The State Taxation Acts Amendment Bill 2019 (Vic), introduced to Parliament on 27 May 2019, contains numerous important changes to Victoria's stamp duty and land tax laws.
In an effort to fill the large gap left by dwindling stamp duty receipts in a falling property market, the State Taxation Acts Amendment Bill 2019 (Vic) (Amendment Bill), introduced to Parliament on 27 May 2019 as part of the Victorian Budget for 2019 / 20, proposes significant changes to Victoria's state taxes. Our comments below focus on the key stamp duty and land tax changes proposed by the Amendment Bill.
Please contact us if you have any questions regarding how the below changes might impact you, your business or your investments.
Imposition of duty on fixtures
Currently, the State Revenue Office's (SRO) practice is not to impose transfer duty on the acquisition of fixtures as a standalone transaction. The Amendment Bill proposes to amend the Victorian Duties Act 2000 (Duties Act) to expressly provide that an interest in a fixture is a form of dutiable property. Consequently, the Amendment Bill will amend the Duties Act so as to impose duty on arrangements where fixtures are acquired independently from the underlying land (contrary to the current SRO position).
At the same time, the Amendment Bill seeks to define 'fixture' to mean anything that constitutes a fixture at law or any other items fixed to land (including tenant's fixtures). This broader definition would ensure that all items currently fixed to land are captured in the duty net, irrespective of whether it can be severed and moved from the land in the future.
The proposed new provisions only apply to the acquisition of fixtures with a value equal to or greater than $2,000,000, with full duty only payable where the fixtures have a value of more than $3,000,000. Duty will be phased-in for fixtures valued between $2,000,000 and $3,000,000.
The proposed changes, which are to operate from the day after the Act receives Royal Assent, seek to align the duty treatment of fixtures closer to the ordinary practice in other jurisdictions. They do however introduce a degree of commercial uncertainty, particularly with determining the value of the relevant fixed items.
Acquisition of economic entitlements
The current economic entitlement rules contained in the landholder duty provisions (Chapter 3 of the Duties Act) will be effectively divided into two separate regimes.
The economic entitlement rules in the landholder duty provisions will be limited to acquisitions of entitlements that relate to rights to participate in the dividends or income of a private landholder. While for acquisitions of entitlements that relate to land (e.g. rights to participate in the income, rents, profits or capital growth of the land), these will be inserted into the transfer duty provisions in Chapter 2 of the Duties Act. There is a de minimis land value threshold of $1,000,000 and a phasing in of duty for land with a value between $1,000,000 and $2,000,000 (thus mirroring the thresholds under the landholder duty provisions).
Overall the operation of the provisions will be significantly broadened as no longer is there a requirement that the relevant economic entitlement relate to all of the land of the relevant landholding entity. The provisions will now apply if the entitlement only relates to some of the land of the landholding entity. The provisions also apply to all land owners and not just companies and unit trusts. For example, land held by the Crown can now be the subject of a dutiable economic entitlement.
Uncertainty as to the calculation of the extent of the economic entitlement acquired (for duty assessment purposes) has also been removed. The new provisions operate by deeming the acquirer of the economic entitlement to have acquired beneficial ownership of the land the subject of the entitlement, and the extent of that beneficial ownership is 100% if the arrangement under which the entitlement was acquired does not specify the percentage of the economic entitlement. The Commissioner is given a discretion to determine a lesser percentage if 'he considers it appropriate in the circumstances'.
The deeming of beneficial ownership of the land also flows through to the landholder duty provisions. Essentially, a company or unit trust that only holds an economic entitlement in relation to land may now be a landholder, making acquisitions of interests in the company or unit trust potentially subject to landholder duty.
A reduction in duty is proposed for a transfer of land to a person who, before the transfer, held an economic entitlement in relation to the land and paid duty in respect of the acquisition of that entitlement. The reduction (constituting a credit for duty already paid in relation to the economic entitlement) will apply to the extent that the land transfer replaces the deemed beneficial ownership of the land arising from the economic entitlement. The new economic entitlement rules are to operate from the day after the Act receives the Royal Assent and there are transitional rules that provide that the new rules do not apply to arrangements made before that date.
Increase in rates for foreign owners / acquirers
Within the last four years, there have been significant changes in the stamp duty rates applicable to 'foreign' purchasers of 'residential' property (either through the direct purchase of land or through the acquisition of interests in companies or unit trusts that hold land) in all Australian States (noting that the surcharge has not been imposed in the Northern Territory or the Australian Capital Territory).
The Amendment Bill proposes to increase the rate of additional duty chargeable for foreign purchasers of Victorian residential property (FPAD) to 8% (up from the current FPAD rate of 7%) giving a total duty rate of up to 13.5% (up from the current 12.5%). This will align the Victorian FPAD rate with that of NSW.
Foreign purchasers of residential property (or other property intended to be developed as residential) will need to factor the FPAD rate change into their financial modelling and bid prices. As always, foreign purchasers should consider whether they may be eligible for an exemption from FPAD. The FPAD amendments are proposed to operate the day after Royal Assent, however, where relevant contracts for the sale or transfer of dutiable property (or interests in landholder entities) have already been entered into (but have not yet completed) prior to commencement of the provisions, it is proposed that the current FPAD rate will apply.
The absentee owner surcharge (AOS) land tax rate, currently 1.5% of the taxable value of the relevant land will increase to 2% (giving a total top land tax rate of up to 4.25% p.a., up from 3.75%). Importantly, unlike FPAD, the AOS generally applies to all types of land, not just residential land.
The AOS increase will be felt by 'absentee owners' of land. If they have not already done so, such owners should consider whether they are eligible for an AOS exemption. Further, for leased property, owners and tenants alike will need to consider who will bear the burden of the AOS increase.
The AOS amendments are proposed to take effect from the 2020 land tax year.
Full duty exemption no longer available under the corporate reconstruction provisions
Like all other Australian States and Territories, the Duties Act currently provides for a full exemption from duty that would otherwise arise on the transfer of dutiable property (e.g. land) or interests in landholder entities between members of the same 'corporate group' (provided that certain criteria are satisfied). This critical change in policy, which has come as a surprise to the market, proposes that the current full corporate reconstruction exemption (CRE) will be replaced with a concession which reduces the duty liability on eligible transactions by 90% (rather than the current 100% reduction). For example, an eligible CRE transaction with a dutiable value of $10m, which would currently incur no duty liability, will now, as a result of the proposed changes, generally give rise to a duty liability of $55,000. That is, duty would be assessed at an effective duty rate of 0.55% (i.e. 10% of the duty that would otherwise be chargeable under the Duties Act on the transaction) plus an additional amount on account of FPAD, if applicable.
Importantly, an exemption may still apply where a corporate reconstruction arrangement involves subsequent eligible transactions that relate to the first eligible transaction. In such circumstances, no duty will be chargeable on an eligible transaction to the extent that duty is chargeable in relation to the same dutiable property on an earlier eligible transaction (that occurred within 30 days prior) – provided that the duty chargeable in relation to the subsequent eligible transaction is not more than the first transaction. If it is, the provisions will apply as a concession rather than an exemption.
At the same time, the proposed amendments make it easier to access the new concessions by explicitly including certain lease arrangements, and certain transfers of a motor vehicle, within the definition of 'eligible transactions'. The Amendment Bill also proposes to remove certain other restrictions, such as the ongoing obligations currently imposed on a corporate group post an eligible transaction (including the current 3 year post-transaction association requirements). In summary, these changes will create an additional impost which impacts on the efficiency of corporate restructures. It will be particularly relevant for corporate groups that currently propose to undertake restructures but have not yet done so – there may be a need to revisit proposals to ensure that unanticipated duty is not a 'deal breaker'.
These changes are to operate from 1 July 2019. However, in the circumstance where contracts for the sale or transfer of dutiable property (or interests in landholder entities) have been entered into prior to 1 July 2019, but have not yet completed, it is proposed that a full CRE will still apply. This will be of some relief for some taxpayers that have already commenced their restructure process.
Transfer duty concession for commercial and industrial land in regional Victoria
New provisions are to be introduced into the Duties Act that provide a concessional rate of stamp duty for transfers of commercial and industrial land in regional Victoria.
The concession, which is to apply from 1 July 2019, is initially a 10% reduction in the duty otherwise chargeable on a transfer of the land, increasing annually to a maximum 50% reduction from 1 July 2023. Importantly the concession does not extend to reduce any foreign purchaser surcharge duty imposed (which is to be increased to 8% - see 'Increase in rates for foreign owners / acquirers' above). Nor does it apply to the calculation of landholder duty under Chapter 3 of the Duties Act.
‘Regional Victoria’ is defined by reference to a list of 48 rural-based municipal councils listed in Schedule 1 to the First Home Owner Grant Act 2000 and the alpine resorts as defined in the Alpine Resorts Act 1983.
For the concession to apply, the land must be used solely or primarily for a qualifying use (i.e. as commercial or industrial land) for a continuous period of at least 12 months within the 2 year period immediately after the transferee / purchaser became entitled to the land. The Commissioner is given a discretion to alleviate this qualifying use requirement.
Where the qualifying use requirement is not complied with, a duty liability arises on the date of the non-compliance and there are notification obligations placed upon the transferee / purchaser. The provisions also give the Commissioner broad reassessment powers to reassess duty on the relevant land transfer the subject of the non-compliance.
Motor vehicle duty increased on luxury vehicles, new exemptions introduced for service demonstrator vehicles
Under the Amendment Bill, the rate of motor vehicle duty for luxury passenger cars (both new and used) valued above $100,000 is proposed to increase to:
- $14.00 per $200, or part, for passenger cars with a dutiable value greater than $100,000 but less than $150,000; and
- $18.00 per $200, or part, for passenger cars with a dutiable value greater than $150,000.
A concessional rate of duty is proposed to be introduced for 'green cars' (which includes pure electric vehicles for motor vehicle duty purposes) and 'primary producer passenger vehicles' (motor vehicles registered or to be registered in the name of a person who is a primary producer and used or to be used primarily in the business of the person as a primary producer). The applicable rate of duty for both 'green cars' and 'primary producer passenger vehicles' (both new and used) is $8.40 per $200, or part, of dutiable value.
A new duty exemption has also been proposed for 'service demonstrator vehicles' by extending the existing duty exemption which applies to demonstrator vehicles. In effect, a motor vehicle used solely or primarily as a 'service demonstrator vehicle' will be exempt from motor vehicle duty. 'Service demonstrator vehicles' are defined to be vehicles used for the purposes of sale of another vehicle of the same class and made available without charge by the licensed motor car trader to its service customers while the customer’s vehicle is being serviced.
The rate of motor vehicle duty imposed on a change of use in a motor vehicle is also being amended to bring the rates in line with the above new motor vehicle duty rates to be introduced.
Each of the motor vehicle duty changes noted above is intended to apply from 1 July 2019.
Valuation of land relating to heritage buildings
Special provisions in the Valuation of Land Act 1960 (VLA) relating to the valuation of land upon which registered heritage buildings are situated, or that is otherwise heritage land, are to be repealed. These provisions currently specify that in valuing such land the following assumptions apply:
- regard can only be had to the current use of the land;
- the land must be maintained so that the current use can continue;
- no other improvements can be made to the land;
- any heritage building on the land cannot be removed or destroyed; and
- the land cannot be subdivided or developed without a permit granted by the Heritage Council.
These assumptions have allowed certain land owners to successful argue that (in the absence of comparable sales evidence) the correct valuation methodology to adopted in valuing the land was a hypothetical development cost approach. This approach took into account the cost to construct the improvements actually in place on the land compared to the returns which could be derived from doing so. This obviously produced an artificially deflated value due to the significant heritage related replacement costs when compared to the net return derived from the land. An actual example of this is the recent VCAT decision which upheld a $1 site value for the Melbourne GPO site.
The repeal of the provisions will result in the value of heritage related land being determined in accordance with the more general valuation principles contained in the VLA and in particular to the land’s highest and best use taking into account the effects of the heritage status. The amendments to the VLA are to operate from the day after Royal Assent.