Victoria is proposing to limit its off-the-plan duty concession; extend the scope of its sub-sale duty provisions; and introduce a vacant residential property tax. The Northern Territory is proposing a significant increase in its duty rates affecting large transactions entered into from 1 July 2017. Partner Adrian Chek, Senior Tax Counsel Jennee Chan and Senior Associate Scott Lang look at the proposed legislative amendments.
How does it affect you?
- The Victorian Government intends, with effect from 1 July 2017, to limit its off-the-plan duty concession to residential properties purchased as a principal place of residence or purchased by first home buyers, in each case up to a specified threshold value. The Victorian Government also intends to remove the concession for residential properties purchased by investors, and for non-residential properties; however it is not clear that the proposed legislation achieves this latter intention.
- The Victorian Government will amend its sub-sale provisions to extend their scope to options involving additional consideration. Further, in relation to sub-sale arrangements, the base on which dutiable value is to be calculated will be extended; the exemption applying to trusts and superannuation funds will be removed; and provisions to deal specifically with partial transfer rights will be introduced.
- From 1 January 2018, the Victorian Government will impose a 1 per cent vacant residential property tax on any residential land within Melbourne's inner and middle ring that is not occupied for at least six months in a calendar year.
- The Northern Territory Government is proposing a significant increase in its transfer duty and landholder duty rates with effect from 1 July 2017. Taxpayers should consider the timing of any potentially affected transaction. With a maximum rate of 5.95 per cent, the Northern Territory will have the highest transfer duty rate in Australia.
The stamp duty payable on a transfer of Victorian land is imposed at rates of up to 5.5 per cent, calculated on the higher of the consideration (including any GST) for the transfer of the property or the unencumbered value of the property. Foreign purchasers of residential property are subject to additional duty of 7 per cent (ie, 12.5 per cent in total).
The 'unencumbered value' of a property is the amount for which the property might reasonably be sold on the open market at the time the contract of sale is entered into, free from any encumbrance to which the property might be subject to at the time. In an 'off-the-plan' transaction, the value at the time of the contract would normally be substantially lower than the purchase price payable at completion of the property.
Under current law, the 'consideration' is determined by deducting from the purchase price, the amounts paid or payable in respect of the construction of a building to be constructed on that land on or after the date on which the contract of sale was entered into. A similar concession applies for the conversion of buildings carried out on or after the contract date. These rules are commonly referred to as the 'off-the-plan' concession (OTP concession).
In its Budget, the Victorian Government confirmed its pre-Budget announcement that for contracts entered into from 1 July 2017, the OTP concession is to be limited to taxpayers who are eligible for:
- the principal place of residence (PPR) stamp duty concession (limited to where the dutiable value as at the contract date is not more than $550,000); or
- the first home buyer stamp duty concession or exemption (limited to where the dutiable value as at the contract date is not more than $750,000).
The proposed legislative amendments are contained in the State Taxation Acts Amendment Bill 2017 (Vic), which is scheduled for debate on 23 May 2017.
The proposed legislative amendments to the OTP concession are brief and appear to limit the concession far more narrowly than was foreshadowed by the Victorian Government's earlier announcement. Although the proposed legislation clearly removes the OTP concession for PPR transfers that exceed the prescribed dutiable value, it is not apparent how the proposed amendments limit the concession for residential investors, and for transactions involving non-residential property (such as retail, commercial or industrial). Nevertheless, taxpayers who might be affected by the Victorian Government's intentions to limit the application of the OTP concession should consider entering into contracts before 1 July 2017 if they wish to ensure the ability to rely on the concession.
Most Australian states and territories impose duty on a contract for sale of land but provide an exemption for the transfer, provided the transfer is made in conformity with the stamped contract of sale. In these jurisdictions, double duty might be chargeable if, for example, the transfer is made to a person other than the named purchaser in the contract.
By contrast, Victoria does not impose duty on a contract for sale of land. Rather, the liability for duty in Victoria arises when the land is transferred (ie, at settlement). However, where Victorian land is transferred to a person other than the purchaser named in the contract, the transaction may be regarded as a sub-sale of the land and potentially subject to double duty.
Under current rules, the sub-sale provisions broadly apply where:
- additional consideration is provided for the transfer right;
- land development occurs before the transfer right; or
- land development occurs between the time when an option is granted in respect of the land and the time when a transfer right is obtained.
The sub-sale provisions separately impose duty on the contracting purchaser as if it completed the contract (or the option) on the transfer itself and on any other transaction under which an entity obtains or assumes the transfer right. In this way, double or multiple duty can be payable.
The proposed legislation will:
- include amounts paid as a reimbursement of costs in the duty base (although these amounts may be excluded when determining whether 'additional consideration' has been provided);
- remove the exemption for sub-sale arrangements involving trusts or superannuation funds, notwithstanding that a 'normal' transfer of the land would otherwise have been exempt from duty;
- provide an adjustment to the duty calculation for sub-sale arrangements involving a partial transfer right; and
- extend the scope of the sub-sale provisions to include option arrangements involving 'additional consideration'.
Example 1: option involving additional consideration
X owns land in Victoria. X grants Y a call option for Y and/or a nominee to acquire the land for $1 million. Y nominates Z to enter into the contract for sale with X. There has been no land development. Z pays Y a nomination fee of $100,000. Y has incurred $10,000 in legal costs and Z agrees to reimburse Y for those costs.
Current law: the sub-sale provisions should not apply as there has been no land development.
Proposed law: duty may be payable by Y (calculated on a dutiable value of $1 million) and by Z (calculated on a dutiable value of $1,110,000).
Example 2: option not involving additional consideration
X owns land in Victoria. X grants Y a call option for Y and/or a nominee to acquire the land for $1 million. Y nominates Z to enter into the contract for sale with X. There has been no land development. Y has incurred $10,000 in legal costs and Z agrees to reimburse Y for those costs but does not otherwise provide consideration.
Current law: the sub-sale provisions should not apply.
Proposed law: the sub-sale provisions should not apply.
Land tax is generally payable on an annual basis on Victorian land owned by a person, unless an exemption or concession applies. The general rate of land tax in Victoria is 2.25 per cent, broadly calculated on the unimproved value of the land (site value). Foreign persons are subject to additional land tax of 1.5 per cent (ie, 3.75 per cent in total).
From 1 January 2018, the Vacant Residential Property Tax (VRPT) will be imposed on taxable land that is vacant residential land within Melbourne's inner and middle ring.1 The rate of the VRPT will be 1 per cent of the property’s capital improved value.
Land to which the PPR exemption would apply under the normal land tax rules is not taxable land.
'Residential land' means land that is capable of being used solely or primarily for residential purposes. Land will also be 'residential land' for the purposes of the VRPT if:
- a residence is being constructed or renovated on the land;
- the land was capable of being used solely or primarily for residential purposes before the commencement of the construction or renovation; and
- on completion of the construction or renovation, the land will be capable of being used solely or primarily for residential purposes.
However, residential land does not include land that is capable of being used and occupied solely or primarily as commercial residential premises (as defined for GST purposes), a residential care facility, a supported residential service or a retirement village service.
Land will be regarded as vacant in a land tax year if it has not been used and occupied for more than six months, in aggregate, within the preceding tax year as the owner's PPR or as the PPR of a permitted occupant or by a person under a lease or short-term letting arrangement made in good faith and not for the purpose of avoiding payment of the VRPT.
Land that is under construction or refurbishment will be regarded as vacant if, at the end of the year preceding the tax year, the construction or refurbishment is not completed after more than two years after the date of issue of the building permit for the construction or refurbishment. The land will not be treated as vacant if the Commissioner is satisfied that there is an acceptable reason for the construction or refurbishment not being completed within the two-year period. In order to maximise the permitted two-year period, it might be advantageous for affected taxpayers to obtain any relevant building permit early in the calendar year, say in January rather than in December.
An exemption will be available for properties:
- used as holiday homes by those with a separate PPR in Australia;
- used for the purposes of attending work by those with a separate PPR in Australia;
- subject to a change in ownership during the preceding tax year; and
- that become residential land during a tax year.
The proposed legislation does not appear to impact on developers who acquire residential land for mixed use development projects where the commercial component of those projects is the dominant use, or on developers who acquire commercial land for redevelopment – at least not during the construction period. However, residential developers may be impacted by stock that remains unsold and unoccupied after practical completion and may need to consider the cost of any VRPT when preparing feasibility models.
Affected taxpayers will be obliged to notify the Victorian State Revenue Office by 15 January each year. This notification requirement is in line with the notification requirements for the purposes of calculating the land tax surcharge applicable to foreign owners.
- The stamp duty exemption for property transfers between spouses and de facto partners will be removed from 1 July 2017, except where the property is the PPR and except for transfers following the breakdown of a relationship.
- A stamp duty exemption will be available from 1 July 2017 for eligible first home buyers of properties with a dutiable value of up to $600,000, with a concession applying based on a sliding scale for properties with a dutiable value of between $600,000 and $750,000.
- The rate of motor vehicle duty on new passenger vehicles will increase from 1 July 2017 to 4.2 per cent, consistent with the rate applying to used passenger vehicles.
- Insurance duty on policies insuring agricultural products will be abolished from 1 July 2017.
- Property valuations for land tax purposes will be undertaken annually, rather than every two years, from 1 January 2019.
- The payroll tax rate will decrease (from 4.85 per cent) to 3.65 per cent for businesses whose regional employees comprise at least 85 per cent of the payroll, from 1 July 2017.
- The payroll tax annual tax-free threshold will increase from $575,000 to $625,000 from 1 July 2017, and to $650,000 from 1 July 2018.
The Northern Territory Government has proposed an increase to its stamp duty rates with effect from 1 July 2017.
Under the proposal, the maximum rate of duty in the Northern Territory will increase from 5.45 per cent to a new maximum rate of 5.95 per cent for dutiable property (which includes business assets and real property) with a dutiable value of at least $5 million. The rate of duty where the dutiable value is between $3 million and $5 million will increase to 5.75 per cent.
The proposed legislation does not contain transitional provisions but the Territory Revenue Office has publicly indicated that the increased rates will apply to contracts signed on or after 1 July 2017.
Taxpayers who are negotiating agreements for the sale and purchase of business assets or real property in the Northern Territory should consider whether it is possible to enter into the agreements before 1 July 2017. This includes any agreement for the acquisition of shares in a company or units in a unit trust scheme that holds land in the Northern Territory.
Both Victoria and the Northern Territory have proposed legislation that may be less clear in their operation than intended. Taxpayers who might be affected by the proposed changes should seek advice on the likely impact on their transactions.
- Affected Council areas: Banyule City Council, Bayside City Council, Boroondara City Council, Darebin City Council, Glen Eira City Council, Hobsons Bay City Council, Manningham City Council, Maribyrnong City Council, Melbourne City Council, Monash City Council, Moonee Valley City Council, Moreland City Council, Port Phillip City Council, Stonnington City Council, Whitehorse City Council and Yarra City Council.