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The new commercial and industry property tax is a complex regime that will impact cash flow and returns, a specialist law firm cautions.
Practitioners should start preparing for a new tax regime for commercial and industry property introduced by the Victorian government, with the new tax to start next month, DBA Lawyers warned in a recent article.
The Commercial and Industrial Property Tax Reform Act 2024 (Vic) (CPIT Act) was approved by Parliament on 14 May.
DBA Lawyers director Daniel Butler said this has left little time for practitioners and businesses to adjust to the next tax which will begin on 1 July.
“Broadly, the new tax relies on phasing out transfer duty over a 10-year period and replacing the upfront duty on subsequent transfers with an annual commercial and industrial property tax,” Butler said.
A property will enter the commercial and industrial property (CIPT) regime where:
- The transfer of property is a dutiable transaction that takes place on or after 1 July 2024.
- The property has a qualifying use.
- The transaction relates to at least a 50 per cent interest in the property (or that amounts to at least 50 per cent when aggregated together with other relevant acquisitions).
“The CIPT will apply to CIP that is defined to include property classified as commercial, industrial, extractive industries, infrastructure or utilities under the Australian Valuation Property Classification Code (AVPCC),” Butler said.
“The CIPT will apply to properties allocated within the 200 – 499 and 600 – 699 ranges. Property that falls within the AVPCC ranges is deemed to have a Qualifying Use.”
DBA Lawyers warned that the CPIT regime will have a significant impact on commercial and industrial property in Victoria.
“Investors in commercial and industrial property should be aware of how this new tax will impact their cash flow and their overall yield and returns from property,” Butler said.
The law firm explained that the CIPT regime seeks to phase out stamp duty on qualifying use property after a 10-year transition period.
The first time a property enters the CIPT regime, the purchaser will have a choice to either:
- Pay the stamp duty as a lump sum payment (which is consistent with the pre-1 July 2024 regime of paying duty); or
- Pay the value of the duty over a 10-year period with a government-facilitated loan (Vic Loan) plus interest.
Regardless of which option the purchaser chooses, a 10-year transition period starts and an annual CIPT will begin to be payable on the 10th anniversary of the entry transaction, the law firm said.
“In a similar way of levying land tax, an owner of CIPT property will be assessed for CIPT after the 10-year transition period ends and is based on the unimproved value of that land at midnight on 31 December,” it said.
“CIPT will be levied at 1 per cent per annum of the unimproved value of the land and the owner must pay within 14 days of receiving an assessment. The owner is prohibited from passing on CIPT to a residential or retail tenant.”
Butler noted that broadly where a contract is signed before 1 July 2024, the property will not enter the CIPT regime, even if the transaction is completed after 1 July 2024.
However, he warned that closer consideration needs to be given to a contract that may have been signed before 1 July 2024 where it is subject to a condition precedent.
“[For example], where the contract states that the contract does not come into existence until finance has been approved,” he said.
“A contract subject to a condition precedent regarding the formation of a contract does not become binding until that condition is satisfied. There may be an argument that this nevertheless constitutes an arrangement that is grandfathered.”
Certain transfers of CIP after 30 June 2024 that satisfy a relevant exemption from duty such as a change of trustee should not constitute an ‘entry transaction’, he said.
Butler said the CIPT is a complex regime and there is currently little guidance available on how this new tax regime will operate especially its interaction with landholder duty.
“Accordingly, we strongly recommend that advance expert advice be obtained with regard to both purchasers and vendors of CIP in Victoria moving forward,” he said.
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