Tax Alert - Commercial and Industrial Property Tax Reform
Commercial and Industrial Property Tax Reform
The Victorian Government announced in the 2023-24 State Budget it will be progressively abolishing stamp duty on commercial and industrial property and replacing it with an annual tax, based on unimproved land value, called the Commercial and Industrial Property Tax (the CIP Tax).
The CIP Tax regime will apply to
commercial and industrial property transactions with
both a contract and settlement date on or after 1 July 2024.
CIP Tax regime explained
For eligible commercial and industrial properties, stamp duty will be paid one final time on the property if (and when) it is transacted, and the new annual CIP Tax will be payable 10 years after the final stamp duty payment, regardless of whether that property has transacted again.
If a property is sold again (even if it is sold multiple times) within the 10 year transition period, stamp duty will not apply if the property continues to be used for commercial and industrial purposes.
Eligible purchasers of commercial or industrial property will be given the choice to either:
- pay the property’s final stamp duty liability as a lump sum in the ordinary course; or
- finance stamp duty through a government facilitated transition loan, as an alternative to self-financing the upfront stamp duty amount, allowing the purchaser to make annual loan repayments (plus interest) over 10 years.
After the 10 year transition period ends, the property will become liable for the CIP Tax which will be set at 1.0% of the property’s unimproved land value, with no tax free threshold.
The CIP Tax will be separate from (and in addition to) the existing Victorian land tax regime. However, the existing land tax exemptions will apply to the CIP Tax.
Commercial and industrial property transactions that are currently exempt from stamp duty will not enter the CIP Tax regime. This includes transfers such as: deceased estates, certain transfers between spouse or partner; or purchases by charities and friendly societies.
The CIP Tax will not be available for properties primarily used for residential, primary production, community services, sport, or heritage and culture purposes, as coded by the Valuer-General.
Mixed use properties
Some properties may have a mixture of uses across different occupancies, for example a street level shop with a residence above. In this example, the property may have more than one property classification code, and they may have a mixture of qualifying (ie. commercial) and non-qualifying (ie. residential) uses.
For such properties, the sole or primary use test will be used to determine if the CIP Tax will apply.
The sole or primary use test can be in reference to factors such as the land or floor area of each use; the relative economic and financial significance of each use, and the length of time of each use, with “primary” use ultimately determined by the Commissioner of State Revenue.
If the sole or primary use test indicates that a property with several occupancies is qualifying (ie. commercial), the CIP Tax will apply to the entire mixed-use property.
If the primary use of the property is determined to be non-qualifying (ie. residential), then the CIP Tax will not apply to the property.
Change in use of property
A property with a commercial or industrial use may change to a different use over time, for example an industrial warehouse could be re-developed into residential apartments.
From 1 July 2024, a property owner who purchases a qualifying commercial or industrial property pays stamp duty and the property enters CIP Tax regime. If the property is converted to a non-qualifying use (ie. residential) and continues to be used for that use as at the liability date for CIP Tax for a given tax year, the owner will not be liable for the CIP Tax for that tax year.
If the owner sells the property whilst it has a non-qualifying use (ie. residential), stamp duty will be payable.
If a property that has CIP Tax regime is sold a second or subsequent time with a qualifying commercial or industrial use, stamp duty would not be payable on the transaction. However, if this property is subsequently converted to a non-qualifying use (e.g. residential) then change-of-use duty would apply.
Change-of-use duty is intended to apply where no stamp duty was paid on a recent property transaction, but the property is also no longer liable for the CIP Tax.
The change-of-use duty will be calculated based on the stamp duty that would have been payable when the property was transacted, including any relevant concessions, but reduced by 10% for every 31 December that has passed since that transaction, to a maximum of 100%.
For example, if change-of-use duty was payable seven years after the property was transacted, then the change-of-use duty payable would be equal to 30% of the duty that would have been payable at the time the property was transacted.
Property owners need to notify the Victorian State Revenue Office (SRO) within 30 days of any change of use of a property.
Importance of maintaining records
This new regime underlines how important it will be for taxpayers to maintain detailed records of all land dealings in Victoria including the type of use, timing of any disposals and acquisitions, and any different titles for subdivisions and land consolidations.
Comprehensive documentation will be very beneficial to respond to any enquiries by the Victorian SRO and to support any future due diligence enquiries.
Please do not hesitate to contact your Lowe Lippmann Relationship Partner if you wish to discuss any of these matters further.
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