Daniel Butler, director of DBA Lawyers, said there are three main issues with the new C&I property tax that will impact SMSFs.
A 1 per cent per annum tax will apply in Victoria from 1 July 2024, levied on unimproved land value, and will be payable in addition to any other land tax, while duty on the purchase of C&I property will be phased out.
“Victorian Treasury issued guidance on the new tax on 11 December 2023 and while it is not yet law and the details may change before the legislation is finalised, there is limited time and opportunity to plan ahead,” Mr Butler said.
If residential or commercial and industrial (C&I) properties in Victoria were acquired before July 1, 2024, the buyer was obligated to pay land transfer duty, typically amounting to up to 6 per cent of the purchase price, commonly known as stamp duty.
Now C&I property sold or transferred from 1 July 2024 will trigger a 10-year transition period. The new regime phases out the upfront cost of duty, giving the purchaser the choice to either pay duty as a lump sum upfront payment or pay the value of the duty over 10 years with a government-facilitated loan (Vic Loan) plus interest.
“Regardless of which option the purchaser chooses, the 10-year transition period will begin from the date of the first transaction such as the sale or transfer on or after 1 July 2024,” Mr Butler said.
Mr Butler gave an example of Trang, who purchased an office on 1 July 2024 – the date that the 10-year transition period starts.
“Trang can choose to either pay the duty up-front or apply for a Vic Loan to pay the duty over a 10-year period plus interest,”’ Mr Butler said.
“During this 10-year transition period, a subsequent sale of that property will not incur duty, nor will it incur the new tax until the 10-year transition period has concluded. However, after the 10-year transition period, the new one per cent pa tax will be payable by the owner.”
He said if Trang obtained a Vic Loan and then sold the property five years later, she would be required to repay the balance of the loan and interest at that time.
“Interestingly, the person who buys the office within that 10-year transition period will not have to pay duty nor the new 1 per cent pa tax until 1 July 2035 as that will be 10 years after Trang purchased the office,” Mr Butler said.
“While some people may seek to retain a C&I property for the longer-term, various reasons may arise resulting in a sale or transfer within the 10-year transition period such as cash flow or a move to more suitable premises, and this may result in plenty of ‘free kicks’.”
After the 10-year transition period, the new tax will be payable by the owner of the property and will be calculated at 1 per cent per annum of the unimproved value of the land. This will be in addition to any land tax, and like land tax, the new tax will not be able to be passed on to retail tenants as defined in the Retail Leases Act 2003 (Vic).
For SMSF trustees, the new tax will present some planning issues, Mr Butler said.
“If the property has not yet entered into the 10-year transition period and the SMSF is purchasing the property outright without borrowing, then the SMSF trustee will be required to pay the duty up-front as a Vic Loan borrowing will most likely result in a charge being placed on the property in contravention of regulation 13.14 Superannuation Industry (Supervision) Regulations 1994 (Cth),” he said.
“If the property has entered the 10-year transition period, the SMSF trustee should be aware of whether there is any ‘free kick’ period remaining on that property and if the 10-year transition period has expired and is over, then the SMSF trustee will have to pay the new one per cent pa tax on the unimproved value of the property.”
He said that the Victorian Department of Treasury has issued a Q&A to offer insights into the practical implementation of the new property tax. The document specifies that in cases where a property serves multiple purposes, such as combining commercial and residential elements, the determining factor for the impact of the reform is identified as the sole or primary use of the property.
It also states that certain C&I properties may qualify for an exemption such as transfers of property from a deceased estate and if a C&I property is rezoned and becomes residential, a change of use duty may apply.
There are also exceptions to the new tax including C&I property acquired before 1 July 2024, residential property and property primarily used for primary production.
Mr Butler said that SMSF trustees looking at transferring or selling a C&I property shortly should get expert advice as it could affect the property’s value.
“Those thinking of transferring to a related party or restructuring should consider whether a transfer prior to 30 June 2024 has any advantages or disadvantages compared to a transfer afterwards,” he said.
“This new tax regime will have a substantial impact on the potential attractiveness of C&I property in Victoria. Indeed, there are a range of other new and increased taxes in Victoria which is adversely impacting property investments in this state.”
What needs to be clarified is the cost base treatment of the duty and interest. Additionally, whether the duty will form part of any settlement amounts when the property is sold.
Nice big tax grab, I wont be investing thats for sure