Vacant Residential Land Tax in Victoria soon to be extended

There is a proposed change to the vacant residential land tax (VRLT) where it will apply to all of Victoria from 1 January 2025. Previously, this tax only applies to specific council areas around inner and middle Melbourne.

This annual tax is 1% of the capital improved value (CIV) of the taxable land. The CIV value can be substantially higher than the unimproved value that land tax is imposed on. VRLT is imposed in addition to any land tax (assuming the VRLT criteria is satisfied). The State Revenue Office (SRO) assesses the value of the land including the value of any buildings and capital improvements on that land.

This tax will be imposed on Victorian land where the following three requirements are met, namely, the land must be:

• taxable;
• residential; and
• vacant.

We discuss the proposed legislative changes including what is taxable, residential and vacant land and several exemptions.

Proposed legislation

The State Taxation Acts and Other Acts Amendment Bill 2023 (Bill) was introduced into the Victorian parliament in October 2023. Among other things, the Bill proposes to substantially expand the current VRLT to apply to all Victorian vacant residential land from 1 January 2025.

Taxable Land

Taxable land, as defined in the Land Tax Act 2005 (Vic) (LTA), includes all land in Victoria unless it satisfies an exception. The most common exceptions to taxable land is a person’s primary place of residence (PPR) or primary production land.

Residential land

Residential land is defined in the LTA as ‘land that is capable of being used solely or primarily for residential purposes.’ This includes land prior to construction/renovation being finalised if the land is capable of being used solely or primarily for residential purposes, subject to the exceptions noted below.

Under the Bill, land can be classified as residential if the following criteria are met:

• The land is not in a ‘non-residential zone; and
• The land is not solely or primarily used for or under development for a non-residential use.

Vacant Land

Determining whether a property is ‘vacant’ requires reference to the use of the land in the year that immediately precedes the relevant land tax year (eg, 2024 use is relied for the purposes of determining whether VRLT applies in 2025).

Property will be taken to be vacant if it has not been lived in for more than six months out of a calendar year. This six-month period does not need to be consecutive. A property is considered to be lived if the owner or a person under a lease or short-term letting arrangement lives in the property.

When working out whether the property has been ‘lived in’, certain factors are considered, including:

• It is not sufficient for the property to be ready to be lived in (eg, the property being listed on a website available to rent). It must be occupied and lived in for at least six months.
• A lease or short-term letting arrangement must be made in good faith and not implemented for the purpose of avoiding tax. A property will be considered ‘vacant’ if the owner allows family or friends to stay in the property on a casual basis.

Homes undergoing significant renovation or construction

Land undergoing renovation or reconstruction within certain areas of metropolitan Melbourne will not be considered vacant for up to five years under the proposed legislation. Under current law, land is not considered vacant for up to two years from the date a building permit is issued for the construction/renovation. Thus, the two year grace period will apply for the majority of Victoria but from 1 January 2026, a five year period applies before land within certain areas of metropolitan Melbourne will be considered vacant.

Exemptions

PPR or primary production land

Properties that are exempt from land tax (such as your PPR or primary production land) are also exempt from the VRLT. This is regardless of whether they have been unoccupied for more than six months or not.

Holiday homes

An exception applies where property is used as a holiday home and occupied by the owner for at least four weeks of that year and the owner has a PPR in Australia. However, this exception is only available when the property is owned by a natural person. Thus, if a holiday home is owned by a company or trustee of a trust including the trustee of an self managed superannuation fund (SMSF), then no exception applies and the property will be subject to VRLT.

Workplace/business

The property was occupied by the owner for at least 140 days of that year for the purpose of attending their workplace or business, and the owner has a PPR in Australia (homes owned by companies, associations or organisations are not eligible for this exemption).

Retirement/support villages 

Commercial residential premises, residential care facilities and land used for supported residential services or retirement village services are exempt. However, expert advice should be obtained to apply this exemption.

Notification responsibilities

The owner must notify the SRO if the land is or becomes vacant. Failure to do so gives rise to penalties.

Impact on trustees on family and unit trusts

Trustees of family and unit trusts are also affected by the new tax and will need to consider its impact. There is no holiday home exception that can apply. Further, the VRLT is in addition to any surcharge land tax that may apply.

Impact on SMSFs

SMSF trustees with residential property in Victoria will be impacted where a property remains vacant for more than six months in a year.

An SMSF should not allow a member or related party to use a holiday home and, in any event, a trustee of a trust cannot qualify for the holiday home exemption.

Adviser limits

Advisers should be careful before advising on state laws such as VRLT having regard to a recent NSW case where invoices owing to an accountant providing advice on NSW duty legislation were in dispute, namely, Galea v Camilleri; The Estate of Patricia Camilleri [2023] NSWSC 206 (Camilleri). The two key paragraphs on this point are extracted below:

[939] … there is a preliminary question regarding whether work carried out by an accountant or registered tax agent, in relation to the Duties Act, which is not a “taxation law” as defined, might involve someone in the position of Mr Batten impermissibly “engaging in legal practice” such as to contravene s 10 [Legal Profession Uniform Law 2014 (NSW)].

[968] However, in light of the fact that (a) Mr Batten was not joined to the proceedings, (b) there is a contestable issue regarding whether Mr Batten’s work and advice in respect of the application for exemption under the Duties Act involved him impermissibly “engaging in legal practice”, and (c) I received no express submissions in the manner I have described above, I expressly refrain from making any determination in relation to whether John, by reason of s 10 Uniform Law impermissibly paid monies from the estate to discharge Mr Batten’s invoice 1720.

In contrast, advisers who are registered tax agents can provide taxation advice on Commonwealth tax law under the Tax Agents Services Act 2009 (Cth). This point is confirmed in Camilleri at [939].

Note that DBA Lawyers, as a law firm, is authorised to advise on both Commonwealth and state law.

Conclusion

The expansion of the VRLT to apply to all Victorian vacant residential land represents a substantial change in policy and a keen desire by the heavily indebted Victorian Government to raise more tax. Both property owners and advisers need to be aware of these changes as there are many clients who may be impacted and there is limited time to prepare given the start date is 1 January 2025.

Naturally, DBA Lawyers would be pleased to assist and provide advice.