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The vacancy residential land tax (VRLT) was expanded late last year to apply to all residential land in Victoria and not just specific inner suburbs within metropolitan Melbourne.
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Vacancy tax expansion: Getting your house in order by 1 July
24 April 2024
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The expansion commences from 1 January 2025, and applies the VRLT based on the status of the property during the 2024 calendar year. In this respect, if the residential property was vacant for more than 6 months (in aggregate) in the 2024 calendar year, VRLT will be imposed unless an exemption applies. The rate of VRLT is initially 1% of the capital improved value (CIV) of the property, but that moves up to 2% in the second consecutive year the property has been vacant and then 3% of the CIV for subsequent years.
Accordingly, if a residential property has been unoccupied since the start of the 2024 calendar year, and no exemption applies, owners have until 1 July 2024 to ensure that the property is occupied for at least 6 months or VRLT will apply.
Land will be taken to be vacant if it has not been used and occupied for a period (in total) of greater than 6 months by either:
(a)The owner of the residential land as the principal place of residence of the owner;
(b) The owner’s permitted occupant as the principal place of residence of the occupant; or
(c) A natural person under a lease or short-term letting arrangement made in good faith and not for the purpose of avoiding the payment of VRLT.
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Owners should be aware that relying on (a) may result in the Victorian Commissioner of State Revenue (Commissioner) no longer treating any other residential property owned by the owner as constituting their principal place of residence (PPR). This may have adverse effects on the owner’s eligibility for other tax concessions that are reliant on such PPR status.
In terms of satisfying (c), it remains to be seen whether the Commissioner will accept a lease or short-term letting arrangement with a related party at or below market rent as one entered into in good faith and not for the purpose of avoiding VRLT. Unlike some other state and federal anti-avoidance provisions, these do not require avoidance of VRLT to be the “sole” or “dominant” purpose. Nevertheless, how the Commissioner and ultimately the courts will interpret this restriction remains to be seen.
Owners should also note that the existence of a lease or short-term letting arrangement made in good faith (and not for the purpose of avoiding VRLT) is necessary, but not - of itself - sufficient, to escape VRLT. The property also must be ‘used and occupied’ by a natural person for at least 6 months under that arrangement. Arguably a tenant still ‘uses and occupies’ a property when away for a weekend or even for a (more lengthy) holiday. It is difficult to ascertain precisely where the line will be drawn in the case of tenancy absences, but owners should note that the Commissioner regularly inspects water and other utility usage to assess whether a property is occupied.
Developing or renovating or making habitable
Land undergoing construction or renovation (or that is uninhabitable) as at the end of the year preceding the tax year will fall within the scope of VRLT. However, owners will have a period of 2 years to complete the construction or renovation from when the building permit is issued (or to make the property habitable) before VRLT may be levied. This 2-year period can be extended if the Commissioner is satisfied that there is an acceptable reason for the construction or renovation not being completed (or for the property not having been made habitable).
Holiday home exemption
The VRLT regime includes an exemption for holiday homes in certain circumstances.
The holiday home exemption is available for one ‘vacant’ property if the Commissioner is satisfied that the owner or a ‘vested beneficiary’ of a trust to which the land is subject:
(i)Used and occupied the property as a holiday home for a period of at least 4 weeks (whether continuous or aggregate); and
(ii) Used and occupied other land in Australia as their principal place of residence.
As currently drafted, the holiday home exemption does not apply to trusts or companies, other than trusts with a ‘vested beneficiary’. A trust with a vested beneficiary is a rare type of trust, meaning that standard discretionary and unit trusts will not be eligible for the holiday home exemption. The government has committed to extending this exemption in 2024 to properties held in companies and trusts as of 28 November 2023, but no draft legislation has yet been released.
While there may be some possible solutions if the government reneges on its commitment to extend the holiday home exemption to companies and trusts, owners should tread cautiously before taking any steps designed to fall within the exemption. You should seek professional advice before taking any action to ensure that any proposed solution achieves its goals, is commercially and legally viable and does not inadvertently trigger other land tax, vacancy tax, duty, or income tax liabilities in the process.
Takeaway
By no later than 1 July 2024, owners will need to ensure that they have appropriate occupancy arrangements in place for their residential properties for the rest of the 2024 calendar year or VRLT may apply.
As currently drafted, residential properties held by companies and discretionary trusts (or indeed any trusts other than trusts with a vested beneficiary), will not be able to access the 4-week holiday home exemption.
If new legislation is not introduced to extend the holiday home exemption to companies and trusts, owners should tread cautiously and should seek professional advice prior to taking any action designed to fall within the terms of the holiday home exemption.
By Jeremy Makowski, partner, Coghlan Duffy Lawyers
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