• What is the change:

  Amend the Duties Act 2000 (Vic) (Duties Act) so certain sub-sale (nomination) arrangements between corporate group entities will qualify for corporate reconstruction and consolidation concession.

• Government Rationale for the change:

  Extension of the concession to inter-group sub-sales better aligns the nomination rules with other exemptions and concessions already in the Duties Act that apply to deemed transfers.

• What developers need to know:

  Developers have long been arguing that the application of the sub-sale rules to nominations within corporate groups is inequitable and discourages developers from adopting more economically efficient corporate structures. So this is one of the better changes in the Bill.

  This change will mean that if Company A enters into a contract of sale with Company B who then nominates Company C after doing land development, concessional duty rates may apply to both the deemed transfer from A to B and actual transfer from A to C if all three companies are members of the same corporate group. Under current rules the deemed transfer from A to B and actual transfer from A to C would both attract duty at 6.5%.

Changes commencing 1 January 2024

Prohibit the apportionment of land tax between a vendor and purchaser under a contract of sale of land

• What is the change:

  Both the Property Law Act 1958 (Vic) (Property Law Act) and Sale of Land Act 1962 (Vic) (Sale of Land Act) will be amended with effect from 1 January 2024 to:

  (a) prevent vendors passing-on any part of their land tax liability to a purchaser under a contract of sale at settlement; and

  (b) make it an offence for a vendor to enter into a contract of sale the terms of which seek to require a purchaser to pay any part of a vendor’s land tax liability assessed pre-settlement.

• Government Rationale for the change:

  The current practice of land tax liability apportionment:

  (a) reduces transparency as the apportioned land tax is not directly reflected in the purchase price; and

  (b) often results in land tax being passed on to purchasers who are subject to little or no actual land tax liability once the property has been transferred (because of primary residence exemption).

• What developers need to know:

  This change is likely to have the greatest day-to-day impact on property transactions, at both a retail and wholesale level.

  The long-standing practice in Victoria is for contracts of sale to pass on to a purchaser part of the vendor’s land tax liability referrable to the new purchaser’s period of ownership. As land tax liabilities have increased on the back of government revaluations in recent years, the amounts often passed on to purchasers have increased in the same proportion, which has led to retail purchaser complaints to government. The new measure will therefore prohibit land tax adjustments at settlement, but nevertheless permit an estimate of land tax to be built into the original contract price.

  Given the impetus for the change is retail purchaser complaints, its application to business-to-business transactions was going to be of dubious merit. The government has therefore amended the Bill prior to passing to provide that transactions valued at $10 million or more will not have the new prohibitions applied

  The ability of developers to overcome the prohibition by estimating land tax and including it in the sale price will not always be straightforward. For apartment projects where the product list is known and delivery timetable manageable, it may be possible for a developer to make an estimate based on some assumptions. However, for broadacre land projects where the delivery timetable for new housing lots is typically less certain, it will be challenging.

  There has been speculation around whether contracts of sale entered into before 1 January 2024 but settling after 1 January 2024 will be subject to the prohibition. This is because the legislation is not clear. However, the Bill was amended prior to passing to confirm it only applies to contracts entered into on or after 1 January 2024.

Prohibit the apportionment of WGT between a vendor and purchaser under certain options and contracts of sale of land

• What is the change:

  Both the Property Law Act and Sale of Land Act will be amended with effect from 1 January 2024 to:

  (a) prevent vendors passing-on at settlement any part of an assessed WGT liability to a purchaser under an option or contract of sale; and

  (b) make it an offence for a vendor to enter into an option or contract of sale the terms of which seek to require a purchaser to pay any part of a vendor’s assessed WGT liability.

• Government Rationale for the change:

  If an option or contract of sale is entered into before a WGT liability is known (i.e pre-rezone), then pass-on clauses are necessary to deal with the unknown future liability. However, a known WGT should be directly reflected in the purchase price negotiated by a vendor in the option or contract of sale.

• What developers need to know:

  A further change directed at residential land sale contracts, but less problematic in practice than the land tax pass-on prohibition.

  Government is probably anticipating consumer complaints about WGT pass-on under residential apartment, townhouse and land sale contracts. In prohibiting such pass-on from 1 January 2024, government is therefore getting ahead of the problem before it becomes established practice.

  By applying only when a contract of sale is entered into after WGT has been assessed, the pass-on prohibition will primarily affect developers who have land that has undergone a rezone, suffered a WGT event, and then deferred the liability.

  This change will not apply to contracts of sale entered into before rezone.

  As with the new land tax rule, there is no prohibition on developers increasing the contract price for an apportioned WGT liability. Practically this should be easier for WGT than land tax (because the WGT liability will be known), but an allowance will need to be made for interest payable on deferred WGT.

  The new measure will not increase the duty impost on contracts of sale because duty was already going to be imposed on WGT added to sale price.

Changes commencing 1 January 2025

Apply Vacant Residential Land Tax (VRLT) to all vacant residential land in Victoria (not just land in in metropolitan Melbourne)

• What is the change:

  Amend the Land Tax Act 2005 (Vic) (Land Tax Act) so:

  (a) VRLT no longer just applies to vacant residential land in metropolitan Melbourne; and

  (b) thereby ensure all residential land in Victoria that is unoccupied for more than 6 months in a calendar year is subject to VRLT.

• Government Rationale for the change:

  (a) The change will help ease pressure on rents and prices and free up available housing stock.

  (b) As the issue of housing affordability remains acute across the whole of the state, expanding VRLT will encourage all owners of long-term vacant and unoccupied homes in the outer suburbs of Melbourne and in regional Victoria to make their homes available for rent or occupation.

  (c) Homes that are not rented or occupied in a particular year because they are holiday homes, are occupied regularly for work purposes, are under construction or renovation, or are recently acquired, will continue to be exempt.

  (d) The change is delayed until 1 Jan 2025 to allow time for property owners to occupy their residences, make them habitable, or complete construction or renovation.

  In addition, the Government has announced that it will increase compliance activity for VRLT and will seek further information from owners of properties that appear to be vacant, with compliance to focus on apartment towers in 2024 and inner and middle suburbs of Melbourne in 2025.

• What developers need to know:

  Not an entirely surprising change.

  Developers will recall that VRLT was first introduced when the market was high, Melbourne apartments sales abundant, and government concerns existed around investors (particularly foreign investors) leaving new properties empty. Whilst the new tax was shaped to apply to all metropolitan Melbourne residential properties, it was mainly targeting foreign investors (who don’t need to lease their property to qualify for negative gearing interest deductions) and developer’s holding unsold stock.

  Fast forward 5 years and the government focus has shifted to housing affordability and the over-use of residential properties (particularly in regional Victoria) for short-stay accommodation. Expanding VRLT to all Victorian residential properties may therefore be intended to:

  • help address housing affordability; and

  • expand the VRLT tax base to unsold developer stock in regional Victoria.

  The Government has also amended the Bill prior to passing to include the following:

  • There will be an exemption for holidays homes left substantially vacant (i.e. it must be used as a holiday home by homeowners or immediate family members for 4 weeks).
  • An extension to the exemption period for unsold newly constructed dwellings to 3 years, provided that the owner is making genuine efforts to sell the dwelling at or below the price expected when construction commenced.
  • The VRLT rate will increase from 1% in the first year of vacancy, 2% in the second year of vacancy and then 3% for further years.  However, the increasing VRLT rate will only apply to vacant dwellings (not vacant land) and will not apply to producers of new housing (i.e. new homes).

Changes commencing 1 January 2026

Impose Vacant Residential Land Tax (VRLT) on certain unimproved land in metropolitan Melbourne

• What is the change:

  Amend the Land Tax Act so:

  (a) VRLT applies to unimproved residential land in metropolitan Melbourne that has remained unimproved for 5 years or more
  

  (b) the Commissioner has a discretion to extend the period of non-application beyond 2 years if there are acceptable reasons for not improving the land, such as genuine delays outside the owner’s control
  

  (c) the residential status of land is determined by its zoning under the relevant planning scheme
  

  (d) land currently used for, or under development for, a non-residential purpose (such as commercial or industrial use) is excluded; and
  

  (e) unimproved residential land contiguous to a person’s principal place of residence, and land that is incapable of or prevented from being developed for residential use, is exempted.
  

• Government Rationale for the change:

  (a) Unimproved land can escape VRLT even if it is capable of residential development.

  (b) The change will incentivise the development of empty blocks in metropolitan Melbourne and increase the supply of housing.
  

  (c) The change will treat unimproved residential land in a similar manner to land which becomes subject to VRLT after 2 years if construction or renovation of a residence is unfinished after that time, or if a residence is left uninhabitable for that time.
  

  (d) The 5-year period will provide adequate time for an owner to commence construction of a residence before it is considered vacant.
  

  (e) Development delayed because it is uneconomic or inconvenient will not prevent VRLT being imposed.
  

  (f) The change is delayed until 1 January 2026 to allow property owners adequate time to take steps to prepare their land for residential development purposes.
  

• What developers need to know:

  Not a change industry was expecting, and not a change government consulted industry on pre-announcement.

  For sites being considered for acquisition, the change has scope to interfere with normal market processes and investment decision-making. For sites already owned, it is questionable whether the imposition of a 1% tax on CIV will necessarily motivate a developer to commence development and add to the housing stock.
  

  The tax has been limited to unimproved land in established areas of metropolitan Melbourne. Although nice for land in regional Victoria, no policy reason has been given by government for the limitation.
  

  It is unclear from the legislation whether the 5-year period over which land must remain unimproved commences from 1 January 2026 (when the new tax commences), or an earlier date (i.e whether upon commencement of new section 34B(2B) will look back 5 years to ascertain unimproved status so the first year VRLT can be imposed is 1 January 2026).
  

  The incorporation of a series of SRO ‘discretions’ into the new tax is likely to mean it will not operate as efficiently or equitably as it otherwise could have. A tax subject to discretions applies with less certainty, and favours those with the financial resources to request the exercise of the discretion. The outcome of such requests is also not published by the SRO, so a body of knowledge and administrative practice accumulates in the SRO that is not publicly available for the wider benefit of market participants and their advisers. To some extent proposed government regulations to guide the SRO will address this problem, but not entirely.
  

  If land is located within metropolitan Melbourne, then its zoning will be important. There is a long list of planning scheme zones in the new legislation to which the new tax will not apply. This includes land zoned commercial, farming, green wedge, industrial, public use, rural, special use, UGZ and urban floodway.

  The exclusion of land situated in the UGZ means a lot of land in the UGB, or outside the UGB but otherwise subject to a PSP in regional Victoria, will not be subject to the new tax. This significantly narrows down the land areas that the new tax will apply to in practice.