Victoria's State Budget introduces changes to real estate tax (Australia)

Tax Update

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As announced in Victoria’s State Budget on Thursday 21 May 2021, Victoria will be introducing a new 50% "windfall gains tax" for rezoned land and increasing land tax and stamp duty rates.

These tax changes will significantly impact the real estate sector in Victoria and will be effective on various dates, as noted below.

Windfall gains tax for rezoned properties

A new windfall gains tax will be introduced from 1 July 2022. This new windfall gains tax will impose tax at 50% for increases in value above AUD500,000 which result from a rezoning decision from local council. Lower taxation rates will apply to value increases of between AUD100,000 to AUD500,000.

This new tax is targeted at developers and landholders who benefit in the increased value of land from a rezoning decision from council.

This is effectively a capital gains tax that is being applied at a State level. Further, the tax may apply to unrealised gains. If so, landholders will need to consider how to fund the payment of this tax (at onerous rates of up to 50%). There are still few details about this in the Budget papers, so we will need to wait for the draft legislation to provide further comment on this topic.

Increased stamp duty rate for properties over AUD2 million

A new top rate of duty will be introduced for properties valued at AUD2 million or more. The current top rate is a flat 5.5% for properties over AUD1 million. Now, for contracts entered into from 1 July 2021, the land transfer duty rate will increase to AUD110,000 plus 6.5% of the dutiable value exceeding AUD2 million.

Increased land tax rates for properties over AUD1.8 million

From 1 January 2022, the land tax rate for taxpayers with property holdings will increase by;

  • 0.25% for taxable landholding exceeding AUD1.8 million; and
  • 0.3% for taxable landholdings exceeding AUD3 million.

Other business tax changes

  • Increase the tax-free threshold for land tax: Beginning on 1 July 2022, The tax-free threshold for general land tax rates will increase from AUD250,000 to AUD300,000 meaning land tax will only apply if the total taxable value of Victorian land is equal to or exceeds AUD300,000. Land held on trust remains unchanged.
  • Vacant residential land tax exemption for new developments: From 1 January 2022, the vacant residential land tax exemption for new developments will be extended to apply for up to two years.
  • Removal of land tax exemption for private gender-exclusive clubs: From 1 January 2022, private gender-exclusive clubs will no longer be eligible for the land tax exemption for societies, clubs or associations.
  • The Mental Health and Wellbeing Levy for payroll tax: A new Mental health and Wellbeing Levy will apply in the form of a payroll tax surcharge at a rate of 0.5% on wages paid in Victoria by businesses with national payrolls over AUD10 million a year. Businesses with national payrolls above AUD100 million will pay another additional surcharge of 0.5% (total increase of 1%).
  • Payroll tax threshold increase: The payroll tax-free threshold will increase from AUD650,000 to AUD700,000 from 1 July 2021.

Any further announcements and draft legislation in respect of these measures should be closely monitored by real estate investors, developers and other key stakeholders to properly assess their financial impact.

For more information please contact the author.