Residential property that remains vacant for six months out of the year will be subject to the levy, a lawyer warns.
Expanded Victoria land tax ‘to hit SMSFs with property’
SMSF trustees with residential property in Victoria will be impacted by the proposed tax change on vacant residential land due to start in January 2025, warns a top legal specialist.
DBA Lawyers director Daniel Butler said the proposal would hit SMSFs with residential property that remained vacant for more than six months in a year.
“The expansion of the vacant residential land tax (VRLT) to apply to all Victorian vacant residential land represents a substantial change in policy and a keen desire by the heavily indebted Victorian government to raise more tax,” he said.
“Both property owners and advisers need to be aware of these changes as there are many clients who may be impacted and there is limited time to prepare.”
Previously, the VRLT only applied to specific council areas around inner and middle Melbourne.
Mr Butler said the expanded levy was 1 per cent of the capital improved value (CIV) of the taxable land.
“The CIV can be substantially higher than the unimproved value that land tax is imposed on,” he said. “VRLT is imposed in addition to any land tax assuming the VRLT criteria is satisfied. The State Revenue Office assesses the value of the land including the value of any buildings and capital improvements on that land.”
The tax would now be imposed on Victorian land where it was taxable, residential and vacant, following the October introduction of the State Taxation Acts and Other Acts Amendment Bill 2023.
Mr Butler said residential land was defined in the act as “land that is capable of being used solely or primarily for residential purposes”.
“This includes land prior to construction or renovation being finalised if the land is capable of being used solely or primarily for residential purposes,” he said.
Under the proposed bill, land could be classified as residential if it was not in a “non-residential zone” and the land was not solely or primarily used for or under development for non-residential use.
“Determining whether a property is vacant requires reference to the use of the land in the year that immediately precedes the relevant land tax year,” he said. “For example, 2024 use is relied on for the purposes of determining whether VRLT applies in 2025.”
The bill proposed that property would be taken to be vacant if it had not been lived in for more than six months out of a calendar year.
“This six-month period does not need to be consecutive,” Mr Butler said and certain factors were considered when working out whether a property had been “lived in”.
“It is not sufficient for the property to be ready to be lived in such as if the property is listed on a website available to rent. It must be occupied and lived in for at least six months,” he said.
“A lease or short-term letting arrangement must be made in good faith and not implemented for the purpose of avoiding tax.”
He said a property would be considered vacant if the owner allowed family or friends to stay in it on a casual basis.
Land undergoing renovation or reconstruction within certain areas of metropolitan Melbourne would not be considered vacant for up to five years under the proposed legislation.
“Under current law, land is not considered vacant for up to two years from the date a building permit is issued for the construction or renovation,” Mr Butler said.
“The two-year grace period will apply for the majority of Victoria but from 1 January 2026, a five-year period applies before land within certain areas of metropolitan Melbourne will be considered vacant.”
There were some exemptions in the bill, Mr Butler said, including land zoned for primary production.
“Properties that are exempt from land tax such as principal place of residence or primary production land are also exempt from the VRLT,” Mr Butler said.
“This is regardless of whether they have been unoccupied for more than six months or not.”
An exception also applied where a property was used as a holiday home and occupied by the owner for at least four weeks of that year and the owner had a principal place of residence in Australia.
“However, this exception is only available when the property is owned by a natural person,” Mr Butler said. “If a holiday home is owned by a company or trustee of a trust including the trustee of an SMSF, then no exception applies and the property will be subject to VRLT.”
Workplace or business properties occupied by the owner for at least 140 days of that year to attend their workplace or business also were exempt.
“Homes owned by companies, associations or organisations are not eligible for this exemption,” he said.
Commercial residential premises, residential care facilities and land used for supported residential services or retirement village services were exempt, but Mr Butler said expert advice should be obtained to apply for this exemption.
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