Victorian State Budget 2021-22: Significant tax changes and their impact on property owners and private business
On 20 May 2021, State Treasurer Tim Pallas handed down the 2021/22 Victorian state budget. The budget aims to chart a road to post-COVID economic recovery, including by raising state revenue.
To help fund investments in mental health, education and public transport, the budget contains significant tax hikes aimed at well-to-do property investors, developers and private businesses, alongside modest tax relief to some small businesses and first home buyers.
Read on for our full breakdown of some of the tax changes in this year’s State Budget, and what they mean for property owners and private businesses.
1. Payroll tax changes
Payroll levy for businesses with national payrolls over $10 million a year
The ‘Mental Health and Wellbeing Levy’ is being implemented upon the recommendation of the Royal Commission into Victoria’s Mental Health System to introduce a new revenue stream for funding mental health services in Victoria.
Businesses with national payrolls of over $10 million per year will pay a payroll tax surcharge of 0.5% (effectively raising the rate from 4.85% to 5.35%), while businesses with national payrolls above $100 million will pay a surcharge of 1% (effectively raising the rate from 4.85% to 5.85%). The surcharge rates will be paid on the Victorian share of wages above the relevant threshold. The Government will legislate that revenue from this surcharge must be spent on mental health services.
While the Government has stated that the levy is aimed at large businesses that continued to profit through the pandemic, the Business Council of Australia has criticised the levy for ‘taxing jobs’. The new levy raises payroll tax for most Victorian businesses to roughly the same headline rate of payroll tax as NSW, although businesses with national payrolls in excess of $100 million will pay a higher rate of tax in Victoria than in NSW. However, in contrast, NSW payroll tax-free threshold is much more generous, at $1,200,000.
Smaller businesses often try to avoid being grouped together for payroll tax purposes. With the introduction of this levy, it may become the case that larger businesses may now find themselves in a similar situation.
Bringing forward payroll tax changes
The Government is also bringing forward an increase in the payroll tax-free threshold, which will increase from $650,000 to $700,000 from 1 July 2021. As a result of these changes, the Government estimates approximately 500 businesses will no longer be liable for payroll tax in the 2021-22 financial year, and a further 42,000 businesses will pay less payroll tax. However, in contrast, every other Australian State has a payroll tax threshold in excess of $1 million.
The Government is also bringing forward reductions in the regional employer rate of payroll tax – from 1 July 2021, the regional employer rate will reduce from 2.02% to 1.2125%. This is aimed at reducing taxation burdens on regional businesses as they recover from difficulties associated with COVID-19 lockdowns.
2. Transfer duty rate changes and concessions
Transfer duty increase for property transactions in excess of $2 million
From 1 July 2021, property transactions worth more than $2 million will be taxed with a higher transfer duty rate of 6.5% of the dutiable value in excess of $2 million.
The Victorian Government’s steps to increase transfer duty contrast with the approach of the NSW Government to transfer duty; NSW is currently considering a plan to replace transfer duty with an annual property tax. Transfer duty remains a thorn in the side of property buyers, sellers and internal business restructures. Unfortunately, the Victorian Government has sent a strong signal that they won’t be doing away with it anytime soon.
Although the legislation for the transfer duty increase has not yet been introduced, it looks as though it will apply to all property transactions, whether residential or otherwise. It is expected that this rate will apply in addition to the foreign purchase duty, which is currently 8%.
Transfer duty concessions for off-the-plan contracts and new residential property in Melbourne
The threshold for the 50% off-the-plan concession for transfer duty will be increased temporarily to $1 million for home buyers who enter into eligible off-the-plan contracts from 1 July 2021 to 30 June 2023. In line with existing requirements, the property must be the principal place of residence for at least one of the purchasers.
The Victorian Government is also providing a transfer duty concession of up to 100% for the purchase of new residential property in the Melbourne local government area, where the dutiable value is up to $1 million. The Melbourne local government area spans 14 suburbs, including Flemington, Kensington, Carlton and Jolimont. For new residential property that has been unsold for less than 12 months since completion, a 50% concession will apply on contracts entered into from 1 July 2021 to 30 June 2022, whereas a 100% concession is available to new properties which have been unsold for 12 months or more since completion for contracts entered into from 21 May 2021 to 30 June 2022. The concessions do not apply to foreign purchaser additional duty.
The off-the-plan concession increase and Melbourne transfer duty concessions are aimed at supporting housing affordability for buyers and renters, especially for inner-city dwellings that have been left vacant or unsold in the wake of the COVID-19 pandemic and international border closures.
3. The introduction of ‘Windfall Gain Tax’
The most radical tax change announced in the Budget is the introduction of a ‘Windfall Gain Tax’ (WGT), which will hit developers and land holders who receive windfall gains due to property rezoning with a 50 per cent tax if the gain is worth $500,000 or more. The tax phases in from the first $100,000, and is payable on rezonings across Victoria except for rezonings:
- to and from the Urban Growth Zone within existing Growth and Infrastructure Contribution areas; and
- rezonings to Public Land Zones.
While the rationale behind this tax is simple – that developers should pay a share back to the Government if they gain a windfall from having their property rezoned – the WGT seems to create more problems than it solves. We outline some of them below.
Is the tax payable upon a rezoning event, or at some later stage?
The Government has announced that the tax is payable on rezonings across Victoria. If WGT must be payable at the time of a rezoning event, the landowner may not have the cash to meet the steep 50% tax burden, and could be forced to sell their land to pay it. Conversely, if the tax can be deferred to a later point in time, this may mean that the WGT will not have the intended effect of redistributing gains from developers and speculators. Instead, the burden of the WGT would be passed on to the buyers of newly developed homes, which would further inflate property prices and push home ownership further out of reach for many Victorians.
Is the tax consistent with Federal taxes, or even constitutional?
Another complicating factor is that the WGT taxes the same gain as Capital Gains Tax (CGT), a Federal tax. It remains to be explained how the tax will tie in with Federal taxes in general – for example, a developer might already be subject to income tax of up to 47% of the gain under the Income Tax Assessment Act 1997 (Cth). Would the WGT be tax deductible from a Federal tax perspective?
Another question the WGT raises is whether it is even constitutional that both the State Government and Federal Government are seeking to tax the same ‘profit’.
Who is subject to WGT?
Although the Government intends to target developers and speculators with the WGT, the budget does not specify whether these groups will be the only persons who have to pay WGT. In the absence of clear carve-outs, WGT may apply to all landholders, including mum-and-dad investors whose land happens to be rezoned – and potentially force them to sell their land to meet the tax burden if they don’t have the cash available to pay it. Until we see the legislation relating to WGT, it is unclear whether WGT will apply to all landholders. It also remains to be seen whether WGT would apply to all land or distinguish between land held on revenue and capital account.
4. Land Tax changes
Land tax increases for high value landholdings
Land taxes will rise by 0.25% for taxable landholdings worth between $1.8m and $3m, and by 0.3% for those above $3m over four years from 1 January 2022. This is in addition to recent land tax increases such as the Foreign Land Tax Surcharge and Absentee Owner Surcharge.
These increases increase the incentive for multiple landholdings not to be aggregated together, and for main residences owned via a company or trust to be transferred to individual owner-occupiers.
Vacant residential land tax exemption for new developments
From 1 January 2022, the vacant residential land tax exemption for new developments will be extended to apply for up to two years. The Government intends this measure to support the construction sector and encourage the completion of newly constructed dwellings.