The Victorian Government has announced further details of the Commercial and Industrial Property Tax (CIPT) that is proposed to be introduced from 1 July 2024. The CIPT was announced in May as part of the 2023/24 budget and since then the government has undertaken targeted consultation with business and industry leaders to help shape the design of the reform.
This is a significant change to the taxation of commercial and industrial property that will have implications for persons acquiring such properties after 1 July 2024 and could also impact certain tenants if the tax is passed on. While CIPT will not be passed on to specific retail tenants identified in the Retail Leases Act 2003 (Vic), it is possible other tenants outside the scope of this Act could be affected.
Taxpayers should seek advice about the potential impact of this tax on existing and future arrangements, including taking CIPT into account when modelling planned commercial and industrial projects.
Case study
Red Co enters into a contract to purchase a commercial office building in Melbourne in August 2024 for $50 million. Settlement occurs in October 2024. In September 2030, Red Co contracts to sell the office building to Blue Co. Settlement occurs in December 2030.
Red Co must pay:
Stamp duty – in October 2024 (no choice to finance over 10 years because the property is worth > $30 million)
Land Tax – annually 2025 - 2030
CIPT – none payable because the property is sold before CIPT commences in 2035
Blue Co must pay:
Stamp duty – none payable
Land tax – annually from 2031 onwards
CIPT – annually from 2035 onwards (10 years after the property entered the reform)
Excluded:
Property allocated an Australian Valuation Property Classification Code (AVPCC) that represents commercial, industrial, extractive industries or infrastructure and utilities land (AVPCC categories 200s, 300s, 400s and 600s) will have a qualifying use. In addition, consistent with the definition of commercial residential premises in the A New Tax System (Goods and Services Tax) Act 1999 (Cth), certain student accommodation will also be deemed to have a qualifying use. University colleges will be excluded.
Yes. For example, the existing regional commercial and industrial 50 per cent stamp duty concession will apply to the stamp duty imposed on eligible properties. The proposal does not explain whether or not regional properties that are entitled to this concession will also receive 50 per cent relief from CIPT.
If 50 per cent or more of the property is sold, it will be considered to have transacted and will fall within the CIPT regime. The entire property will then be subject to CIPT.
If a property has more than one use, the Commissioner will apply the “sole or primary use” test to determine whether the property will enter the regime if it is transacted. Factors such as land or floor area of each use, the relative intensity, economic and financial significance of each use and the length of time of each use will be taken into consideration. If the primary use is non-qualifying, CIPT will not apply to the property.
CIPT will not be payable on a property with a non-qualifying use. If a property has a qualifying use and enters the CIPT regime, CIPT will be payable and no further stamp duty will be payable on subsequent sales. However, if that property changes to a non-qualifying use (e.g., residential) and is subsequently sold, change-of-use duty will be payable.
If a property in the reform returns to a qualifying use, CIPT becomes payable immediately after the original 10-year transition period has concluded and no refund of change of use duty will be given.
Transactions eligible for the corporate consolidation concession, dutiable leases, economic entitlement and sub-sale transactions will not trigger entry into the CIPT regime. Properties will only enter the regime when they are directly transferred via a standard dutiable transaction or a fractional interest of 50 per cent or more is transacted.
No. There is no absentee owner surcharge imposed on the CIPT.
Details of whether a property is subject to the CIPT and any outstanding amount will be outlined in the Property Clearance Certificate issued by the State Revenue Office.
This is a significant shift in the taxation regime for commercial and industrial property and we anticipate that it may drive different market conditions for commercial and industrial property.
The benefit to the government is clear – it can shore up an ongoing revenue stream as compared to stamp duty which is lumpy and only received when a transaction occurs. The Government contends this reform is positive for taxpayers because it will free up capital to enable investment in buildings and infrastructure, encourage businesses to set up in the best location, promote more efficient use of commercial and industrial land and thereby boost economic growth. However, given stamp duty on the first transaction after 1 July 2024 is still payable, it will take a long time for taxpayers to realise these benefits. Coupled with increased land tax and foreign surcharges, in the short-to-medium term this may discourage investment in Victoria because instead of just paying stamp duty, a purchaser will now also have to factor in the ongoing CIPT after 10 years.
In South Australia, the government progressively abolished stamp duty on commercial transactions to encourage investment. In contrast, Victoria is not abolishing duty on commercial transactions, and it is effectively procuring two rounds of stamp duty revenue on commercial and industrial land holdings by collecting the stamp duty one last time and then also imposing the ongoing CIPT. A more equitable solution could be if properties simply fell into the new regime immediately rather than paying duty and then also having to pay the CIPT tax after 10 years.
We understand that draft legislation is expected to be introduced to Parliament in approximately April 2024, however, taxpayers should start planning for these changes now.
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