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Victoria land tax ‘onslaught’ could spark investor exodus

Tax

The expansion of the state’s vacant residential land tax follows a string of recent property tax changes and hikes.

By Christine Chen 10 minute read

Victoria’s expanded tax on vacant residential land adds to a regulatory “onslaught” that may end up driving investors away from the state instead of forcing them to “build or sell”, one expert warns. 

William Buck advisory director Kyle Wathen said Victorian developers were still coming to grips with a new windfall gains tax, short-stay accommodation levy and increased land taxes, and feared the collective effect would undermine the state’s housing objectives and drive capital away to more favourable jurisdictions. 

Treasurer Tim Pallas’s proposal aims to increase the state’s housing supply by adding an extra 1 per cent tax on residential land left undeveloped for more than five years in established areas of Melbourne.

The changes would also expand the existing vacant land tax for land sitting idle for more than six months to all of Victoria and prohibit purchasers from passing on land or windfall gains tax to sellers. 

“We can’t afford to have vacant land in metropolitan Melbourne sitting idle for year on year and our clear message to landowners is to either develop the land or sell it to someone who will,” Mr Pallas said. 

Mr Wathen criticised the approach as “counterintuitive” and said transaction costs meant some developers would rather pay the new tax than go through the process of selling their property.   

“The cost to transact a property is incredibly high. You’ve got to look at the marketing costs, the commissions to the agents, the stamp duty that the purchaser is paying,” he said.

“So, it is a question of: Will this vacant residential land tax be high enough to really push the owner to incur those costs to transfer the property effectively? In some cases it may be, in other cases it may not, and then this tax really will be blunted.” 

High construction costs have also deterred landowners from developing vacant blocks. From March 2020 to March 2023, KPMG found that residential construction costs in Melbourne increased by 32 per cent. 

“It’s a perfect storm of high taxes and high construction costs in the market right now,” said Melbourne-based Mr Wathen, whose phone was “already ringing” from concerned clients. 

“The fact the government is constantly moving the goalposts with these changes makes it even harder to address. We’re having to work with our clients to re-look at feasibilities for projects and make sure that we’re costing in these additional taxes to enable them to make the right decisions for themselves.” 

He said the “onslaught of increased property taxes in Victoria” would also discourage prospective buyers from investing in the state. 

“We are starting to see these announcements drive capital and investment out of the state as developers become increasingly concerned with the volatility and increased cost of doing business in Victoria,” he said. 

Mr Wathen called for greater consultation and for the government to incentivise developers and investors to create the housing supply instead of “hitting them with extra taxes that reduce their margins and returns”. 

“The value of property is so high so the property and construction industries are probably the easiest place or the best low-hanging fruit to go and find revenue after Covid spending threw the government’s budget into deficit,” he said. 

The expanded scheme, forecast to raise an extra $37 million a year, comes as the Victorian government set a target last month to build 800,000 homes over the next 10 years as part of its landmark housing statement. 

Data from the Housing Industry Association showed that the state had previously built a maximum of 67,589 houses and units in a single calendar year.

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Christine Chen

Christine Chen

AUTHOR

Christine Chen is a graduate journalist at Accountants Daily and Accounting Times, the leading sources of news, insight, and educational content for professionals in the accounting sector.

Previously, Christine has written for City Hub, the South Sydney Herald and Honi Soit. She has also produced online content for LegalVision and completed internships at EY and Deloitte.

Christine has a commerce degree from the University of Western Australia and is studying a Juris Doctor degree at the University of Sydney. 

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