THE PROPERTY DEVELOPMENT REVIEW
significant tax complications and therefore is not always feasible. New problems Apart from the existing problems, the proposed changes to the VRLT rules carry new problems. Firstly, the expanded rules are proposed to take affect from the 2025 land tax year which, according to drafters of the new rules, provides “adequate time” for landowners to deal with the changes. However, the application of the rules in the 2025 land tax year looks back to the use of the property starting from 1 January 2024 – about two months away. As properties count as vacant if not occupied for more than six months in a year, properties at risk of the VRLT effectively need to be occupied starting no later than July 2024. So in reality, many landowners have approximately six to seven months to get their head around yet another set of new tax rules (assuming Parliament passes the rules by the end of 2023), ensure that any properties undergoing construction or renovation are completed within the relevant timeframe, ensure that properties are fit for occupation and ensure that the properties will actually be occupied for the relevant periods. Adequate time? I think many would disagree. Secondly, when it comes to the application of the rules to unimproved or undeveloped properties, the proposed rules, as currently drafted, provide the Commissioner of State Revenue with a range of discretionary powers to decide if properties should be subject to the VRLT. This could give rise to a lot of uncertainty and lead to potentially harsh outcomes for landowners. While taxpayers may sometimes benefit from the exercise of the Commissioner’s discretion in their favour, leaving broad discretionary powers with the Commissioner is unwise. With various circumstances (such as planning delays) often outside a landowner’s control, this could leave room for subjectivity and disputes regarding when and how the discretionary powers should be exercised. Be aware and act now Unfortunately, with these VRLT changes Victoria is expected to maintain its reputation for the highest property taxes, and time will tell if the changes ultimately hinder, instead of help, the housing issues. Developers and holiday homeowners need to be aware of the proposed changes, consider the potential impact on their specific circumstances and explore mitigating strategies where required. The rules are complex and the quantum of VRLT could be significant (as it is a percentage of the CIV) - so property owners should tread carefully.
rationale for the tax is questionable, as in its five year tenure we have not seen any statistical evidence of the tax achieving its purported aims. In introducing the proposed expansions to the VRLT rules, it was recognised that the issue of housing affordability remains acute across the whole of Victoria with the expectation that expanding the VRLT to the entire state will ease pressure on rents and prices. Current evidence makes this unlikely. When the VRLT was first introduced in 2017, the government recognised that “there are legitimate reasons why some properties have been left unoccupied and sought valuable input from industry stakeholders on the nature and extent of the exemption that will be required” and designed exemptions for holiday homes, city properties used regularly for work purposes, and residences undergoing renovations or rebuilds. However, there was a lack of proper industry consultation, leaving many persisting problems that are expected to compound with the proposed VRLT expansions. Existing problems for residential developers A key problem relates to residential projects that suffer delays in construction, or that have completed but the developers suffer issues with selling all residential stock. In those scenarios, a developer could face prolonged holding costs (such as ordinary land tax) and the VRLT at 1% of the CIV of the relevant properties. It is mind-boggling that developers, who are instrumental contributors to the supply of housing (and help advance the government’s housing policy), can get stuck with a bill for the VRLT despite all efforts to complete developments and sell properties in a timely manner. This appears to be an unintended consequence when you look at the background policy statements referred to above, and is no doubt unfair for the developers as well as the eventual purchasers of the properties given the VRLT would generally factor into the prices for the properties. While the above scenarios can affect several developers across multiple land tax years, there is next to no relief for such issues in the relevant VRLT legislation. This leaves many developers with limited potential solutions to deal with the issue. Existing problems for holiday homes Another key problem is one that involves holiday homes. Many holiday homeowners hold their respective holiday homes in discretionary trusts. However, the holiday house exemption only applies where, among other things, the owner of the holiday home also has a principal place of residence in Australia. This means that, essentially, the owner of the holiday house needs to be an individual, and holiday homes owned by trusts, such as discretionary/ family trusts and companies, are not eligible for the exemption. While there may be solutions involving the transfer of the ownership of the holiday home to an individual, often a transfer of ownership involves
November / December 2023 – 9
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