Reminder - Vacant Residential Land Tax in Victoria will be Expanding from 1 January 2025

Current Rules

Pursuant to Part 2 – Division 6 of the Land Tax Act 2005 (Land Tax Act) Vacant Residential Land Tax (VRLT) is currently imposed on residential land and within the stated council areas in inner and middle Melbourne (as defined in Schedule 2A of the Land Tax Act).

Under the existing VRLT rules, a property is considered vacant if for more than 6 months in the preceding calendar year, it has not been occupied either by:

1. the owner as their principal place of residence (PPR); or
2. a tenant under a leasing arrangement.

If a property is vacant for the purposes of VRLT, an annual tax at 1% of the capital improved value (CIV) of the property will apply. For example, if a vacant home has a $1,000,000 CIV, the owner will be liable for VRLT of $10,000.

There are a few exemptions that currently apply for vacant residential property, namely:

1. the ‘holiday home’ exemption (section 88A of the Act);
2. the ‘work accommodation’ exemption (section 88B of the Act);
3. the ‘change of ownership’ exemption (section 88C of the Act);
4. the ‘construction and renovation’ exemption (section 34C(3) of the Act); and
5. the property ‘becoming residential property’ exemption (section 88D and section 88E of the Act).

Note that VRLT also will not apply to land tax exempt properties.

Changes to Vacant Residential Land Tax from 1 January 2025

As announced by the Victorian Government in December 2023 and as later legislated in the State Taxation Acts and Other Acts Amendment Act 2023, the existing VRLT rules will be changing from 1 January 2025.

Expansion of VRLT State-Wide.

VRLT will apply to all residential properties in Victoria if the property is vacant for more than 6 months in the preceding year – this means that if you own a residential property in Victoria that was vacant for more than 6 months in 2024, you will be liable for VRLT unless an exemption applies.

Progressive Rates of VRLT

A progressive rate of up to 3% of CIV of the property will apply from 1 January 2025 based on the number of years that the property has been vacant for the purposes of VRLT.

For example, a property with CIV of $1,000,000 that has been vacant will be liable for VRLT of $10,000 (1% of its CIV) in the first year of vacancy, then $20,000 (2% of CIV) in the second year of vacancy and $30,000 (3% of CIV) in the third and subsequent years the property is vacant.

Expansion of Exemptions

From 1 January 2025 – the ambit of some of the exemptions will also expand as follows:

1. the ‘holiday home exemption’ will expand to allow the use of the property by the owner, a vested beneficiary (if owned by a trust), a shareholder (of 50% of the shares in a company if the property is owned by a company) OR the relatives of those natural persons; and
2. the ‘work accommodation’ exemption will also expand from the requirement for the workplace to be within the stated council areas to all of Victoria.

Unimproved Land

From 1 January 2026, VRLT will also apply to unimproved residential land in metropolitan Melbourne (i.e. residential land without a habitable dwelling on it) if it has been undeveloped for 5 years or more and is otherwise capable of residential development. There will be exemptions if the unimproved land is contiguous to the owner’s PPR or the land is incapable of being used or developed for residential purposes.

Action to be Taken

In light of the expansion of VRLT state-wide in Victoria from 1 January 2025, owners of residential property in Victoria that are not otherwise occupied as their PPR or under a long-term lease must be across the changes and take urgent action to manage their affairs as soon as possible.

Notification

The notification requirements for VRLT are strict and must be made by 15 January each year if a residential property has been vacant for 6 months in the prior calendar year. Owners must also notify the SRO if an exemption applies or ceases to apply or if the property is no longer vacant for more than 6 months. The notification requirements are such that the onus is on owners to notify the SRO as opposed to receiving an assessment for VRLT in the first instance.

If an owner of vacant residential property in Victoria fails to comply with the notification requirements, penalties can apply for the notification default. The applicable penalty tax can range from 5% to 90% depending on the degree of lateness or non-compliance with the notification requirements.

We note that the deadline for notification follows very closely from the usual Christmas/New Year’s festivities and at a time when many Victorians (and their professional advisers) are on holiday. Accordingly, it is important that this date is diarised and managed as soon as possible to avoid falling foul of the notification requirements.

Restructuring

Depending on the current ownership structure and usage of a residential property, owners, particularly those in regional Victoria now need to carefully consider whether:

1. a restructure of the ownership of the property may be required such that an exemption may apply (for example, the ‘holiday home’ exemption requires that the owner or the vested beneficiary of a trust maintains a PPR in Australia – therefore, the exemption will not be available if the owner resides overseas. Given the progressive rates of VRLT, the ongoing annual costs of VRLT could exceed the upfront costs of a restructure of ownership within a short span of time); or
2. they need to enter into a long-term lease agreement for the property (notwithstanding that the demand for long-term rentals in regional Victoria may not be as high as in metropolitan Melbourne).

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‍This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.