Victorian State Budget: Commercial stamp duty shape-up and the COVID Debt Repayment Plan

The Victorian Government handed down a much-discussed State Budget on 23 May 2023, with two significant measures generating a mixed-response from stakeholders. The Budget was notable for its inclusion of the ‘COVID Debt Repayment Plan’ and a new measure to reform the tax regime relating to commercial and industrial properties.

In a ‘once in a generation move’ aimed at boosting economic growth and encouraging investment, the Government aims to abolish transfer duty on commercial and industrial property from 1 July 2024. The duty will be replaced with an annual tax equal to 1% of the land’s unimproved value to be payable from 10 years after a transfer. This announcement marks a major departure from the traditional duty framework.

In addition to the duty reform, the Government’s ‘COVID Debt Repayment Plan’ aims to pay down $31.5 billion of COVID debt over the next 10 years. The plan aims to do this by introducing sweeping increases to payroll tax and land tax.

Commercial stamp duty shake up

Under the current stamp duty regime in Victoria, duty is an upfront lump sum payment due within 30 days of settlement (Current Regime). In a significant move aimed at boosting economic growth and encouraging investment, the Victorian Government has recently announced it will abolish stamp duty on commercial and industrial properties and replace it with an annual property tax.

From 1 July 2024, a purchaser of commercial or industrial property may choose to either:

• pay duty upfront according to the Current Regime; or 
• pay fixed stamp duty instalments (plus interest) over a 10-year period under a government-facilitated loan as a way to transition into the new regime. 

For land purchased under the new regime, after ten years the land will become subject to an annual property tax equal to 1% of the unimproved value of the land.

The Government says the scheme aims to increase cash flow for businesses by freeing up capital to invest, expand their operations, and employ more workers. The government estimates this reform to result in a $50 billion increase to Victoria’s economy.  

Clarifications required

No further details on the new system have been released, and we are yet to receive clarification on how it will operate practically and with other taxes. For example,  it is not clear how the new system will:

• apply to mixed-use sites that combine commercial, industrial and residential elements. For example, will the dominant use of the land be determinant or will the Government take a proportionate approach;
• navigate payment of the balance of the annual payments when the property is sold before the ten-year loan period. For example, will the liability for the outstanding instalments stay with the original purchaser (if so, will it continue to be payable in instalments or will the entire amount become immediately payable on sale) or will the liability transfer to the new owner with the land itself;
• interact with concessions and thresholds that apply to the purchaser would have the option of paying the concessional duty over time; and
• apply to entities which would otherwise be subject to landholder duty or constitute economic entitlement acquisitions.

The Government is conducting industry consultations until December 2023, with the anticipated release of the new system’s final legislation at the end of 2023, and ought to clarify these ambiguities.

Not the first attempt 

Victoria is not the first State to implement a scheme of this nature. In NSW, former Premier Dominic Perrottet implemented a similar regime by abolishing stamp duty for first home buyers, known as the 'First Home Buyer Choice Scheme.' However, the previous duty scheme is now being effectively replaced with higher exemptions and concession thresholds to create a ‘simple and fairer system. You can read more about these changes in ClearLaw here.

As a result of only being in operation for six months, it is difficult to evaluate whether the scheme would have achieved its objectives or if its short lifespan foreshadows its viability in Victoria.

Covid-19 Debt Repayment Plan

As part of the plan to recoup the estimated $31.5 billion of COVID related expenditure, the Victorian Government has announced increases to payroll and land tax which are expected to apply until 30 June 2033. These changes to payroll and land tax are estimated to raise an additional $3.9 billion and $4.7 billion respectively to repay COVID debt over four years.Payroll tax 
From 1 July 2023, large businesses with national payrolls above $10 million per annum will temporarily pay additional payroll tax. Businesses with payrolls under $10 million per annum will not be subject to the levy.

The levy will be at a rate of 0.5% and will apply for businesses with national payrolls above $10 million and 1% for businesses with national payrolls above $100 million. Payroll tax exemptions will continue to apply for hospitals, charities, local councils, and parental and volunteer leave wages.

Land tax

From 1 January 2024, the tax-free threshold for general land tax rates will temporarily decrease from $300,000 to $50,000 of the unimproved value of the land.
Those who pay land tax will attract a temporary additional fixed charge starting at $500 for landholdings between $50,000 and $100,000. There will be a $975 fixed charge for landholdings above $100,000 and the tax rates will temporarily increase by 0.1% for general and trust taxpayers with holdings above $300,000 and $250,000, respectively. 
Land tax exemptions will continue to apply to the primary place of residence (i.e., family home), primary production land, land used by charities and residential care facilities. 
 

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Tax & Structuring Practice Group.

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