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SMSF trustees that invest in qualifying use property in Victoria from 1 July 2024 will need to be aware of how the new commercial and industrial property tax works, says a leading legal specialist.
Daniel Butler, director of DBA Lawyers said, the Victorian government has introduced a new tax regime on commercial and industrial property (CIP) that will phase out transfer duty over 10 years and replace the upfront duty on subsequent transfers with an annual commercial and industrial property tax (CIPT).
“Broadly, a property will enter the CIPT regime where the transfer of property is a dutiable transaction that takes place on or after 1 July 2024, the property has a Qualifying Use, or the transaction relates to at least a 50 per cent interest in the property or that amounts to at least 50 per cent when aggregated together with other relevant acquisitions,” Butler said.
He explained that where a contract is signed before 1 July 2024, the property will not enter the CIPT regime, even if the transaction is completed after 1 July 2024, however, it is important to note that closer consideration needs to be given to a contract that may have been signed before 1 July 2024 where it is subject to a condition precedent.
“This could be where the contract states that the contract does not come into existence until finance has been approved, or a contract subject to a condition precedent regarding the formation of a contract does not become binding until that condition is satisfied. There may be an argument that this nevertheless constitutes an arrangement that is grandfathered,” Butler said.
“Additionally, certain transfers of CIP after 30 June 2024 that satisfy a relevant exemption from duty such as a change of trustee should not constitute an ‘entry transaction’. Another popular exemption involves a transfer from an ‘apparent purchaser’ to a ‘real purchaser’ who provided all the purchase monies such as a transfer from a custodian holding property on bare trust for an SMSF trustee under a limited recourse borrowing arrangement (LRBA) after the SMSF pays off its borrowing.”
Butler warned some transfers that may appear exempt may fail due to factors such as lack of evidence, a poor document trail or not having been implemented carefully. Obtaining expert advice and feedback is important, as a transfer of CIP that fails to satisfy a relevant exemption will become subject to the CIPT regime.
He continued that CIPT will apply to CIP that is defined to include properties classified as commercial, industrial, extractive industries, infrastructure or utilities under the Australian Valuation Property Classification Code (AVPCC) and will apply to properties that are allocated within the 200 – 499 and 600 – 699 ranges.
Property that falls within the above AVPCC ranges is deemed to have a Qualifying Use, while land that falls outside of the above AVPCC ranges such as residential and primary production land will not be subject to the CIPT regime.
“The CIPT Act outlines that property will enter the CIPT regime where it has a Qualifying Use and either an entry transaction, an entry consolidation or an entry subdivision occurs from 1 July 2024,” he said.
“An ‘entry transaction’ means a transfer of dutiable property that has a qualifying use. The date on which the property enters the CIPT regime will be the date on which the transfer occurs.”
This means that from 1 July 2024, when at least a 50 per cent interest in qualifying use property is acquired, the property will enter the CIPT regime. Multiple transactions in relation to acquiring interests in the property will be aggregated together where the purchaser is the same person and where the purchasers are associated persons. Where aggregated transactions equal or exceed 50 per cent in a three-year period, the property will be deemed to enter the CIPT regime.
Butler continued that the term ‘associated persons’ has the same definition as in the Duties Act 2000 (Vic) and for individuals, this includes people who are related as well as those in a business partnership.
“For companies, this includes companies where a majority shareholder or a relative of the majority shareholder, is a majority shareholder in each company,” he said.
“Similarly, an entry landholder transaction may also bring the Qualifying Use property into the CIPT regime. The property will enter the CIPT regime where a person acquires a 50 per cent or greater interest whether alone or with an associated person in a landholder such as a unit trust or company.”
Additionally, if a person already has a significant interest in a landholder and acquires a further interest, qualifying landholder transactions within the prior three-year period by the same person or associated persons are aggregated.
“The example in s13(1) of the CIPT Act states: ‘Person A obtains a 20 per cent interest in land under a qualifying landholder transaction occurring on 1 December 2024 (Qualifying Landholder Transaction A). Person B obtains a 40 per cent interest in the land under a qualifying landholder transaction occurring on 1 July 2026 (Qualifying Landholder Transaction B). Person A and Person B are associated persons. The interests Persons A and B acquired in the land are aggregated and together amount to a qualifying interest. This means qualifying landholder transaction B is the entry transaction for the land,” Butler said.
“Expert advice should be obtained before investing in a unit trust or company that is a landholder as landholder duty may be payable upfront. Broadly, landholder duty may not be payable if 100 per cent of the land has already entered into the CIPT regime or the transaction is occurring three or more years after the land entered the CIPT regime.”
The new law states that if the land held by the landholder has entered the CIPT regime, an annual one per cent per annum CIPT is payable at the end of the 10-year transition period.
“An ‘entry consolidation’ occurs where multiple parcels of qualifying use property are consolidated after 1 July 2024,” Butler said.
“The consolidated parcel of land enters the CIPT regime on the first date on which land that forms part of the consolidated land entered the regime provided that 50 per cent or more of the area of the consolidated land is tax reform scheme land.”
However, he added that if tax reform scheme land is consolidated with land that has not entered the regime and, as a result of the consolidation, less than 50 per cent of the area of the consolidated land is tax reform scheme land, then the consolidated land will no longer be tax reform scheme land.
“For example, if three parcels of qualifying use property were being consolidated and those three parcels entered the CIPT regime on 1 July 2024, 2 August 2025 and 3 September 2026 respectively, then the date that the consolidated land would have entered into the CIPT regime is the earliest of those dates of 1 July 2024,” he said.
“An ‘entry subdivision’ occurs where a parcel of qualifying use land (Parent Lot) is subdivided into multiple lots (Child Lots). The date that the Child Lots enter the CIPT regime is the date the Parent Lot entered the CIPT regime – not the date that the subdivision occurred.”
Furthermore, Butler said the CIPT regime seeks to phase out stamp duty on qualifying use property after a 10-year transition period and the first time a property enters the CIPT regime, the purchaser will have a choice to either pay the stamp duty as a lump sum payment that is consistent with the pre-1 July 2024 regime of paying duty 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, a 10-year transition period starts and an annual CIPT will begin to be payable on the 10th anniversary of the entry transaction whether that entry is an ‘entry transaction’, an ‘entry consolidation’ or an ‘entry subdivision’,” he said.
“In a similar way of levying land tax, an owner of CIPT property will be assessed for CIPT after the 10-year transition period ends and is based on the unimproved value of that land at midnight on 31 December. CIPT will be levied at one per cent per annum of the unimproved value of the land and the owner must pay within 14 days of receiving an assessment. The owner is prohibited from passing on CIPT to a residential or retail tenant.”
Regarding SMSFs, Butler said if the property has not yet entered into the 10-year transition period and the SMSF is purchasing the property outright without any borrowing, then the SMSF trustee will be required to pay the duty up-front.
“This is because a Vic Loan borrowing will most likely result in a charge being placed on the property in contravention of regulation 13.14 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR),” he said.
“Therefore, SMSFs will most likely only have the option of paying duty upfront on CIP on or after 1 July 2024. SMSFs will only be able to rely on an LRBA to borrow money to acquire the CIP and will not be permitted to seek a Vic Loan to pay CIPT as that would result in a contravention regulation 13.14 of the SISR.”
He added that if the property has already entered the 10-year transition period after 1 July 2024, the SMSF trustee should confirm the period remaining, if any, that the property can be acquired without duty and without CIPT being payable on that property.
“We refer to this situation as that a potential ‘free kick’ benefit can be factored into the purchase price,” Butler said.
“If the 10-year transition period has expired, then the SMSF trustee will have to pay the new over per cent per annum CIPT on the unimproved value of the property. However, there should be no upfront duty payment.”
He concluded that the CIPT regime will have a significant impact on CIP in Victoria and investors should be aware of how this new tax will impact their cash flow and their overall yield and returns from property.
“The CIPT is a complex regime and there is currently little guidance available on how this new tax regime will operate, especially its interaction with landholder duty. Accordingly, we strongly recommend that advance expert advice be obtained with regard to both purchasers and vendors,” he said.
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