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Last Thursday, the Victorian Treasurer handed down the 2021-2022 Victoria State Budget (Budget) – the Government’s second budget in six months following the delay of the 2020-2021 Budget due to the COVID-19 crisis.

Unsurprisingly, the Government’s articulated focus remains on getting the economy back on track following the devasting economic effects of the COVID-19 crisis.  As the Victorian economy embarks on the ‘road to recovery’, the Government is continuing to provide support to some industries, with a number of initiatives announced which expand on or bring forward last year’s special COVID Budget announcements (our summary of the 2020-2021 Victorian State Budget can be found here).

However, unlike last year, not all industries will benefit. Big businesses, property developers and commercial landlords who were beneficiaries to varying degrees in last year’s COVID Budget are set to be hit hardest if tax changes announced in the Budget proceed. Those changes will see these taxpayers act as the main revenue sources to repair the Victorian budget and fund a number of the Government’s key initiatives – including an ambitious $3.8 billion overhaul to the State’s mental health system.

We have highlighted below some of the main taxation and specific funding initiatives provided for in the Budget, outlining how these may impact landowners, homebuyers and businesses in different sectors and areas of Victoria.

revenue raising initiatives – big business and landowners hit hard

mental health and wellbeing surcharge

The Government will introduce a Mental Health Levy from 1 January 2022 to fund significant changes to the Victorian mental health system. The levy will be implemented as a payroll tax surcharge as follows:

  • 5% for businesses with national payrolls over $10 million a year; and
  • an extra 0.5% for businesses with national payrolls over $100 million a year.

The Government has announced some organisations will be exempt from paying the levy, which includes private schools, hospitals, charities and local councils.

A bill was introduced into Parliament immediately after the Budget’s announcement to legislate this proposal (amongst others) – being the State Taxation and Mental Health Acts Amendment Bill 2021 (Bill).

windfall gains tax for high-value landholdings

Probably the most discussed proposal of the Budget is the introduction of a ‘windfall gains tax’. The tax is proposed to apply to windfall gains associated with planning decisions to rezone lands from 1 July 2022.

The total value uplift from a rezoning decision will be taxed at 50 per cent for windfalls above $500,000, with the tax being phased in from $100,000.  The windfall gains tax will apply to all rezonings across Victoria, except rezonings to and from the Urban Growth Zone within existing Growth and Infrastructure Contribution areas, and rezonings to Public Land Zones, which will each be exempt from the measure.

Details other than the above are otherwise fairly limited – including in relation to the effect of uncompleted Contracts of Sale on rezoned land (i.e. whether the vendor or the purchaser would be liable for the windfall gains tax in such circumstance), the mechanisms to value the relevant rezoning gains, and other practical issues. The Property Council of Australia has heavily criticised this proposal (amongst the land tax and stamp duty increase proposals), and unsurprisingly given the intense debate surrounding the proposed introduction of this new tax, the proposal is not set out in the Bill (and thus it is expected the proposal will be the subject of significant consultation with industry before being proceeded with).

land tax rate increases for high-value properties

Land tax is increasing significantly from 1 January 2022 for landholders with total landholdings with a taxable value exceeding $1.8 million.  Rates are proposed to be increased as follows:

  • a 0.25 percentage points for taxable landholding values between $1.8 million and $3 million (a potential $3,000 increase for landholdings in this value range); and
  • a 0.30 percentage points for taxable landholdings in excess of $3 million (a $3,000 increase for every additional $1 million of property value in a landholder portfolio).

Whilst the percentage increases may seem negligible when reflected as percentage point increase by reference to land value, they represent an almost 20% real increase in land tax for some landowners, without regard to the effect of any annual revaluation impact (which could push real increases even higher).

The higher rates further emphasise the importance of foreign owned subsidiaries who own land – or occupy land held by another entity within their foreign owned group – ensuring they have explored and sought (where available) relevant exemptions from the additional absentee owner surcharge rate of land tax, which will otherwise expose them (or their related entity landlord) to a potential land tax rate of 4.55%.  The higher rates also underline the importance for all landowners of careful annual valuation management (and considering objections to values within the 60 day objection window each year).

increase in the top duty rate for properties above $2 million

For contracts entered into from 1 July 2021, the acquisition of properties will attract a 6.5% premium rate of transfer duty for any dutiable value above $2 million (with the first $2 million of dutiable value taxed at the current rate of 5.5%) – a 1% increase on the current top stamp duty rate in Victoria.

Unlike NSW which has a similar premium rate of duty, this measure will apply to all land types – not just residential properties – and thus be a significant impost for businesses looking to acquire commercial property.  It also means that the top rate of stamp duty for foreign purchasers is now a whopping 14.5%!

removal of land tax exemption for private gender-exclusive clubs

As announced earlier in the week, from 1 January 2022, private gender-exclusive clubs will no longer be eligible for a land tax exemption under the societies, clubs or associations banner.

This was another measure which was not addressed in the Bill, nevertheless it has not been met with the same outrage by the property industry as other measures.

support to small businesses, medium and regional businesses

increase in the payroll tax-free threshold

In a win for small businesses, the Government will bring forward to 1 July 2021 increases in the payroll tax-free threshold (previously proposed to be effective 1 July 2022).  The threshold increase means payroll tax is only payable where total wages exceed $700,000 (previously $650,000).

According to the Government, approximately 500 Victorian businesses will no longer be liable for payroll tax in 2022 due to the increase in the threshold and a further 42,000 businesses will pay less payroll tax as a result.

payroll tax reduction in regional victoria

The Government has also brought forward a reduction in the payroll tax rate for regional businesses, reducing the rate from 2.02% to 1.2125%, effective from 1 July 2021.

support to property developers, homebuyers and development activity in melbourne’s cbd

duty concession for new residential property located with Melbourne local government area

As a means to support housing affordability and new developments within Melbourne’s CBD, the Government will introduce a temporary transfer duty concession of up to 100% for purchase of new residential properties in the City of Melbourne. The concession or exemption is based on several conditions, including how long the newly built residential property has been unoccupied for and the date the contract of sale was entered into.

The concession does not apply to reduce any foreign purchaser additional duty.

vacant residential land tax exemption for new developments

The vacant residential land tax exemption for new developments will be extended to apply for up to 2 years. This proposed measure will commence from 1 January 2022.

increase of the tax-free threshold for land tax

From 1 January 2022, the Government proposes to increase the general land tax-free threshold rate from $250,000 to $300,000. The trust surcharge rates will not change.

This measure is predicted to provide land tax savings to approximately 61,000 taxpayers.

temporary increase in the off-the-plan duty concession

The off-the-plan concession available to purchasers of homes under construction has been widened.  Whilst it will still only apply to purchasers that acquire property to be used as their principal place of residence, the applicable dutiable value thresholds (purchase price limits) will be increased to $1 million for all such buyers (currently limited to $750,000 for first home buyers and $550,000 for other home buyers), and will apply to all contracts entered into from 1 July 2021 to 30 June 2023.

our thoughts

In less than six months we have seen a clear shift in the taxation initiatives aimed at providing immediate short-term relief to measures aimed at revenue raising and repairing the Victorian budget.

A faster than expected recovery has led to the underlying change in the Government’s policies. ‘Top-end property owners’ and big businesses, who had supposedly benefitted from tax exemptions and concessions last year, will be the main target for the Government’s tax raising measures. The Property Council of Australia  was quick to condemn these initiatives, stating that these measures will slow down economic and development activity in Victoria, and drive out investments to other cities.

Aside from this, the continued tax exemptions and concessions provided to support small, medium and regional businesses has been welcomed, with an acknowledgement that many are still feeling the flow on economic effects as a result of the COVID-19 crisis.

If you or your business would like to explore whether you are eligible for any of the newly announced tax concessions, exemptions or other reliefs, or you or your business are detrimentally impacted by the proposed increases in land tax and stamp duty rates and other tax proposals, please get in contact with us.

Macpherson Kelley’s TaxProperty and Construction teams have specialist knowledge and experience in obtaining stamp duty, land tax and payroll tax concessions and exemptions for our clients, advising on development projects (including affordable and social housing developments), and otherwise guiding foreign owned and other clients through their State tax management.

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big spending comes at a cost! significant proposals in the 2021-22 victorian budget

26 May 2021
craig gibson jai manoharan

Last Thursday, the Victorian Treasurer handed down the 2021-2022 Victoria State Budget (Budget) – the Government’s second budget in six months following the delay of the 2020-2021 Budget due to the COVID-19 crisis.

Unsurprisingly, the Government’s articulated focus remains on getting the economy back on track following the devasting economic effects of the COVID-19 crisis.  As the Victorian economy embarks on the ‘road to recovery’, the Government is continuing to provide support to some industries, with a number of initiatives announced which expand on or bring forward last year’s special COVID Budget announcements (our summary of the 2020-2021 Victorian State Budget can be found here).

However, unlike last year, not all industries will benefit. Big businesses, property developers and commercial landlords who were beneficiaries to varying degrees in last year’s COVID Budget are set to be hit hardest if tax changes announced in the Budget proceed. Those changes will see these taxpayers act as the main revenue sources to repair the Victorian budget and fund a number of the Government’s key initiatives – including an ambitious $3.8 billion overhaul to the State’s mental health system.

We have highlighted below some of the main taxation and specific funding initiatives provided for in the Budget, outlining how these may impact landowners, homebuyers and businesses in different sectors and areas of Victoria.

revenue raising initiatives – big business and landowners hit hard

mental health and wellbeing surcharge

The Government will introduce a Mental Health Levy from 1 January 2022 to fund significant changes to the Victorian mental health system. The levy will be implemented as a payroll tax surcharge as follows:

  • 5% for businesses with national payrolls over $10 million a year; and
  • an extra 0.5% for businesses with national payrolls over $100 million a year.

The Government has announced some organisations will be exempt from paying the levy, which includes private schools, hospitals, charities and local councils.

A bill was introduced into Parliament immediately after the Budget’s announcement to legislate this proposal (amongst others) – being the State Taxation and Mental Health Acts Amendment Bill 2021 (Bill).

windfall gains tax for high-value landholdings

Probably the most discussed proposal of the Budget is the introduction of a ‘windfall gains tax’. The tax is proposed to apply to windfall gains associated with planning decisions to rezone lands from 1 July 2022.

The total value uplift from a rezoning decision will be taxed at 50 per cent for windfalls above $500,000, with the tax being phased in from $100,000.  The windfall gains tax will apply to all rezonings across Victoria, except rezonings to and from the Urban Growth Zone within existing Growth and Infrastructure Contribution areas, and rezonings to Public Land Zones, which will each be exempt from the measure.

Details other than the above are otherwise fairly limited – including in relation to the effect of uncompleted Contracts of Sale on rezoned land (i.e. whether the vendor or the purchaser would be liable for the windfall gains tax in such circumstance), the mechanisms to value the relevant rezoning gains, and other practical issues. The Property Council of Australia has heavily criticised this proposal (amongst the land tax and stamp duty increase proposals), and unsurprisingly given the intense debate surrounding the proposed introduction of this new tax, the proposal is not set out in the Bill (and thus it is expected the proposal will be the subject of significant consultation with industry before being proceeded with).

land tax rate increases for high-value properties

Land tax is increasing significantly from 1 January 2022 for landholders with total landholdings with a taxable value exceeding $1.8 million.  Rates are proposed to be increased as follows:

  • a 0.25 percentage points for taxable landholding values between $1.8 million and $3 million (a potential $3,000 increase for landholdings in this value range); and
  • a 0.30 percentage points for taxable landholdings in excess of $3 million (a $3,000 increase for every additional $1 million of property value in a landholder portfolio).

Whilst the percentage increases may seem negligible when reflected as percentage point increase by reference to land value, they represent an almost 20% real increase in land tax for some landowners, without regard to the effect of any annual revaluation impact (which could push real increases even higher).

The higher rates further emphasise the importance of foreign owned subsidiaries who own land – or occupy land held by another entity within their foreign owned group – ensuring they have explored and sought (where available) relevant exemptions from the additional absentee owner surcharge rate of land tax, which will otherwise expose them (or their related entity landlord) to a potential land tax rate of 4.55%.  The higher rates also underline the importance for all landowners of careful annual valuation management (and considering objections to values within the 60 day objection window each year).

increase in the top duty rate for properties above $2 million

For contracts entered into from 1 July 2021, the acquisition of properties will attract a 6.5% premium rate of transfer duty for any dutiable value above $2 million (with the first $2 million of dutiable value taxed at the current rate of 5.5%) – a 1% increase on the current top stamp duty rate in Victoria.

Unlike NSW which has a similar premium rate of duty, this measure will apply to all land types – not just residential properties – and thus be a significant impost for businesses looking to acquire commercial property.  It also means that the top rate of stamp duty for foreign purchasers is now a whopping 14.5%!

removal of land tax exemption for private gender-exclusive clubs

As announced earlier in the week, from 1 January 2022, private gender-exclusive clubs will no longer be eligible for a land tax exemption under the societies, clubs or associations banner.

This was another measure which was not addressed in the Bill, nevertheless it has not been met with the same outrage by the property industry as other measures.

support to small businesses, medium and regional businesses

increase in the payroll tax-free threshold

In a win for small businesses, the Government will bring forward to 1 July 2021 increases in the payroll tax-free threshold (previously proposed to be effective 1 July 2022).  The threshold increase means payroll tax is only payable where total wages exceed $700,000 (previously $650,000).

According to the Government, approximately 500 Victorian businesses will no longer be liable for payroll tax in 2022 due to the increase in the threshold and a further 42,000 businesses will pay less payroll tax as a result.

payroll tax reduction in regional victoria

The Government has also brought forward a reduction in the payroll tax rate for regional businesses, reducing the rate from 2.02% to 1.2125%, effective from 1 July 2021.

support to property developers, homebuyers and development activity in melbourne’s cbd

duty concession for new residential property located with Melbourne local government area

As a means to support housing affordability and new developments within Melbourne’s CBD, the Government will introduce a temporary transfer duty concession of up to 100% for purchase of new residential properties in the City of Melbourne. The concession or exemption is based on several conditions, including how long the newly built residential property has been unoccupied for and the date the contract of sale was entered into.

The concession does not apply to reduce any foreign purchaser additional duty.

vacant residential land tax exemption for new developments

The vacant residential land tax exemption for new developments will be extended to apply for up to 2 years. This proposed measure will commence from 1 January 2022.

increase of the tax-free threshold for land tax

From 1 January 2022, the Government proposes to increase the general land tax-free threshold rate from $250,000 to $300,000. The trust surcharge rates will not change.

This measure is predicted to provide land tax savings to approximately 61,000 taxpayers.

temporary increase in the off-the-plan duty concession

The off-the-plan concession available to purchasers of homes under construction has been widened.  Whilst it will still only apply to purchasers that acquire property to be used as their principal place of residence, the applicable dutiable value thresholds (purchase price limits) will be increased to $1 million for all such buyers (currently limited to $750,000 for first home buyers and $550,000 for other home buyers), and will apply to all contracts entered into from 1 July 2021 to 30 June 2023.

our thoughts

In less than six months we have seen a clear shift in the taxation initiatives aimed at providing immediate short-term relief to measures aimed at revenue raising and repairing the Victorian budget.

A faster than expected recovery has led to the underlying change in the Government’s policies. ‘Top-end property owners’ and big businesses, who had supposedly benefitted from tax exemptions and concessions last year, will be the main target for the Government’s tax raising measures. The Property Council of Australia  was quick to condemn these initiatives, stating that these measures will slow down economic and development activity in Victoria, and drive out investments to other cities.

Aside from this, the continued tax exemptions and concessions provided to support small, medium and regional businesses has been welcomed, with an acknowledgement that many are still feeling the flow on economic effects as a result of the COVID-19 crisis.

If you or your business would like to explore whether you are eligible for any of the newly announced tax concessions, exemptions or other reliefs, or you or your business are detrimentally impacted by the proposed increases in land tax and stamp duty rates and other tax proposals, please get in contact with us.

Macpherson Kelley’s TaxProperty and Construction teams have specialist knowledge and experience in obtaining stamp duty, land tax and payroll tax concessions and exemptions for our clients, advising on development projects (including affordable and social housing developments), and otherwise guiding foreign owned and other clients through their State tax management.