In 2023, the Victorian government announced a series of tax reforms aimed at significantly affecting the commercial property sector from 2024. These reforms, part of broader tax changes across Australia, aim to address the economic impacts of the COVID-19 pandemic and associated government debt with key changes including adjustments to land tax rates, absentee owner surcharges, and the introduction of a new Commercial and Industrial Property Tax (CIPT).

As a leading voice in Victorian commercial real estate, Joe Phegan provides an in-depth overview of these reforms and outlines their implications for property owners and investors.

Absentee Owner Surcharge (AOS)

One of the most impactful changes is the increase in the absentee owner surcharge (AOS) from 2% to 4% for the 2024 land tax year. This surcharge, initially introduced in 2016 at 0.5%, aims to tax foreign owners more heavily, encouraging property availability for local residents and ensuring non-resident owners contribute to the local economy.

Commenting on this, Mr Phegan says, "The doubling of the AOS presents a significant cost increase for foreign investors and absentee owners. This policy shift reflects the Victorian government's intent to prioritise local ownership and residency and investors need to be acutely aware of these changes and plan accordingly.

“The increase, while aimed at reducing property speculation and enhancing housing availability, has contributed to deterring foreign investment, significantly impacting the commercial market dynamics."

COVID-19 Debt Levy

The Victorian government has introduced a COVID-19 Debt Levy, effective from January 1, 2024, for a duration of ten years. This levy is tiered based on landholding values and includes temporary surcharges on both land tax and payroll tax to mitigate the fiscal impacts of the pandemic.

Land Tax Surcharges:

• $50,000 - $100,000: Flat surcharge of $500
• $100,000 - $300,000: Flat surcharge of $975
• Over $300,000: $975 plus a 0.10% increase in the land tax rate

Payroll Tax Surcharges:

• National payrolls over $10 million: Additional 0.5% payroll tax
• National payrolls over $100 million: Additional 1.0% payroll tax (0.5% + 0.5%)

Mr Phegan said, "The COVID-19 Debt Levy introduces significant temporary surcharges that property owners and businesses must account for in their financial planning. Large businesses, particularly those with substantial land holdings, will face increased operational costs and these surcharges are likely to impact profitability and may lead to higher prices for consumers.

“While these measures are crucial for addressing pandemic-induced debt, they impose additional financial burdens that businesses must navigate strategically."

Abolition of Stamp Duty and Introduction of CIPT

A particularly transformative change is the abolition of stamp duty on industrial and commercial properties, replaced by the Commercial and Industrial Property Tax (CIPT) starting July 1, 2024. This tax reform aims to stimulate business growth by eliminating the upfront cost of stamp duty and spreading payments over a 10-year transition period.

Key Features of CIPT:

• Applies to properties transacted on or after July 1, 2024.
• Buyers can choose to pay stamp duty upfront or opt for a government-facilitated transition loan.
• After 10 years, properties are subject to a flat 1% annual tax on their unimproved land value.
• No stamp duty applies to future transactions if the property remains in commercial or industrial use.

"The introduction of the CIPT is a progressive step towards fostering a more dynamic and investment-friendly market,” said Mr Phegan.

“By removing the significant upfront cost of stamp duty, this reform aims to encourage more transactions and investments in commercial and industrial properties. The 10-year transition period with the option of a government-facilitated loan provides flexibility for buyers, making it easier to manage their financial commitments. The hope here is that this change will enhance market liquidity and stimulate economic growth across the state."

Strategic Considerations for Property Owners and Investors

Given the extensive nature of these reforms, property owners and investors must undertake strategic planning to navigate the new landscape effectively. Increased costs from the AOS and COVID-19 Debt Levy require careful financial management and potential re-evaluation of investment strategies.

"It’s important property owners and investors stay informed of these tax reforms and their implications, consulting with their financial and real estate advisors to understand the full impact on their portfolios and operations.

“Proactive planning and strategic adjustments will be key to mitigating the effects of increased surcharges and leveraging the opportunities presented by the CIPT. The commercial real estate landscape in Victoria is evolving, and those who adapt effectively will be best positioned for success.

"Overall, these reforms necessitate a strategic approach from property owners and investors. By understanding the nuances of these changes and planning accordingly, businesses can navigate the evolving landscape and capitalise on new opportunities in Victoria's commercial property market,” Mr Phegan concluded.

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