This question and answer sheet was prepared following a recent webinar on VRLT presented by DBA Lawyers. A number of queries were raised at this webinar. This Q&A is a summary of the key queries with brief answers. Naturally, we would be pleased to assist with any query.
Q-1. Can VRLT be tax deductible?
A-1. Broadly, a taxpayer can deduct an outgoing to the extent that it is incurred in producing assessable income. Thus, VRLT can potentially be claimed as a deduction against the owner’s assessable income. This is provided the owner can prove VRLT is incurred in producing assessable income, ie, to the extent the owner leases the property for income producing purposes (assuming this is on arm’s length terms).
Note here that an owner of a holiday home, for instance, may be doing their best to have the property fully rented all year round. However, the demand for renting the property may be limited to just the peak periods around Christmas/January and the Easter holiday periods. In this instance, the VRLT still applies even to an owner seeking to rent their property out as the property does not satisfy the 6+ months U+O test.
In contrast, an owner that is comfortable having their property remain vacant and who does not wish to let it out, who has no income producing purpose would not be able to claim any deduction for VRLT.
We recommend that you obtain tax advice prior to claiming VRLT as a deduction having regard to your specific circumstances.
Q-2. Does VRLT apply to a “barren” block of land?
A-2. From 1 January 2026, barren/unimproved land will be considered residential (for VRLT purposes) provided the land is zoned residential and within the metropolitan Melbourne region as prescribed by the Land Tax Act 2005 (Vic). Owners will have 5 years to develop the land before it will be considered vacant and thus subject to VRLT. This is to encourage those with barren blocks of land to develop their land so that they can be used for residential or other eligible purposes that may be exempt from VRLT.
Q-3. If land is leased to a business entity (ie, not a natural person) and sub-let to a natural person for short term accommodation (provided the agreement allows for sub-letting), will the land likely be subject to VRLT?
A-3. The legislation refers to ‘a natural person under a lease or short‑term letting arrangement’. There is no clarity on how far the term ‘under’ extends in this context. Provided the residential land is subject to a lease or a short-term letting arrangement to a natural person who will U+O the land for more than 6 months in a calendar year, arguably the land should not be subject to VRLT. The safer view is that the arrangement is directly with a natural person unless you have legal opinion to support your position or the SRO issues public guidance to clarify this position. There is currently no SRO guidance on this answer.
Q-4. Does the holiday home exemption’s at least 4 week requirement to U+O the land require 28 nights at the holiday home or is 28 days enough?
A-4. The owner’s total time spent to U+O their holiday home is aggregated over a calendar year to determine whether the HH Exemption applies. Therefore, the owner (or from 1 January 2024, a relative of the owner) must U+O the holiday home for a total of at least 4 weeks/28 days. We consider 28 days U+O should be sufficient. However, for a day to count, the period of U+O on that day may need to be more than 12 hours. Furthermore, to ‘clock up’ at least 28 days U+O, at least 28 nights stay may be needed. We recommend using a logbook (or similar record) to track the U+O of the holiday home. Furthermore, phone records, bank records of purchases in the local area and any other evidence should be gathered to support the U+O of the holiday home. This will assist those that want to build up sufficient and appropriate evidence to prove they satisfy the at least 4 week U+O requirement as the taxpayer carries the burden of proof (ie, broadly, a taxpayer is guilty until they prove their innocence).
Q-5. Can someone have 2 holiday homes and both benefit from the HH Exemption (assuming both holiday homes are owned by a natural person)?
A-5. The HH Exemption can only apply for one holiday home. A second or subsequent holiday home will be subject to VRLT unless it satisfies another exemption, eg, the 6+ month U+O requirement or some other exemption.
Q-6. Can a property that is held in a family trust benefit from the HH Exemption?
A-6. No. To be capable of qualifying for the HH Exemption, the land must be owned by a natural person who has a PPR elsewhere in Australia. The Victorian Government promised that it will extend the holiday home exemption but the law currently does not cover a family trust. We will be monitoring developments.
Q-7. Are there any geographical restrictions with holiday homes? Can it be anywhere in Victoria, eg, in Melbourne CBD?
A-7. To benefit from the HH Exemption, the land can be anywhere in Victoria, including in the Melbourne CBD. However, the Commissioner must be satisfied that the U+O of the land is for a holiday home. The Commissioner will consider the distance between the owner’s PPR and their holiday home and the nature and frequency of the use of the land in determining whether the HH Exemption applies. A farmer living in rural Victoria, for instance, who uses the Melbourne CBD property as a holiday home may qualify.
Q-8. How long do you have to stay at a house to make it your PPR? What if you are spending more time at your holiday home instead of your PPR?
A-8. There is no minimum stay requirement for your PPR. Instead, there are a range of factors that are considered, such as length/nature of stay, where the owner is registered to vote, where the owner’s family and work activities occur, etc. As such, determining which land is your PPR is a question of fact and depending on the factors above and any others that the Commissioner determines relevant. Determining which land is your PPR is also relevant for land tax as well as VRLT.
Q-9. If the beneficiary of a trust is not considered to be the owner of land held in a trust, does this logic apply to SMSFs holding land? Furthermore, would a distinction be made between individual trustee versus corporate trustee SMSFs?
A-9. The members of an SMSF are not the legal owners of the fund’s property but do hold an underlying beneficial interest in the fund’s assets. In any event, SMSF members should not U+O land held in their SMSF as this will likely breach the SISA. This is regardless of whether the trustee are individuals or a company. The exemption to SMSF members using property owned by an SMSF is the BRP exemption. The BRP exemption requires the property to be wholly and exclusively used for business purposes and subject to an arm’s length lease. This generally excludes occupation for residential or private purposes.
Q-10. How does VRLT operate where land is held in an SMSF?
A-10. VRLT laws apply to SMSFs in much the same way as they do to other landowners including individuals. Thus, the residential land must generally be U+O for more than 6 months under a lease or short term letting arrangement to a natural person so it is not subject to VRLT. Furthermore, the SISA requires SMSFs to conduct all dealings in a manner that is consistent with arm’s length commercial dealings, this includes when leasing/letting land. Where the land is leased to an arm’s length tenant who will U+O the land for more than 6 months in the calendar year, no VRLT should apply.
Q-11. What happens in the context of a deceased estate where the deceased was living alone?
A-11. Broadly, land held by the legal personal representatives of a deceased estate is exempt from land tax for the period commencing from the date of death and ending on the completion of the administration of the deceased estate, subject to a maximum of 3 years from the date of death. Such land is also exempt from VRLT subject to the maximum period of 3 years.
Q-12. Should the client consider having a draft lease agreement to potentially sign prior to 29 June, ie, so the tenant can U+O the land for more than 6 months?
A-12. Having a lease without U+O will not be sufficient. Thus, actual U+O for the minimum period plus having an appropriate lease is key for the land to not be subject to VRLT if the government does not extend the HH Exemption for family trusts and companies. It is also important to note that a lease must be made in good faith and not for the purpose of avoiding the payment of VRLT. If the Commissioner finds the lease is a mere sham, the lease can be disregarded and the land will be subject to VRLT. Furthermore, before entering into a lease, it is important that the landlord and the tenant have been properly advised of their rights and obligations under the proposed lease and the RTA. Some leases and letting arrangements may be structured so they are not subject to the RTA. Legal advice should be obtained.
Related article:
- Vacant Residential Land Tax – Vic (webinar link)
- Vacant Residential Land Tax in Victoria soon to be extended
- Why should you order trusts from DBA Lawyers?
- Tax Services
Definitions used above:
| Business real property | BRP | Holiday home exemption | HH Exemption |
| Land Tax Act 2005 (Vic) | LTA | Principal place of residence | PPR |
| Residential Tenancies Act 1997 (Vic) | RTA | Superannuation Industry (Supervision) Act 1993 (Cth) | SISA |
| Self managed superannuation fund | SMSF | State Revenue Office | SRO |
| Use and occupy | U+O | Vacant residential land tax | VRLT |
Disclaimer
This Q&A is a general guide only based on our view of the law as of 1 March 2024. This document is no substitute for expert advice and is not intended to be relied on as advice. Anyone seeking to rely on these notes should obtain expert advice to confirm issues, especially as the law is subject to ongoing changes and substantial penalties can be imposed. Further, the above does not constitute financial product advice. Financial product advice should be obtained from a licenced financial adviser under the Corporations Act 2000 (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 ([email protected]), Director and Nick Walker ([email protected]) Lawyer
DBA LAWYERS
27 March 2024
