What Victoria’s new commercial property tax means for investors

Whether land has a qualifying use is determined by the Australian Valuation Property Classification Code that is applied by the Valuer General. Land with an AVPCC in the range from 200 through 299 (commercial), 300 through 399 (industrial), 400 through 499 (extractive industries) and 600 through 699 (infrastructure and utilities) will have a qualifying use. So too will land that is used for eligible student accommodation. Land that is classified for any other purpose (including residential, community or heritage use) will not qualify.

If an entry transaction occurs in relation to a part interest in land, the whole of the land is brought into the CIPT scheme.

Dutiable transactions involving “economic entitlements”, which typically arise under property development agreements or property-linked financial instruments, will not enter land into the scheme. Further, transactions that are exempt from duty or eligible for corporate reconstruction concessions will not bring land into the scheme.

To illustrate, assume a unit trust owns 100 per cent of a $10 million warehouse. An investor buys 50 per cent of the units in the trust on October 1, 2024. The investor will be deemed to have acquired a 50 per cent interest in the land. Landholder duty will apply to the unit purchase. 100 per cent of the land will enter the CIPT scheme on October 1, 2024. CIPT will apply from January 1, 2035.

As a transition measure, transactions that occur after July 1 2024, pursuant an agreement or arrangement entered into before that date, will not bring land into the scheme.

If a subdivision scheme is registered that relates to two or more parcels of land, and one or more of the parcels is scheme land, an “entry consolidation” may occur. The scheme land must make up at least 50 per cent of the land area in the consolidated lot. The entry date for the consolidated lot is taken to be the first entry date for scheme land included in the consolidated lot.

For example, assume a company acquired Lot 1 in 2023. The company buys adjoining Lot 2, which is scheme land and larger, on July 1, 2027. The two lots are consolidated on July 1, 2029. The consolidated lot is scheme land and has an entry date of July 1, 2027. CIPT will apply to all of the land from January 1, 2038.

If scheme land (a parent lot) is subdivided (creating child lots), an “entry subdivision” will occur. The child lots will be included in the CIPT scheme and have the same entry date as the parent lot.

CIPT will apply, in addition to land tax, at a rate of 1 per cent based on the unimproved land value. If the land is exempt from land tax, CIPT will not apply.

For “BTR land” that qualifies for build-to-rent land tax concessions, CIPT will apply at a concessional rate of 0.5 per cent. This is unlikely to apply in practice, given residential land does not have a qualifying use and student accommodation does not qualify for BTR land tax concessions.

Certain restrictions will apply to the passing on of CIPT to tenants and purchasers.

Future land transfers involving scheme land will be exempt from duty. Consistently, landholder duty will not apply to future share or unit transactions involving a company or trust to the extent it holds scheme land.

The duty exemptions will be immediately available if a 100 per cent interest in the land is brought into the scheme through one or more transactions subject to duty. Otherwise, the land will need to be in the scheme for at least three years before the full duty exemptions apply (partial exemptions may apply in that period).

If scheme land ceases to have a qualifying use in the 10 years following a duty-exempt transaction, the duty may be clawed back.