus, the first purchaser of Qualifying Use land after 1 July 2024 may, in essence, provide a ‘free kick’ to a subsequent purchaser who benefits from the first purchaser’s entry into the CIPT regime.

What type of tax is CIPT?

CIPT is in addition to land tax and any other applicable taxes. Unlike duty, which typically adds to the cost base of property for capital gains tax (CGT) purposes and is not deductible, CIPT should be tax deductible to the extent that the property is used for income producing purposes (refer to s 8-1 of the Income Tax Assessment Act 1997 (Cth)). If the property is not used to derive assessable income, the CIPT should add to the reduced cost base of that asset for CGT purposes in calculating a capital gain.

What if there is a change of use?

A change of use of land will result in a need to consider what adjustments are needed (eg, if residential land is rezoned or reclassified as CIP or vice versa). For example, after a property enters the CIPT regime, a change of use can occur when either:

  • the property did have a Qualifying Use and then subsequently changed to a non-Qualifying Use; or
  • the property did not have a Qualifying Use and then subsequently changed to having a Qualifying Use.

An owner must notify the State Revenue Office (SRO) of a change of use within 30 days.

The date when the property enters the CIPT regime is relevant for determining the 10-year transition period for when CIPT will be payable. During this transition period, if a property changes to a non-Qualifying Use and then subsequently changes back to a Qualifying use, the initial date when the property first entered the CIPT regime is still relevant. In other words, the 10-year transition period timer is ‘still ticking’ even during a period where the property does not have a Qualifying Use.

Change of use duty may be payable where, Qualifying Use property has entered the CIPT regime, a second transfer of the Qualifying Use property takes place (ie, to a new purchaser) and, following that second transfer, the property undergoes a change of use. The change of use duty is payable based on:

the duty that would have been paid on that second transfer if at the time of the transfer, the property was not-Qualifying Use land (eg, residential land)

less

10% for each calendar year that has elapsed since the date of the second transfer.

For example, if a property that has entered the CIPT regime is transferred a second time and then 5 years after that second transfer, the property underwent a change of use, that second transfer would be assessed for duty. However, since the change of use occurred 5 years after the second transfer, the duty payable on that second transfer would be reduced by 50%.

Interrelationship with landholder duty

Broadly, when units in a private unit trust or shares in a private company are transferred, duty at the same rates that apply to the transfer of land apply subject to certain criteria (eg, the land in Victoria held by a unit trust or company is more than $1,000,000). Landholder duty arises when a person (when aggregated with their associated persons and associated transactions) acquires a significant interest in the landholder entity and in the case of a private unit trust a 20% or greater interest and in the case of a private company, a 50% or greater interest. A person also makes a relevant acquisition in relation to a landholder if they acquire a further interest after already holding a significant interest.

In a very broad sense, the CIPT will apply to the transfer of units/shares where the landholder entity owns CIP in Victoria and a 50% or greater change in units/shares occurs. When there is a relevant acquisition in such a landholder after 30 June 2024 of a 50% or greater change in units/shares, duty will apply to the acquisition of those units/shares and a 10-year transition period will commence in respect of the application of the CIPT regime.

Subsequent transfers of relevant acquisitions of units/shares in landholders after the 10-year transition period should then generally be free of duty. However, the interrelationship between CIPT and the landholder provisions in the Duties Act 2000 (Vic) are complex and require careful consideration. We recommend expert advice be obtained.

Impact on SMSFs

Self managed superannuation fund (SMSF) trustees that invest in Qualifying Use property from 1 July 2024 will need to be aware of how this new tax will work. This includes:

  • If the property has not yet entered into the 10-year transition period and the SMSF is purchasing the property outright (ie, without any borrowing), then the SMSF trustee will be required to pay the duty up-front as a Vic Loan borrowing will most likely result in a charge being placed on the property in contravention of regulation 13.14 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR). Therefore, SMSFs will most likely only have the option of paying duty upfront on CIP on or after 1 July 2024. SMSFs will only be able to rely on an LRBA to borrow money to acquire the CIP and will not be permitted to seek a Vic Loan to pay CIPT as that would result in a contravention regulation 13.14 of the SISR.
  • If the property has already entered the 10-year transition period (after 1 July 2024), the SMSF trustee should be confirm the period remaining, if any, that the property can be acquired without duty and without CIPT being payable on that property. We refer to this situation above as that a potential ‘free kick’ benefit can be factored into the purchase price.
  • If the 10-year transition period has expired, then the SMSF trustee will have to pay the new 1% p.a. CIPT on the unimproved value of the property. However, there should be no upfront duty payment.

Conclusions

The CIPT regime will have a significant impact on CIP in Victoria. Investors in CIP should be aware of how this new tax will impact their cash flow and their overall yield and returns from property.

The CIPT is a complex regime and there is currently little guidance available on how this new tax regime will operate especially its interaction with landholder duty. Accordingly, we strongly recommend that advance expert advice be obtained with regard to both purchasers and vendors of CIP in Victoria moving forward.

Since this is a new tax regime and not many advisers and lawyers are familiar with this regime, expert advice should be sought if there is any doubt. Naturally, DBA Lawyers would be pleased to assist.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Daniel Butler, Director ([email protected]) and Nick Walker, Lawyer ([email protected]) DBA Lawyers.

DBA LAWYERS

31 May 2024

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