Changes to Property Tax Laws – For Better or For Worse?

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Melissa Barlas – 15/12/2023

We rejoice as the government proposes a bill to make a number of unfair terms unenforceable in contracts of sale. It’s a great win, to some extent, for buyers and a good shake up for practitioners that love to bastardise contracts with grossly unfair and risky terms for buyers that leave many of us fair-minded practitioners speechless.

On 3 October 2023 the State Taxation Acts and Other Acts Amendment Bill 2023 (the Bill) was introduced into the Victorian Parliament which, if passed, will result in significant changes to Victorian tax laws in the areas of land tax, windfall gains tax (WGT) and stamp duty from 1 January 2024.

The bill proposes the following changes, to name a few:

  • Where the day of sale is on or after 1 January 2024, prohibiting the apportionment of land tax between vendors and purchasers at settlement.
  • Where the day of sale is on or after 1 January 2024, prohibiting the apportionment of existing windfall gains tax assessed between vendors and purchasers at settlement. This does not preclude the apportionment of WGT in situations where a notice of assessment of WGT has not been served on a person at the time the contract of sale of land is entered into.
  • Expanding the 1% land tax on vacant residential properties to include ALL properties across Victoria, including simple vacant residential land. Currently this tax only applies to residential dwellings that are not occupied for six months or more of a calendar year and it only applies to properties within the 16 inner-metro Melbourne areas.

Here’s my take on these changes:

Changes to adjustments to land tax

This prohibition, as it stands, captures all property transactions. For example, the sale of a large commercial office building between two large commercial entities would have the same purchase protections as the sale of a $450,000 residential unit, even though the prohibition would result in a much more significant impact on the vendor’s sale proceeds at settlement in the commercial building scenario. Apply the same protections in both scenarios, for this reason, seems a little odd.

Regardless, this is still a welcome change for property buyers. Especially where you have a purchaser intending to occupy a property as their principal place of residence. Currently, purchasers are required to make a contribution towards land tax at settlement despite the fact that they are moving into the property as their principal place of residence and not land tax is charged against a home owner in that scenario. A purchaser should not have to pay a debt that they otherwise would not have incurred by using a property.

A Land tax adjustment can also hefty, in the thousands even, especially where you have vendors charging land tax at settlement on a proportional basis. For some purchasers, it becomes an expense they did not anticipate and can make the difference between whether the purchaser has enough of a shortfall to fund their settlement costs. Removing land tax from adjustments will avoid this scenario in future transactions.

Changes to adjustments to windfall gains tax

Perhaps the most welcome of all changes is the prohibition to adjust windfall gain tax assessed on or before the day of sale. Following the introduction of windfall gains tax in July 2023, I cannot begin to tell you how many contracts I have seen with special conditions requiring purchasers to pay the vendor’s windfall gains tax at settlement, regardless of whether the tax liability arose before the day of sale. If enforced, a purchaser would be significantly out of pocket at settlement, or worse may not be able to afford to settle, as WGT is a significant cost.

Let’s apply common sense to this scenario, shall we, and put the gun-hoe antics we see in these contracts aside for just a moment. If you’re selling a property, you want your sale proceeds, right? So why on earth would you jeopardise your sale for the sake of trying to slap a grossly significant tax on the purchaser at settlement to the point where they cannot settle? On a practical level, actually on any level, it’s ridiculous and practitioners that include such special conditions needs to revisit their precedents strike out such unfair clauses.

From 1 January 2024, if this bill passed, and it is expected it will, such practitioners will have no choice but to remove their beloved WGT special conditions or they will penalised at law for legislative breach.

Extending vacant residential land tax to ALL vacant residential land

This one is a bit of a doozy. The extensions to this tax law are significant for anyone that owns a dwelling or undeveloped vacant land.

  1. Dwellings: If you own a dwelling, regardless of where it is in Victoria, that’s vacant for 6 months or more starting from 1 January 2024, you’ll be slapped with a liability to pay land tax from 1 January 2025. Let’s apply it to a practical scenario. If you struggle to find a tenant for 6 months because your property is located in the least desirable area to love in its jurisdiction, you pay vacant residential land tax. Or if you are leaving a new property vacant for at least 6 months so that a loved one has a newly constructed, unused property to stay in when they come back from holidays, you pay vacant residential land tax. I cannot see how this change in these scenarios would be fair. The extension to the vacant residential land tax laws is excessive.
  2. Undeveloped land: From 1 January 2026, you pay vacant residential land tax on land you own in established areas of metropolitan Melbourne, if the land is undeveloped for a period of 5 or more years. This applies even to simple vacant land in suburbia somewhere. What if you cannot afford to build for 5 years because your financial situation has changed? Too bad, you’re slapped with a vacant residential land tax liability. That hardly seems fair. At the very least, the Bill should allow for a financial hardship exemption to paying vacant residential land tax.

Ultimately changes to land tax and WGT adjustments is a great win for purchasers so that they are protected against contracts seeking to palm off these large taxes to them at settlement, particularly if the liability is incurred before the day of sale. I don’t believe changes to vacant residential land tax are fair. They are excessive and a hardship exemption needs to be considered for those who cannot afford to build within a 5-year window or can prove that they have actively tried to rent their property out for 6 months without success.

Regardless of what I think, as a practitioner, it is important that you are across these proposed tax law changes and incorporate them into your advices. Ensure you update all your precedents to factor in these law changes once they are passed, so that your advices are accurate.

Melissa Barlas is a Lawyer, founder and director of Conveyed and Lawyers Weekly sole Practitioner of the Year 2023.  This article is intended to provide general information and should be used purely as a guide. Members are encouraged to seek their own independent legal advice as each matter turns on its own fact.