In December 2023, the Victorian Government passed the State Taxation Acts and Other Acts Amendment Act 2023 (Vic), introducing multiple State tax changes that will predominantly impact the real estate sector, as well as landowners leasing or licencing their land for the operation of high-value infrastructure (e.g. infrastructure for power generation).

Key Changes

The most significant changes are summarised below:

Expansion of vacant residential land tax

Vacant residential land tax (VRLT) is an additional land tax payable in respect of taxable residential land that was vacant for more than six months in the preceding land tax year. 

For this purpose, ‘residential land’ includes:

  • land that is capable of being used solely or primarily for residential purposes;
  • land on which:
    • a residence is being constructed or renovated;
    • where there was previously a house; and
    • following completion of the construction or renovation, will be capable of being used solely or primarily for residential purposes; or
  • land on which there is a residence that is uninhabitable.

From 1 January 2025, VRLT can apply to all taxable land across Victoria, where previously it was limited to taxable land in inner and middle Melbourne.

In the following year, from 1 January 2026, VRLT can apply to taxable land located within inner and middle Melbourne that does not constitute ‘residential land’, provided that the land:

  • is zoned for residential development, and is capable of being used for residential purposes;
  • is not being used for or under development for a non-residential use;
  • is not being used for a purpose that is contiguous to its owner’s principal place of residence (e.g. a swimming pool); and
  • has remained undeveloped for five years or more.  

The amount of VRLT that will apply to effected land will increase from 1 January 2025 on a progressive basis, such that the rate will be:

  • 1% of the capital improved value of the land if it is the owner’s first year of liability to pay VRLT;
  • 2% of the capital improved value of the land if the land was liable for VRLT the preceding year; and
  • 3% of the capital improved value of the land if the land was liable for VRLT for the preceding 2 or more years.

From 1 January 2025, the VRLT exemption for newly constructed residential premises will be extended to three years, provided that the owner makes ‘genuine and reasonable’ efforts to sell the property during this time.  Following the completion of this period, VRLT will apply at a capped rate of 1% until the property is sold.

These changes are likely to have a substantial impact on developers holding land in anticipation of development, and may encourage expedited development timelines. Persons holding vacant residential land in Victoria for investment purposes will of course also be impacted, and should factor VRLT into their decision making.

Prohibition on apportioning land tax

Land tax in Victoria is assessed for a given calendar year against the owner of land as at midnight on 31 December in the previous year. Therefore, when land tax is paid, it is generally seen as a ‘pre-payment’ of land tax for the coming year. 

When land is sold, it is common practice for the sale contract to contain a clause requiring the purchaser to reimburse the vendor for the amount of land tax attributable to that part of the year that the purchaser will own the land. 

This is no longer the case, as from 1 January 2024:

  • a clause in a land sale contract that seeks to apportion land tax to the purchaser is now invalid; and
  • it is now an offence to include such a clause in a sale contract, punishable by a fine of up to 300 penalty units (currently $57,693).

For clarity, this restriction does not apply to contracts entered prior to 1 January 2024 (even if completion is scheduled to occur after this date). Furthermore, this restriction will not apply to contracts with a sale price of $10 million or greater (this threshold is subject to annual CPI adjustment).

The standard contract terms set out in the Property Law Act 1958 (Vic) have been updated to reflect this change, and no longer include a clause for apportioning land tax.

Rather than having a substantive impact on amounts paid under land sale contracts, this change will ultimately lead to estimated land tax liabilities being indirectly reflected in market prices. Nonetheless, vendors should be careful to ensure that they do not violate the new restrictions.

Prohibition on passing on windfall gains tax

Windfall gains tax (WGT) is a tax that is incurred when land is rezoned, and this rezoning results in an increase to the capital improved value of the land of more than $100,000. You can read more about this tax on our previous article here. 

Though an assessment for WGT will generally be issued shortly after a relevant rezoning, the liability can be deferred until the land is next sold (including indirectly through a landholder acquisition), or for 30 years if no sale occurs.

Therefore, it has become common for sale contracts for land on which WGT is payable to include a clause under which the purchaser is required to pay an amount on account of the WGT liability of the vendor. 

This will no longer be the case, as from 1 January 2024:

  • a clause in a land sale contract (or option to enter into a land sale contract) that seeks to pass an amount of WGT to the purchaser is now invalid; and
  • it is now an offence to include such a clause in a land sale contract (or option to enter into a land sale contract), punishable by a fine of up to 300 penalty units (currently $57,693).  

For clarity, this restriction will not apply to contracts entered prior to 1 January 2024, or contracts entered upon the exercise of an option granted prior to 1 January 2024. Furthermore, contracts entered after 1 January 2024 can still include a clause passing any WGT that arises following entry, but prior to completion on to the purchaser.

As with the prohibition on apportioning land tax, we anticipate that this change will ultimately lead to WGT amounts being indirectly reflected in market prices. Once again, vendors should be careful to ensure that they do not violate the new restrictions.

Capital improved value and fixtures

The capital improved value of land in Victoria is determined by the Valuer General under the Valuation of Land Act 1960 (Vic) (VLA) as the market value of the property including all improvements. It is used for the calculation of taxes such as vacant residential land tax and rates. 

The VLA has been amended to specify that the capital improved value of land includes the value of any fixtures on the land.  Notably, the valuation of ‘improvements’ already captured fixtures at law owned by the landholder. However, under the new definition of ‘fixtures’ inserted into the VLA, this has now been expanded to include:

  • fixtures at law; and
  • any other item fixed to the land,

whether owned by the owner of the land, a tenant, or any other occupier of land.  

This change is likely to have the biggest impact on landowners who lease or licence their land for the operation of high value infrastructure (e.g. infrastructure for power generation).

The McCullough Robertson tax team can assist with tax advice, structuring and compliance across all Australian jurisdictions.