On 20 March 2024, the Commercial and Industrial Property Tax Reform Bill 2024 (Vic) (Bill) was introduced to the Victorian Parliament. The Bill was passed by the Legislative Assembly without amendment on 2 May 2024, and is due to be debated in the Legislative Council on 14 May 2024.

The Bill will establish an annual ‘commercial and industrial property tax’ (CIPT) to apply from 1 July 2024. The CIPT system will replace the current stamp duty regime for commercial and industrial land in Victoria.

In this alert, we have outlined the core provisions of the Bill, and noted points of interest in respect of the introduction of the CIPT system.

Entry of land into the CIPT system

Land will enter the CIPT system (becoming ‘CIPT taxable land’) where:

  • a contract of sale is entered into in respect of the land on or after 1 July 2024;
  • the transaction is for a 50% or greater interest in the land;
  • the transaction would attract a duty liability; and
  • the property has a qualifying industrial or commercial use at the date of settlement.

As outlined in further detail below, land may also become CIPT taxable land as a result of:

  • a number of smaller acquisitions which, in aggregate, amount to a 50% or greater interest in the land; or
  • an acquisition of an interest in a landholder which results in an indirect acquisition of a 50% or greater interest in the land.

Consolidations and subdivisions of land may also have CIPT implications.

Upon entry into the CIPT system, CIPT taxable land will be subject to a 10 year transitional period, during which CIPT will not apply. After the transitional period, the owner of the land will be required to pay CIPT annually at a flat rate of 1% (or 0.5% for land containing an eligible build-to-rent (BTR) development) of the unimproved value of the land (i.e. the same value that is used in the assessment of land tax). As with land tax, CIPT liability will be determined at 31 December each year.

Subject to the ‘further interests’ provisions outlined below, and provided the qualifying industrial or commercial use is maintained, once land enters the CIPT system, subsequent transactions in respect of that land will not be subject to duty.

For clarity:

  • the transaction that brings land into the CIPT system will still be subject to duty (though as outlined below, the acquirer may be able to pay this liability over the course of the transitional period, facilitated through a loan from the Victorian Government); and
  • the existing land tax regime will still apply to CIPT taxable land.

Aggregated transactions

Separate dutiable transactions over land which together amount to an interest of 50% or more will be aggregated for the purpose of bringing that land into the CIPT system where:

  • those dutiable transactions are aggregated under section 24 of the Duties Act 2000 (Vic) (Duties Act). This captures certain dutiable transactions occurring within 12 months which together form evidence, give effect to or arise from what is substantially one arrangement relating to all of the transacted interests in the land; or
  • the dutiable transactions occur within a three year period and either:
    • the transferee under each dutiable transaction is the same person; or
    • the transferees under the dutiable transactions are associated persons.

The Commissioner will have the power to disaggregate acquisitions by associated persons captured under the three year rule, provided that:

  • the Commissioner is satisfied that the relevant interests in the land:
    • were acquired, and will be used, independently; and
    • were not acquired, and will not be used, for a common purpose; and
  • the transferees are not associated persons because they are related bodies corporate under the Corporations Act 2001 (Cth).

Landholders

An acquisition of an interest in a landholder may also result in land becoming CIPT taxable land, provided that, applying the relevant provisions of the Duties Act:

  • the transaction constitutes a relevant acquisition in the landholder;
  • the landholder holds a freehold interest in land; and
  • the relevant acquisition is not:
    • exempt from duty; or
    • eligable for a corporate consolidation or reconstruction concession.

A transaction which meets these requirements is referred to as a ‘qualifying landholder transaction’. Where a qualifying landholder transaction results in an indirect acquisition of a 50% or greater interest in land (determined by multiplying the interest acquired in the landholder, and the interest that the landholder holds in that land), the land in question will become CIPT taxable land.

A qualifying landholder transaction may result in multiple items of land becoming CIPT taxable land.

Separate acquisitions of interests in landholders may be aggregated in a manner that is effectively equivalent to that described above in respect of dutiable transactions over land. We note that outside of the anti-avoidance provisions outlined below, there is no mechanism for aggregating dutiable transactions over land with acquisitions of interests in landholders.

CIPT taxable land will continue to count towards the $1 million landholder threshold, though will not (subject to the ‘further interest’ provisions outlined below) be included in the assessment of landholder duty.

Qualifying commercial or industrial use

Land will have a qualifying commercial or industrial use if:

  • the land has been allocated an Australian Valuation Property Classification Code (AVPCC) in the ranges:
    • 200-299 (commercial classification);
    • 300-399 (industrial classification);
    • 400-499 (extractive industries classification); or
    • 600-699 (infrastructure and utilities classification);
  • the land that has been allocated to more than one AVPCC, not all of which fall within the above ranges, provided that the land is used solely or primarily for a use described in the above ranges; or
  • the land is used solely or primarily as ‘eligible student accommodation’, defined as including residential premises that are:
    • designed for students of higher education providers (having the same meaning as under section 16-1 of the Higher Education Support Act 2003 (Cth)) to occupy;
    • occupied or available for occupation by students of a higher education provider; and
    • commercial residential premises (having the same meaning as under section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth)).

Accommodation provided in connection with a higher education provider, such as accommodation owned and operated by a university, does not constitute ‘commercial residential premises’, and therefore cannot be eligible student accommodation.

As noted above, a special CIPT rate of 0.5% will apply to land containing an eligible BTR development. Relevantly, student accommodation cannot qualify as an eligible BTR development, as these projects will not meet the ‘available to the general public’ requirement.

Exemptions

The following transactions will not result in the transacted land becoming CIPT taxable land:

  • transactions pursuant to an agreement or arrangement entered into before 1 July 2024;
  • transactions over land that is (pursuant to its AVPCC allocation) primarily used for:
    • primary production;
    • residential purposes;
    • community services or sport; or
    • heritage and cultural purposes; and
  • transactions that are, under the Duties Act:
    • exempt from duty;eligible for a corporate consolidation or reconstruction concession;
    • a grant, transfer or assignment of a lease; or
    • an acquisition of an economic entitlement.

In addition to not triggering entry into the CIPT system, an acquisition of an economic entitlement over CIPT taxable land will continue to be dutiable. This is notable, given that the economic entitlement provisions were introduced as an integrity measure, preventing the use of such entitlements as a means of avoiding the duty that would apply on a change in the ownership of the relevant land. As such, where a change in the ownership of CIPT taxable land would not be dutiable, it is questionable as to why the economic entitlement provisions should continue to apply.

Consolidations and subdivisions

Where land that has become CIPT taxable land is consolidated with other land, and 50% or more of the resulting consolidation consists of land that has become CIPT taxable land, the consolidated land will be CIPT taxable land, and will be deemed to have become CIPT taxable land at the earliest time of entry into the CIPT system of land included in the consolidation.

Conversely, if less than 50% of the resulting consolidation consists of CIPT taxable land, the consolidated land will not be CIPT taxable land.

Where CIPT taxable land is subdivided, each subdivided lot will be CIPT taxable land, and will be deemed to have become CIPT taxable land at the time of entry into the CIPT system of its parent lot.

Further interests

Where land becomes CIPT taxable land as the result of the acquisition of a 100% interest in that land, any subsequent dutiable transactions over that land will (provided the qualifying industrial or commercial use is maintained) not be subject to duty.

Where land becomes CIPT taxable land as the result of the acquisition of a less than 100% interest in that land, a dutiable transaction over a further interest in the land that occurs within three years of the land becoming CIPT taxable land may be subject to duty. Note that the transacted interest must be a different interest to:

  • the interest that caused the land to become CIPT taxable land; and
  • any further interest acquired after the land became CIPT taxable land that has already been assessed to duty.

Where the dutiable transaction that causes land to become CIPT taxable land, and any dutiable transactions over further interests constitute, in aggregate, the acquisition of a 100% interest in the land, any subsequent dutiable transactions over the land will (provided the qualifying industrial or commercial use is maintained) not be subject to duty.

Acquisitions of further interests in landholders may also be aggregated in a manner that is effectively equivalent to that described above in respect of dutiable transactions over land.

Transitional loans

Subject to eligibility criteria, a person acquiring an interest in land which causes that land to become CIPT taxable land will have the option to obtain a transitional loan from the Victorian Government to finance payment of the duty liability.

The Bill, together with guidance issued by the Victorian Government, provides that the transitional loan will have the following features:

  • a commercial market-based interest rate will apply, calculated at the beginning of the transitional loan;
  • a 10-year repayment term will apply (matching the transitional period), with annual repayments commencing 12 months following settlement;
  • a break fee will apply to early repayments;
  • the transitional loan cannot be novated or transferred to a subsequent purchaser;
  • in the event the land ceases to have a qualifying commercial or industrial use, or is sold, the borrower will be obligated to repay the transitional loan’s remaining balance; and
  • the amount owed under the transitional loan will be a first charge on the borrower’s interest in the CIPT taxable land, and this charge will have priority over all other encumbrances to which this interest is subject, including any charges arising or imposed under any other act (e.g. CIPT or land tax).

Change of use

Where CIPT taxable land ceases to have a qualifying commercial or industrial use (or if such land, whilst not having a qualifying commercial or industrial use, starts to have such a use), the owner of the land will be required to notify the Commissioner within 30 days of the change of use.

Whilst CIPT taxable land does not have a qualifying commercial or industrial use:

  • CIPT will not apply to the land (as noted above, CIPT liability is determined at 31 December each year); and
  • duty will apply to any dutiable transactions or relevant acquisitions in respect of this land as normal.

Where CIPT taxable land ceases to have a qualifying use, and a person that holds an interest in the land at the time of the change of use was exempted from duty on the acquisition of that interest by virtue of the land being subject to the CIPT system, the owner of that interest will be subject to ‘change of use’ duty.

The change of use duty will reflect the duty that would have been payable on the acquisition of the interest in question, were the land not CIPT taxable land. However, this liability will be reduced by 10% for each calendar year that has elapsed since that acquisition.

For clarity, if CIPT taxable land ceases to have a qualifying commercial or industrial use, and then later returns to such a use:

  • no refund will be provided for any change of use duty paid; and
  • the 10 year transitional period will not reset.

Anti-avoidance

Anti-avoidance provisions mirroring the land tax regime will apply to schemes entered into with the purpose of:

  • obtaining a reduction of, or exemption from, CIPT;
  • preventing land from entering the CIPT system;
  • entering land into the CIPT system to avoid duty on subsequent dutiable transactions in respect of the land; or
  • entering land into the CIPT system to avoid duty on subsequent acquisitions in landholders that hold the land.

Where the Commissioner identifies such a scheme, they may:

  • disregard the scheme;
  • treat the land as CIPT taxable land;
  • determine the CIPT payable if not for the scheme; and
  • make an assessment or reassessment of CIPT to give effect to the above determination.

The Commissioner may also aggregate interests in land obtained in one or more dutiable transactions or relevant acquisitions that the Commissioner is satisfied formed part of a scheme.

Recovery of unpaid CIPT

Unpaid CIPT (including any resulting interest and penalty tax) will be a first charge on the CIPT taxable land, and have priority over all other encumbrances on the land (except the charge arising from the transitional loan described above). However, unpaid CIPT will not be a first charge on land that is Crown land or vested land under Part 3A of the Victorian Plantations Corporation Act 1993 (Vic).

Property clearance certificates will indicate whether the land in question is CIPT taxable land, and whether there is a charge in respect of unpaid CIPT on the land. For bona fide purchasers of CIPT taxable land, the charge will not secure any amount of CIPT in excess of the amount listed in the property clearance certificate.

In the event of a tax default in relation to CIPT, the Commissioner may require the mortgagee, lessee, or occupier of the land to pay an amount of unpaid CIPT (including any resulting interest and penalty tax).

Similar to the land tax regime, a lessee or occupier cannot be required by the Commissioner to pay an amount in respect of an unpaid CIPT liability:

  • greater than the amount of rent that the lessee or occupier is required to pay to the owner; or
  • before the day on which the lessee or occupier is required to pay their rent to the owner.

These limitations do not apply to lessees or occupiers that are a related corporation or relative of the owner.

Adjustment and passing on of CIPT

In line with changes made to the land tax regime earlier this year (which were detailed in our recent article), vendors of land will be prohibited from apportioning part of their CIPT liability to a purchaser (i.e. to reflect the portion of the year that the land will be held by the purchaser) under a land sale contract.

Landlords will generally be able to pass on CIPT amounts to their tenants, however they cannot do so in respect of:

  • residential tenancies (noting that the CIPT system will not apply to most residential land, though may apply to, e.g., eligible student accommodation); or
  • retail leases.