Knock, knock...anybody home? If not, you'll be taxed23 February 2018
Residential land that is "vacant" in the inner and middle suburbs of Melbourne is now subject to an annual tax of 1% of the property's capital improved value under the Victorian Residential Land Tax (VRLT), which was introduced on 1 January this year.
Residential property developers and landowners must now consider the VRLT among other land tax considerations and the impact it may have on the process of site acquisition and construction, sites currently under construction and unsold stock.
When does the VRLT apply?
VRLT is imposed on residential land—land that is capable of being used solely or primarily for residential purposes, but does not include commercial residential premises, residential care facilities or land used for supported residential services or retirement village services. Concepts of "capable of being used" or "residential purposes" are not defined in legislation, however, the State Revenue Office (SRO) has provided some guidance on this.
The areas where VRLT is imposed include the following municipalities: Banyule, Bayside, Boroondara, Darebin, Glen Eira, Hobsons Bay, Manningham, Maribyrnong, Melbourne, Monash, Moonee Valley, Moreland, Port Phillip, Stonnington, Whitehorse and Yarra.
VRLT is calculated on the capital improved value of residential land, which is the valuation of land together with its improvements such as buildings. VRLT is therefore imposed on a significantly higher valuation of land compared to ordinary land tax.
A property will be considered "vacant" for the purposes of a land tax year if it has not been "used and occupied" in the preceding year for a period of more than six months, whether continuously or in aggregate.
Residential land will be considered "vacant" if the six month threshold applies irrespective of whether a landowner undertakes active marketing of residential land for sale, lease or short-term occupation (e.g. Airbnb).
Several exceptions apply, including land exempt from land tax (e.g. principal places of residence recognised by the SRO), holiday homes or homes used for attending the owner's place of business.
Land being constructed or renovated with a permit will not be considered vacant for up to two years from when construction or renovation starts. Under certain circumstances the Commissioner can extend this period. The commencement date of construction is deemed to be the date of issue of a relevant building permit. This does not apply to works not requiring a permit.
In addition to the above exceptions, if a landowner has acquired a property in a particular year, they are exempt from the VRLT for the next land tax year, that is, the next calendar year. For example, if a landowner effects settlement of residential land in 2018, it is exempt from any VRLT in the 2019 land tax year.
Landowners are required to notify the SRO of any vacant residential land by 15 January of the relevant land tax year via an online portal.
The SRO has provided guidance that if a landowner believes their residential land is not considered vacant for VRLT purposes, it does not need to make this notification. It does, however, reserve the right to make an enquiry about any residential land and has advised that landowners who do not make this submission should maintain proper records of occupancy rights, such as leases, to be provided to the SRO if an enquiry is made.
Key considerations to keep in mind
If there is a possibility that residential land may be subject to the VRLT, now or in the future, landowners and developers should consider:
- whether its place of residence is recognised by the SRO as their principal place of residence
- whether vacant residential land held can be leased to a natural person under a bona fide arrangement
- seeking advice as to whether any exemptions are applicable or whether land held is "capable of being used for residential purposes"
- effecting settlement of any contracts of sale of residential land before 31 December 2018 if selling land, to avoid VRLT liability in the 2019 land tax year
- whether contractual provisions require the purchaser to pay for the vendor's VRLT liability by way settlement adjustments, if purchasing land—It is commonly held that it is inequitable for a purchaser to pay for a vendor's VRLT liability
- if the land to be developed is currently classified as residential land under these provisions and whether development of that land will be completed within two years from commencement of construction
- seeking advice as to whether any exemptions apply to any unsold stock of residential land in a development portfolio, and
- if the land is owned by a foreign landowner, and
- whether it is also liable for the federal Annual Vacancy Charge administered by the Australian Tax Office.
If you are uncertain about whether the VRLT applies to your land, it is recommended that you seek advice.