The Victorian Government has recently forecast a 28.3% increase in its land tax revenue in the 2017 land tax year, largely as a result of the biennial land revaluation process currently being reviewed by the Valuer-General. The strength in the property market between the last and current valuation dates (being 1 January 2014 and 1 January 2016 respectively) is expected to translate to significant increases in the value of not only residential, but also commercial and industrial land.
The impact of the expected valuation rise is amplified for foreign owners, with legislation currently before the Victorian Parliament1 to increase the "absentee owner" surcharge rate applied to Victorian landholdings of certain foreign controlled entities, from 0.5% to 1.5% from 2017 onwards (increasing the top marginal rate of land tax payable by foreign owners to 3.75%).
The Treasurer of NSW has not ruled out the introduction of a similar surcharge in that State (with NSW's budget to be announced on 21 June 2016)2, and with other States and Territories expected budget dates falling in May and June, foreign landholders with portfolios spread across Australia should be mindful of developments that may occur over coming months.
As one of the most significant outgoings for landlords, the management of land tax through valuation review and objection, and appropriately drafted lease provisions, is integral, particularly in light of the valuation and foreign owner surcharge increases expected. Set out below is a summary of key matters which landholders should remain mindful of:
Valuation Objection Window
Whilst each State and Territory has slightly different valuation regimes and cycle dates, Victorian Councils should by now have submitted all valuation figures to the Valuer-General for review and finalisation. Accordingly, landholders should expect to receive their new valuation notices towards the end of June, which will be based on levels of value applying to their properties as at 1 January 2016. Such valuations will be used for the purpose of assessing land tax, council rates, fire service levies and water rates over the 2016/2017 and 2017/2018 rating years (which, for land tax, means the 2017 and 2018 calendar years).
The Valuation of Land Act 1960 (Vic) provides landholders with a 2 month window to lodge an objection to a valuation notice. With the large valuation increases expected, it is prudent that all landholders review their valuation notices carefully as soon as possible upon receipt, to allow ample time to consider the merits of an objection (in light of the level of increase applied to their property) and prepare the necessary objection.
Review of lease recovery provisions
The drafting of appropriate outgoing provisions is something most landlords and their advisors should be well on top of. However, similarly as with the introduction of GST in 2000 and land tax surcharges applying to landholders who hold their land as trustees in 2006, the introduction of the absentee owner surcharge presents a new challenge in the negotiation of leases (or lease extensions), and a potential issue of recoverability for foreign landholders depending on the nature of their existing lease terms.
In light of the developments occurring in Victoria (and which may occur across Australia in coming months), Landlords should ensure that their lease provisions allow recoverability by reference to the circumstances of the actual landlord, rather than a "hypothetical general" landlord, so that the nature of the landlord (as foreign or domestic) can be taken into account when determine the amount of land tax recoverable under the lease. Such review is not only important for foreign landholders, but also domestic landholders to ensure maximum desirability of their properties in future to potential foreign purchasers.
Exemption from land tax surcharge
The Victorian Treasurer is empowered with discretion to exempt certain persons from the absentee owner surcharge, with the circumstances in which he will exercise such discretion set out late last year in the Victorian Government Gazette. Specifically, the Treasurer has displayed his intention to exempt corporations which conduct a commercial operation in Australia and whose commercial activities make a strong and positive contribution to the Victorian economy and community (through engagement of local labour and utilisation of local material and services).
Whilst this criteria may be difficult for some passive landholders to meet, all large foreign landholders which undertake, or facilate the undertaking, of commercial / retail activities, should give consideration to the making of an application for such exemption. Annual savings of $15,000 for every $1 million of property held by a landholder otherwise subject to the foreign surcharge are achievable if an exemption is received.