Insights Library
New Commercial and Industrial Property Tax Commencing 1 July 2024
Legislation for the new Commercial and Industrial Property Tax (CIPT) has now passed Parliament and will start from 1 July 2024.
The property industry was taken by surprise when the Victorian government introduced the bill for this new tax earlier this year and now with less than 6 weeks before the new tax starts there is even less time to prepare.
According to the Government, the driving force for the new law is to remove the expensive barrier, that is stamp duty, and encourage businesses to expand and invest in Victoria. Whether this will have the intended effect will remain to be seen given that the Government has to date not provided any details of its financial modelling behind the changes. It also will in the long run give more certainty around the tax revenue to be raised annually from these properties rather than relying on the market and transactions.
What it will mean though for both buyers and sellers of commercial properties is that they do not have long to decide whether to enter into the contracts of sale for such properties before the effective date.
A summary of the new CIPT regime is set out below.
CIPT
From 1 July 2024, any commercial or industrial property that is brought into the new regime will be subject to a flat annual tax (the CIPT) of 1% of the unimproved land value (site value).
A commercial or industrial property will be brought into the new regime on an “entry transaction”. Generally, an “entry transaction” will be a contract of sale entered into on or after 1 July 2024 and the resultant dutiable transaction at settlement. That is, both the contract of sale and settlement will both need to occur after 1 July 2024. If the contract (or agreement) is signed before 1 July 2024 and the settlement occurs after 1 July 2024, the property will not enter the new regime. Stamp duty concessions will continue to apply, and these properties will enter the new regime provided other requisite conditions are also met.
CIPT will be payable on a property brought into the new regime on the 11th year after the entry transaction. That is, there is a transitional period of 10 years after the entry transaction before CIPT becomes payable.
Stamp duty will still be payable (one last time) at settlement of the entry transaction, but subsequent dutiable transactions of that property will be exempt from stamp duty. So, if the owner of a property that has entered into the new regime sells the property, the purchaser will no longer have to pay stamp duty on that property but will begin paying CIPT on the 11th year after the property entered into the regime, that is, 11 years after the previous owner transacted on the property to bring it into the new regime.
The CIPT will be in addition to land tax. However, unlike land tax, the CIPT will not be affected by aggregation of land value.
Landowners should take heed also as a subdivision of land may qualify as an “entry transaction”.
Land that is rezoned after 1 July 2024 may not attract CIPT but may be liable to windfall gains tax – we have discussed this in a previous article here .
Commercial and Industrial Property
The CIPT will only apply to commercial and industrial properties – it does not apply to residential properties or properties used primarily for primary production, community services, sport or heritage purposes.
Properties considered commercial or industrial for the purpose of the new CIPT include:
- Properties classified under commercial, industrial, infrastructure or utilities Australian Valuation Property Classification Codes; and
- Student accommodation used solely or primarily for housing tertiary students
Mixed-use properties will be subject to a ‘sole or primary use’ test to determine if the CIPT applies. The test examines factors like floor area, intensity of use and economic significance.
Concessions and exemptions may be applicable where relevant. For example, if part of a mixed-use property is used as a principal place of residence.
Transition Loan
The Victorian Government will make available to the first purchasers of a property that is brought into the new regime the option of accessing a government-facilitated transition loan to finance the upfront stamp duty payable (for the last time) repayable over the 10-year transition period. This offers purchasers an opportunity to spread out the upfront cost of stamp duty over time. It is still not clear what the interest rate will be on this government loan but it is expected to be less than commercial bank lending rates in order to be attractive. These loans will likely not be available to self-managed super funds however due to strict borrowing rules.
If the property is resold before the CIPT becomes payable (that is, before the 11th year after the entry transaction) the balance of the stamp duty payable on the entry transaction will be payable at settlement of that property. That is, the loan must be repaid when the first purchaser is not the owner of the property anymore.
Current owners or prospective purchasers of commercial, industrial or mixed use properties should consider the impact of the new regime before 1 July 2024 and the costs/benefits of executing an agreement prior to this date to suit their intended holding.
If you require any advice on the impact of these new laws on your property or your prospective purchase, please contact our team today.
