Commercial and Industrial Property Tax Reform - Big Changes in Victoria from 1 July 2024

Introduction

As announced in the 2023-24 Budget, the Victorian Government is introducing certain measures to reform the current transfer duty regime for commercial and industrial properties. In its place comes the new Commercial and Industrial Property Tax (CIPT).  

Once a property becomes part of the new system, transfer (stamp) duty will no longer be payable on subsequent transactions of that property.  

The policy reasoning behind these changes and the removal of the upfront costs of commercial and industrial property includes driving business growth and to support business investment in buildings and infrastructure.

On 11 December 2023, the Victorian Government announced the final design of the Commercial and Industrial Property Tax, including details on how the transfer duty system will transition to the reform from 1 July 2024. Some of those details, and unresolved issues, are explored in this article.

What is the Commercial and Industrial Property Tax?

CIPT will be an annual tax calculated at the flat rate of one per cent of the property’s unimproved land value. CIPT is separate to and payable in addition to land tax.

A landowner will become liable for CIPT in the first calendar year following the 10th anniversary of the first post-1 July 2024 settlement (of 50% or more of the property).  For example, if John acquires a commercial property on 9 November 2025, he will commence paying CIPT from 1 January 2036.

Note that transfer duty will apply in the ordinary course when John acquires the property, however transfer duty will not apply to any subsequent transfers (whether before or after 1 January 2036).

What Properties are covered?

The new CIPT regime will apply to properties with a qualifying commercial or industrial use (as of the date of settlement) (as allocated by the property’s Australian Valuation Property Classification Code (AVPCC) that represents commercial, industrial, extractive industries or infrastructure and utilities land). Notably, student accommodation (i.e. land which is solely or primarily used for providing accommodation to students) will be considered commercial property.

The new regime does not apply to property classified as or primarily used for residential, primary production, community services or sport, heritage or cultural purposes.

For mixed-use properties (e.g. a street level shop with a residence upstairs), the sole or primary use of that property will determine whether or not the property enters into the CIPT system. If the primary use of the mixed-use property is commercial, then CIPT will apply. A mixed-use property may be eligible for concessions or exemptions from CIPT to the extent of the non-commercial/industrial portions of the property.

Like land tax, in certain circumstances landlords of retail premises will prohibited from seeking reimbursement of CIPT from their tenants.

When does CIPT apply from?

Where a property (or 50% or more of the property) is has a contract and settlement date on or after 1 July 2024, that property will become part of the new regime roughly ten years after that transaction occurs.

Until such time that a commercial or industrial property is sold or transacted (after 1 July 2024), the ‘ten year countdown’ to CIPT will NOT commence. This can be thought of as somewhat similar to the Capital Gains Tax distinction between properties acquired before 20 September 1985 (‘pre-CGT’) and those acquired on or after that date (‘post-CGT’).

The transition of a property to CIPT will also not commence if there is a duty-exempt transfer of that property (for example, pursuant to a trust distribution or a will).

What about Transfer Duty?

When a commercial property is sold or transacted on or after 1 July 2024, transfer duty will be payable for the last time. Eligible purchasers will also be given the option of paying the Transfer duty will be payable of paying the duty upfront or financing the duty liability via a government-funded transition loan (on which interest is payable).

Subsequent transactions of that property (once it is part of the new system) will not be subject to duty, including where the transaction occurs before the first year in which CIPT is actually charged.

Change of Use Duty

Where a qualifying commercial or industrial property within the CIPT system is subsequently redeveloped into a residential property, then CIPT will cease to apply going forward.

However, if the owner acquired the property without transfer duty, a ‘change-of-use’ duty will apply, essentially to recognise that if the use of the property changed prior to the acquisition, transfer duty would have been payable in the normal way.

Change of use duty 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 year (31 December) that has passed since that transaction. For example, if Jim acquired a commercial or industrial property on 1 December 2036 for $2 million (Jim’s acquisition is exempt from transfer duty on that basis that the property entered into the CIPT regime as a result of a prior transaction on say 1 December 2024) and Jim subsequently converts that property to residential use on 1 December 2038, Jim would be liable for change-of-use duty calculated at 80% of the duty that would have been applicable on 1 December 2036 (i.e. a 20% reduction as Jim has held the property for 2 years).

Duty Exemptions and Concessions

The CIPT regime will not apply to transactions of commercial or industrial properties where a duty exemption applies.  For example, a property transferred in-specie out of a discretionary trust or out of a deceased estate or purchased by a charity would ordinarily be exempt from duty.  Accordingly, that duty-exempt transaction (whether or not post-1 July 2024) would mean that the property remains outside of the CIPT regime, and that any subsequent transfer would be subject to duty.

Any applicable duty concessions to the first post-1 July 2024 of a commercial or industrial property will continue to apply to that last dutiable transaction as it enters into the CIPT regime (e.g. the 50% regional commercial and industrial duty concession).

Complex Transactions

Transfers of 50% or more of the ownership interests of a commercial or industrial property will cause the entire property to enter into the CIPT regime.

Where property is held by a company or unit trust, it is intended that post 1 July 2024 transfers of shares or units that amount to relevant acquisitions under the landholder duty rules will cause a property to entire the CIPT regime. The landholder rules themselves are complex and there is little detail regarding how this will occur is currently available. It is noted that for a unit trust, a single acquisition of 20% can trigger landholder duty. An existing shareholder / unitholder increasing their stake (e.g. by 1%) can also trigger landholder duty.

Various other complex transactions that may result in duty will not cause a property to enter into the CIPT regime. This includes transactions eligible for the corporate consolidation concession, dutiable leases, economic entitlement and sub-sale transactions.

Finally, anti-avoidance provisions will be included. No details are currently available regarding those provisions, and further details on these provisions will be provided in 2024.

Final Comments

Now that more detail is known regarding the CIPT regime (but not all of the detail), parties currently seeking to sell or purchase commercial or industrial property, must consider whether to transact before or after 1 July 2024. For example:

• for contracts entered into on 30 June 2024, the existing rules will apply, with the CIPT regime not commencing until 10 years after a future transaction occurs;
• for contracts entered into on 1 July 2024, the CIPT regime will commence from 1 January 2035. That cost may be tax deductible and able to be passed on to a tenant. However, a future sale of that property will not be subject to transfer duty. We expect that a future sale will be able to command a higher sale price if a subsequent / prospective purchaser is able to acquire free from transfer duty.

From the information available so far, it is unclear how options granted prior to 1 July 2024, but exercised after that date, will be treated.

From a State-Federal tax perspective, the reform has a number of interesting effects. For example, incurring CIPT will in many cases be income tax deductible, whereas as transfer duty is not (a reduction in the federal tax base).

The bill implementing these changes has yet to be tabled into Parliament. Legislation is expected to be introduced to Parliament in the first half of 2024. Both current and prospective owners of commercial and industrial property should definitely watch this space for further details in due course.

‍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.