Replacing Duty with an Annual Tax - Commercial and Industrial Property Tax Reform Act 2024 (Victoria)

Introduction

CIPT will be an annual tax payable on commercial or industrial properties (determined by their Australian Valuation Property Classification Code (AVPCC)) as well as student accommodation (qualifying use).

CIPT will not apply to property classified as or primarily used for residential, primary production, community services or sport, heritage or cultural purposes and a ‘sole or primary use’ test will be applied to mixed-use properties (i.e. properties with both a commercial/industrial and a residential use).

From 1 July 2024, duty will be paid upon the transfer of a property with a qualifying use for the last time*. 10 years from that last transaction (with duty paid), the annual CIPT will be payable in addition to land tax.

That last payment of duty can also be paid upfront or financed through a government funded loan for eligible applicants purchasing property up to a maximum price of $30 million, the latter of which can be beneficial from in terms of reducing the upfront cashflow required for a purchase.

The legislation to implement the CIPT, the Commercial and Industrial Property Tax Reform Bill 2004 (Vic) has now passed both Houses of Parliament and is due to receive Royal Assent shortly (Act). There are some key differences between the enacted legislation and the initial guidance previously provided by the Victorian Government

Key features of the Act

When will CIPT apply?

CIPT will apply to land that:

• has entered the CIPT regime;
• has passed the 10-year transition period;
• has a qualifying use as at midnight on 31 December of the previous tax year; and
• is taxable land (as defined under the Land Tax Act 2005).

At what rate will CIPT apply?

CIPT will be charged at the following rates:

• 1% of the capital unimproved value (CUV) of the land (the same value as used for land tax assessments); or
• a reduced rate of 0.5% of the CUV for Build to Rent land – note that there are strict requirements to satisfy the Build to Rent CIPT concessions.

Are there surcharges for foreign owners?

Unlike land tax, there is no additional surcharge CIPT for foreign owners of land with a qualifying use. The landholding aggregation rules that apply for land tax also do not apply to CIPT.

When does a property become part of the CIPT regime?

Land with a qualifying use becomes part of the new CIPT regime upon the occurrence of one of the following on or after 1 July 2024:

• an entry transaction;
• an entry subdivision; or
• an entry consolidation.

Importantly, a property will not become part of the CIPT regime should any of the above occur prior to 1 July 2024, including if pursuant to an ‘arrangement’ (which can include term sheets, options and rights of first refusal).

What is an entry transaction?

An entry transaction occurs upon a dutiable transaction of 50% or more of the property or upon a relevant acquisition (as defined in section 78 of the Duties Act 2000).

Note that a property will remain outside of the CIPT regime if the transaction is

• exempt from duty; or
• eligible for a corporate reconstruction or consolidation concession.

What about aggregation?

A transaction of less than 50% of the property will generally not cause entry into the CIPT regime. However, subsequent transactions can be aggregated if the transactions form ‘substantially one arrangement’ or the interests are acquired within 3 years by a person or ‘associated persons’.

*Is duty really payable for the last time?

Duty may continue to be payable for land within the CIPT regime if it previously entered the CIPT regime through a transaction of less than 100% and there is a future transaction of a separate interest in the land. In this instance, duty will continue to apply to subsequent transactions of the property until the earlier of:

• 3 years from the date that the property entered into the CIPT regime; or
• duty has been fully assessed on the property (i.e. 100% of the property).

The following example is provided in the Act:

Person A acquires a 50% interest in land under a transfer of land which occurs on 1 January 2026. This is a qualifying interest in the land and the dutiable transaction is an entry transaction. Person A acquires another 30% interest in the land on 1 January 2027 under a qualifying dutiable transaction. Person B is the beneficial owner of the remaining 20% interest in the land. On 1 July 2027, Person C purchases the land from Person A and Person B. No duty is chargeable on this tax reform scheme transaction to the extent that the interest acquired by Person C is the same, or substantially the same, as the entry interest for the land (50%) and the further interest acquired in the land (30%). Duty is assessed on the remaining 20% interest in the land acquired by Person C.

The practical effect of this is that timing needs to carefully considered for any potential acquisitions of partial interests in land with a qualifying use.

What happens where commercial or industrial property is converted to residential?

Where a property in the CIPT regime is converted to a non-qualifying use (e.g. residential), CIPT will not apply in the following calendar year.

Duty will apply to subsequent transactions of the property following the change of use.

A ‘change-of-use duty’ will also apply following a second or subsequent sale of a CIPT property, which will be payable based on the transfer duty that would have been payable when the property transacted (subject to any applicable concessions), reduced by 10% for every 31 December that has passed since that transaction.

Expected Impact of CIPT regime

Retail Leases Act 2003

CIPT cannot be passed on from landlord to a tenant under a retail lease – this is consistent with land tax and the relevant section under the Retail Leases Act 2003 has also been amended to prohibit CIPT from being passed. Of course, some leases are exempt from the operation of the Retail Leases Act 2003 (for example, where rent is more than $1,000,000 or tenants who are publicly listed (or subsidiaries of public listed corporations) outside of Australia).

Sale of Land Act 1962

Vendors will also be prohibited from apportioning CIPT with a purchaser under a contract of sale of land with a sale of price of less than $10 million.

The Act will also amend the Section 32 – Vendor Statement disclosure requirements to include details about whether the property is part of the CIPT regime, its AVPCC as well as its entry date into the CIPT regime. It is expected that the SRO will provide a property clearance certificate (similar to the current ones regarding land tax and windfall gains tax) to include this required information relating to CIPT.

Impact on stakeholders

Owners, purchasers and prospective purchasers (including their financiers) of commercial or industrial properties must carefully consider the impact of the CIPT regime including its impact on the costs of acquisition and ownership.

Similar to land tax, CIPT will be a first charge on the land and the Act allows the Commissioner to require a lessee, mortgagee or occupier of the land to pay the unpaid CIPT.  

It also still remains to be seen whether the transition to the CIPT regime will cause an increase in activity pre-1 July 2024. However, the first buyer of a property with a qualifying use after 1 July 2024 would need to factor in the eventual imposition of CIPT and whether or not they intend to own the property beyond the 10-year transition period.

Whilst CIPT and the intended transition away from duty for commercial or industrial properties is supposed to facilitate cash flow and business investment, that first post-1 July 2024 purchaser will be getting ‘both ends of the stick’ if they continue to own the property after 10 years (as they would become liable for the annual CIPT thereafter). What we may see is an increase in arrangements pre-1 July 2024 that give prospective purchasers the ability to purchase a commercial or industrial property without starting the clock on the eventual annual CIPT liability.

We expect that the CIPT regime may also have an impact on new residential developments, particularly in the situation of a developer hoping to buy and redevelop/rezone commercial land into residential housing. The ongoing costs of CIPT, when combined with the potential application Windfall Gains Tax to the developer, could result in further upward pressure on the prices of new housing stock for potential homebuyers.

For subsequent purchasers of land that is already in the regime, the imposition of CIPT will need to be carefully considered in their ownership financial modelling (whilst trying to crystal ball the future CUV of the property) as the subsequent annual costs of CIPT (which will be payable in perpetuity) will eventually exceed what would have been the upfront (one-off) duty under the current regime. Considering the recent (substantial) increases in land tax bills, CIPT could ultimately make ownership of commercial/industrial property more expensive – if so this may cause negative repercussions for rental costs and/or suppress the values of these properties.

On the other hand, one benefit of the transition away from stamp duty to CIPT is that CIPT should be income tax deductible where duty is a capital cost and not deductible.

The new CIPT regime is a big change for commercial and industrial property in Victoria. Affected parties should obtain advice on the potential impact of CIPT on them prior to any potential transaction.

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.