Victorian Commercial and Industrial Property Tax detail announced

Articles Written by Kathryn Bertram (Partner), Eleanor Kwak (Partner), Cassidy Smith (Associate)
corporate building

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.

Key features of the proposed reform

  • CIPT will apply to commercial and industrial transactions with both a contract and settlement date on or after 1 July 2024.
  • At settlement, a purchaser will have a choice to either:
    • pay stamp duty one final time; or
    • for taxpayers who meet certain criteria (including that the property is valued at $30 million or less), finance the stamp duty through a government-facilitated transition loan.
  • The annual CIPT will become payable 10 years after the final stamp duty payment, regardless of whether that property has transacted again.
  • If the property is transacted again, stamp duty will not be payable if the property continues to be used for commercial and industrial purposes.
  • CIPT will be charged at one per cent of the unimproved land value (there is no tax-free threshold).
  • This is a separate tax from, and in addition to, land tax.

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) because BlueCo is the owner at 31 December 2034)

 

What properties are excluded from the CIPT regime?

Excluded:

  • commercial or industrial property purchased prior to 1 July 2024 (unless 50 per cent or more of the property is transacted after 1 July 2024);
  • properties primarily used for residential, primary production, community services or sport, heritage and culture purposes; and
  • transfers of commercial or industrial properties that are exempt from stamp duty (e.g., purchase by a charity).

What properties have a qualifying commercial or industrial use?

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.

Will concessions apply to CIPT?

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.

What if there is a part sale of a property after 1 July 2024?

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 a mixed use does it become liable for 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.

What happens if the use of the land changes to a non-qualifying use?

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.

What transactions do not trigger entry into the CIPT regime?

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.

Will the absentee owner surcharge apply to CIPT?

No. There is no absentee owner surcharge imposed on the CIPT.

How will purchasers know if a property has entered the CIPT regime?

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.


What are the implications of moving to the CIPT regime?

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.

What are the next steps?

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.

 

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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