New Victorian land tax will impact SMSFs with residential property: expert
SMSF trustees with residential property in Victoria will be impacted by the proposed change to the vacant residential land tax (VRLT) set to apply from 1 January 2025, warns a top legal specialist.
Daniel Butler, director of DBA Lawyers, said the proposal will specifically impact SMSFs with residential property that remains vacant for more than six months in a year.
“The expansion of the VRLT to apply to all Victorian vacant residential land represents a substantial change in policy and a keen desire by the heavily indebted Victorian Government to raise more tax,” he said.
“Both property owners and advisers need to be aware of these changes as there are many clients who may be impacted and there is limited time to prepare.”
Previously, the VRLT only applied to specific council areas around inner and middle Melbourne.
Mr Butler explained that this annual tax is one per cent of the capital improved value (CIV) of the taxable land.
“The CIV value can be substantially higher than the unimproved value that land tax is imposed on,” he said.
“VRLT is imposed in addition to any land tax assuming the VRLT criteria is satisfied. The State Revenue Office assesses the value of the land including the value of any buildings and capital improvements on that land.”
The tax will now be imposed on Victorian land where the land is taxable, residential and vacant.
The State Taxation Acts and Other Acts Amendment Bill 2023 (Bill) was introduced into the Victorian parliament in October 2023.
Mr Butler said the Bill proposes to substantially expand the current VRLT to apply to all Victorian vacant residential land from 1 January 2025.
Under the proposal, taxable land, as defined in the Land Tax Act 2005 (Vic) (LTA), includes all land in Victoria unless it satisfies an exception.
He added the most common exceptions to taxable land are a person’s primary place of residence (PPR) or primary production land. Residential land is defined in the LTA as “land that is capable of being used solely or primarily for residential purposes”.
“This includes land prior to construction or renovation being finalised if the land is capable of being used solely or primarily for residential purposes,” he said.
Under the proposed bill, land can be classified as residential if the land is not in a “non-residential zone” and the land is not solely or primarily used for or under development for non-residential use.
“Determining whether a property is 'vacant' requires reference to the use of the land in the year that immediately precedes the relevant land tax year,” he said.
“For example, 2024 use is relied on for the purposes of determining whether VRLT applies in 2025.”
The Bill proposes that property will be taken to be vacant if it has not been lived in for more than six months out of a calendar year.
“This six-month period does not need to be consecutive,” Mr Butler said.
He continued that to work out whether the property has been “lived in”, certain factors are considered.
“It is not sufficient for the property to be ready to be lived in such as if the property is listed on a website available to rent. It must be occupied and lived in for at least six months,” he said.
“A lease or short-term letting arrangement must be made in good faith and not implemented for the purpose of avoiding tax.”
He added that a property will be considered “vacant” if the owner allows family or friends to stay in it on a casual basis.
If land is undergoing renovation or reconstruction within certain areas of metropolitan Melbourne it will not be considered vacant for up to five years under the proposed legislation.
“Under current law, land is not considered vacant for up to two years from the date a building permit is issued for the construction or renovation,” Mr Butler said.
“The two-year grace period will apply for the majority of Victoria but from 1 January 2026, a five-year period applies before land within certain areas of metropolitan Melbourne will be considered vacant.”
There are some exemptions in the Bill, Mr Butler said including land that is zoned primary production land.
“Properties that are exempt from land tax such as Principal Place of Residence or primary production land are also exempt from the VRLT,” Mr Butler said.
“This is regardless of whether they have been unoccupied for more than six months or not.”
An exception also applies where a property is used as a holiday home and occupied by the owner for at least four weeks of that year and the owner has a PPR in Australia.
“However, this exception is only available when the property is owned by a natural person,” Mr Butler continued.
“If a holiday home is owned by a company or trustee of a trust including the trustee of an SMSF then no exception applies and the property will be subject to VRLT.”
Workplace or business properties occupied by the owner for at least 140 days of that year for the purpose of attending their workplace or business also are exempt.
“Homes owned by companies, associations or organisations are not eligible for this exemption,” he said.
Commercial residential premises, residential care facilities and land used for supported residential services or retirement village services are exempt, but Mr Butler warned that expert advice should be obtained to apply for this exemption.
He concluded that advisers should be careful before advising on state laws such as VRLT having regard to a recent NSW case where invoices owing to an accountant providing advice on NSW duty legislation were in dispute.