The Victorian Government has passed changes to property tax that will come into force in three stages. Here is what you need to know for the first stage, commencing 1 January 2024.[1]
Land Tax and Windfall Gains Tax: a vendor or purchaser responsibility?
From 1 January 2024:
- Land tax: a vendor under a contract of sale can no longer pass on their land tax liability to the purchaser at settlement for contracts for sale that are less than $10 million. Properties sold for a purchase price of $10 million or greater are exempt.
- Windfall gains tax: A vendor under a contract of sale or an option agreement who has windfall tax assessed before the contract is entered into can no longer pass their windfall gains tax liability to the purchaser at settlement. This has particular implications for properties intended for rezoning, as discussed in the effects on property development section below.
The Victorian government’s rationale for the changes is to improve price transparency for property purchasers, meaning the purchase price will reflect the full amount of the property and the hidden costs often unveiled in adjustments will be reduced.
Considerations for parties when buying/selling from 1 January
Parties who enter into contracts of sale on or after 1 January 2024 will need to consider whether these changes affect their transaction and, if so, what amendments may be needed to their contracts. A failure to consider the implications may have an effect on the commercial value of a deal, and non-compliant contracts will also attract penalties. Accordingly, parties should note:
- Most land contracts allow the vendor to adjust land tax and windfall gains tax at settlement. These clauses will need to be amended for affected transactions.
- Other outgoings (rates, taxes, assessments, fire insurance premiums and other outgoings etc) can continue to be adjusted on settlement as usual.
Penalties will apply
Contracts of sale that allow adjustments in contravention of the changes will be unenforceable. This means vendors will need to account for those taxes themselves and will not be able to pass the costs along.
In addition, vendors will be penalised. For corporations, that is 300 units. With penalty units currently at $192.31 per unit, that is a penalty liability of approximately $60,000 per contract of sale.
The effect on property development
These are significant changes that will affect the property development industry over the coming years. We anticipate there will be an increase in property prices to incorporate land tax amounts and any potential windfall gains tax into the sale price.
Additionally, the changes will make it difficult for purchasers to obtain vendor approval for any rezoning applications during the contract period as the vendor will not want to bear any windfall gains tax that may arise prior to settlement as a result of successful rezoning. Accordingly, vendors are more likely to prohibit purchasers for seeking any form of a rezoning until the property has been transferred to the purchaser.
These substantial changes are going to be a lot to take in over the next couple of years. The next stage of changes will apply to the Vacant Residential Land Tax regime and will come into force on 1 January 2025 and 1 January 2026 respectively. We will keep you up to date with the changes as they come into force.
For further information, please contact:
David Sinn, Partner, Herbert Smith Freehills
david.sinn@hsf.com
[1] The State Taxation Acts and Other Acts Amendment Act 2023 (Vic), which amends (amongst other things) the Sale of Land Act 1962 (Vic).
