Today, the Treasurer of Victoria, the Hon. Tim Pallas, handed down the 2015-16 State Budget.

Recognising the recent increase in foreign investment in Victoria, the government has used the budget to implement a number of reforms targeted at foreign investors in the Victorian property market.

Stamp duty reform for property acquired by foreign residents

The budget outlines that Victoria is expected to derive a $1.2 billion surplus for the next financial year and $1.8 billion by 2018-19. Whilst this is a significant improvement on the previous year, it represents a decline to the most recent surplus forecast in December 2014.

In a bid to manage and maintain the State’s net operating balance in light of revised growth figures, the budget proposes a number of important reforms to state taxes in Victoria. There are two key tax changes announced in this regard. These are:

  1. a proposed increase to the rate of stamp duty levied on properties purchased in Victoria by foreign investors. With effect from 1 July 2015, the Government proposes to increase the rate of stamp duty charged on transfers of real property by 3% where the transfer is made to any person or entity that is not a permanent Australian resident or a New Zealand citizen at the time of the transaction; and
  2. from 1 July 2016, a proposed surcharge of 0.5% to land tax payable on new and existing properties held by absentee property owners.

It is unclear whether there will be any tracing or look-through provisions in relation to either of the above proposals. In particular, it is unclear whether either of the above proposals will seek to apply to real property assets that are purchased by foreign investors through an Australian resident company or discretionary trust.

Expected effect of changes

The proposed changes have come about from the substantial increase in foreign investment in Victoria during the last financial year (which has double from $5.8 billion to approximately $14 billion).

Across Australia, foreign investment has also tripled over the same period. According to the Property Council of Australia, foreign investment in Australian real estate currently represents approximately 4.6% of total residential purchases.

Once implemented, the proposed changes are likely to have the biggest effect on Chinese investors of real property in Victoria. This is because according to data recently released by the Foreign Investment Review Board, the majority of foreign investment in Victoria is made by Chinese nationals.

Next steps

The reforms proposed under the budget are intended to take effect shortly, but have not yet been legislated. The exact form and nature of the changes are therefore currently not known.