Commercial and industrial property tax – Victoria’s quiet revolution

Not a day goes by without an economist, academic or media commentator spruiking our nation’s urgent need for comprehensive tax reform. Yet while the Stage 3 tax cuts, bracket creep and the GST distribution amongst the states are constantly making the headlines, the Victoria Labor Government has continued its quiet revolution in property tax reform.

Victoria’s transfer duty on commercial and industrial property will be replaced by an annual property tax. This is a much more significant change than its virtual elimination of the land tax free threshold earlier this year. The legislation to enact the changes has been tabled in the Victorian Parliament and is still to become law.

The Commercial and Industrial Property Tax (CIPT) will apply to the land categories its name suggests and also to retail premises, infrastructure and student accommodation (all known as “CIPT land”) however, excludes residential, health, aged care, government, community and primary production land. A taxpayer will be assessed for CIPT for a tax year for all CIPT land held at the previous 31 December. The rate of CIPT will be 1% of the taxable value of the land being the unimproved or site value determined by the Valuer-General. A lower rate of 0.5% will apply to qualifying Build to Rent land. The CIPT will not apply to land which is fully exempt from transfer duty or landholder duty.

The most remarkable feature of the CIPT is its long transition from the commencement date (1 July 2024). To prevent the collapse in state revenue from a cold turkey replacement of the sizeable transfer duty with a smaller annual tax, the existing transfer and landholder duty will apply one last time – being to the first acquisition of a qualifying interest (more than 50%) in the CIPT land or landholder on or after 1 July 2024.

The CIPT will then commence in earnest for the first tax year commencing 10 or more years after that acquisition. It will apply to whoever is the owner of the interest on each 31st of December. Transfer duty or landholder duty will not apply to the interest even where the interest is subject to future transfers. The current Land Tax will continue unaffected by the introduction of the CIPT being assessed in the land tax year for property owned at the previous 31 December.

Example A

WidgetMaker acquires a factory on 30 September 2024. It pays transfer duty on the factory purchase and also annual land tax from 1 January 2025 thereafter. From 1 January 2035, it pays CIPT as 1% of the unimproved land value as well as land tax. On 1 July 2040, WidgetMaker sells the land. The purchaser will not be required to pay transfer duty on its acquisition but because of its ownership at 31 December 2040, it will be required to pay will pay CIPT and land tax in 2041.

During the 10 year transition period, the purchaser of the CIPT land interest could instead opt to pay a State Facilitated Transition Loan instead of the final transfer duty or landholder duty liability. The loan requires repayments of ten equal instalments incorporating the amount of duty otherwise payable, plus interest.

Example B (based on a Victorian 2023-24 Budget Fact Sheet)

QuickSale buys a retail store on 31 March 2025. The purchase price is $1.8million upon which transfer duty would be $99,000. Instead, QuickSale takes up a State Facilitated Transition Loan requiring 10 annual repayments of $13,100. It also pays annual land tax. QuickSale divests of the store on 31 March 2027 to LongHold. The State Facilitated Transition Loan becomes the first charge against the property and QuickSale repays the unpaid loan balance of approximately $79,000 to facilitate its sale. LongHold does not pay transfer duty on its acquisition of the store but pays land tax from 2028 onwards. Its CIPT liability on the retail store commences in 2036.

The CIPT regime includes provisions to cater for subdivisions and consolidations, aggregation of transactions, changes of use and joint ownerships.

The new tax and its transition is very complex, has many moving parts and is subject to Parliamentary processes and interpretation by Victorian State Revenue Office. Many issues remain to be fully determined and understood including:

  • Application to acquisitions straddling the 1 July 2024 commencement date including planning of proposed acquisitions
  • Application to options, and
  • The income tax and CGT treatment of payments of both the State Facilitated Transition Loan and the CIPT.

Mazars will issue further guidance on these issues and the transition to the new tax in the near future.

For more information on CIPT please contact your usual Mazars advisor or alternatively our specialists on:

Brisbane – Jamie Towers

Melbourne – Michael Jones

Sydney – Stephen Baxter

+61 7 3218 3900

+61 3 9922 1166

+61 2 9922 1166

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Published: 02/04/2024

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