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The Victorian Labor government’s decision to abolish stamp duty property tax for commercial and industrial properties was announced as part of the State Budget on 23 May 2023.

But what does it mean for property investors?

Craig Whatman heads the transaction taxes team at Pitcher Partners, and advises on all aspects of goods and services tax, stamp duty (nationally), land tax (nationally), windfall gains tax, the Growth Areas Infrastructure Contribution and fuel tax credits.

He shares his insights with EA to help you understand what the changes will mean for property investors in Victoria – changes that Mr Whatman says won’t be completely known for some months to come.

Understanding the new regime

The 2023-24 State Budget saw the Treasurer announce a significant reform to Victoria’s duty regime, with duty on commercial and industrial properties to be replaced over time with an annual property tax.

Based on the government’s media release, Mr Whatman says the changes will be as follows:

• From 1 July 2024, commercial and industrial properties will transition to the new system as they are sold, with annual property tax equal to 1% of the land’s unimproved value to be payable from 10 years after the sale transaction.

• The first purchaser of eligible property after 1 July 2024 can choose whether to pay the final duty liability as an upfront lump sum, or as fixed instalments over 10 years (with interest applied).

• Once the property enters the new system after 10 years, no further duty will be payable when the property is sold and from then on the annual property tax will apply.

The new regime will not apply to the current owner of any commercial or industrial property bought before 1 July 2024.

What does the change hope to achieve?

The government is promoting the change as a “concessional measure, which will help business growth in Victoria and boost the state’s economic activities and employment”, says Mr Whatman.

Mr Whatman considers it a potentially positive move and believes “abolishing stamp duty on commercial and industrial property purchases will boost mobility and help businesses’ cashflow position”. 

But …

“The new regime also could result in significant holding costs for owners of these properties. For investors who are looking to hold properties long term, these added holding costs over an extended period could offset the benefit of the upfront duty saving,” says Mr Whatman.

Crunching the numbers

Imagine that, on 1 July 2024, Zoe buys a commercial property and pays $10 million. Based on current rates, the duty that is payable would total $630,000. But, instead of paying it all upfront, Zoe elects to pay the duty in instalments, spread over 10 years.

If Zoe holds the property for 15 years, the new regime means she will be liable for the additional 1% annual property tax on the property’s unimproved land value in the last five years of her ownership. Assuming the property’s unimproved value (for land tax purposes) is $6 million, the additional property tax payable over those five years adds up to $300,000.

So, under the new regime, the duty (plus accrued interest) and the additional annual property tax totals $1,044,534. Under the current system, though, Zoe would only be liable to pay $630,000 of upfront duty.

Planning to buy property?

If you’re planning to buy commercial and industrial properties in the next 12 months, Mr Whatman recommends paying “close attention to the cost and benefit that the new regime could bring”. 

As the example shows, the new regime may not necessarily be beneficial for certain types of investors or businesses. For anyone planning long-term investment in commercial or industrial properties, consider making that purchase prior to 1 July 2024 to avoid the potential for the additional 1% annual property tax to apply, should they hold the property longer than 10 years. 

Other issues around clarifying the definition of commercial and industrial property are also important to note.

The bottom line

The announcement is new and there is still more to learn about it. Like many taxes, the changes look like they could be positive for some but potentially negative for others.

Victorian Treasurer Tim Pallas said the government will consult with business and industry in coming months, with the final details being made clear by the end of the year. Go deeper: Fixed vs variable:what’s the best choice right now?