As predicted in the media in the leadup to budget day, and not unexpected for the first year of a new term for the Government, the 2023-24 Victorian budget goes hard on tax related measures as a means to pay down the State’s burgeoning debt arising from the COVID-19 pandemic. Property investors will bear the brunt of these tax increases.
COVID-19 DEBT LEVY
The centrepiece of the 2023-24 Budget is a framework for the repayment of Victoria’s burgeoning debt. The State borrowed heavily during the COVID-19 pandemic to stimulate the economy.
The COVID-19 Debt Levy involves an increase in land tax as one of two components to get the State’s finances back on track.
From 1 January 2024 the Government will temporarily reduce the tax-free threshold for general land tax rates from $300,000 to $50,000. Whilst the family home will remain exempt from Land Tax, this measure will capture almost every investment property owned in Victoria. The effect of this change is:
- For landholdings valued between $50,000 and $100,000, a fixed charge of $500 will apply.
- For landholdings valued between $100,000 and $300,000 (between $100,000 and $250,000 for Trusts), a fixed charge of $975 will apply.
- For landholdings in excess of $300,000 ($250,000 for Trusts), additional Land Tax of $975 plus 0.1% of the value in excess of $300,000/$250,000 will apply
Landholding grouping and values will affect the ultimate amount of land tax paid by each respective investor. This measure is expected to contribute $4.7 billion to help repay Victoria’s COVID debt over the next 4 years.
Although the measure is stated to be “temporary”, it will be in place for 10 years, scheduled to expire on 30 June 2033.
This is a significant increase in tax costs for property investors. Ultimately one would expect that this cost will be passed on to tenants.
The Government has committed to reforming the Stamp Duty regime. The Budget announces that Stamp Duty on Commercial and Industrial properties will be phased out and replaced with an annual property tax. The estimated increase in the size of the Victorian economy from this reform is $50 billion.
A media release from Victorian Treasurer the Hon Tim Pallas MP provides some additional information.
From 1 July 2024, the first purchaser of a commercial or industrial property will still be subject to stamp duty on the property’s purchase. The purchaser however has an option to pay the stamp duty upfront in one lump sum, or pay it over 10 years (with interest).
Once 10 years since the first sale after 1 July 2024 have elapsed, the property will be subject to the annual property tax. This will be levied at a flat rate of 1% of the property’s unimproved value.
There is much more detail to come on this measure, with business and industry consultation to occur in the coming months. The final form of the arrangements is scheduled to be detailed by the end of the year. Watch this space!
HARMONISATION OF THE ABSENTEE OWNER SURCHARGE WITH NSW
From 1 July 2024, the absentee owner surcharge will increase from 2% to 4%, and the minimum threshold for non-trust absentee owners will decrease from $300,000 to $50,000. There will be no changes to the trust threshold. This is to align the position adopted in New South Wales and so prevent foreign landholders obtaining a competitive advantage from purchasing land in Victoria rather than north of the Murray River.
CONSTRUCTION & RENOVATION LAND TAX EXEMPTIONS
In response to some recent high profile residential builder collapses, the Government announced that the Commissioner of State Revenue will be given the power to extend the principal place of residence land tax exemption for properties under construction or renovation for an additional 2 years. This discretion will be able to be exercised where additional time to complete a dwelling is required owing to builder insolvency, and the owner is not claiming a principal place of residence exemption on another property.
WINDFALL GAINS TAX
Whilst not a current Budget Announcement, the Windfall Gains Tax announced previously commences from 1 July 2023. The 2023-24 Budget Papers include a projection of $40 million in revenue from the Windfall Gains Tax in the year ending 30 June 2024, increasing to $97 million by the end of the forward estimates (2026-27).
Key Spending Measures
Key spending measures announced by Treasurer Pallis to make good on the Labor Government’s election promises relevant to the property and construction industries include:
- $694 million to upgrade key roads and intersections;
- $650 million to upgrade the Melton train line;
- $601 million to buy 23 additional V/Line trains;
- $450 million to support the delivery of new and upgraded Catholic and low-fee independent schools;
- $320 million to plan the delivery of major investments at seven hospitals across Victoria; and
- $266 million to upgrade 43 Government schools.