Victorian CIPT Reform: Stamp Duty Out, Annual Tax In for Commercial and Industrial Property

Victoria is preparing to phase out stamp duty on commercial and industrial property and replace it with an annual tax The Commercial and Industrial Property Tax Reform Bill has now passed both houses of the Parliament and will become law on 1 July 2024. The legislation creates a new annual property tax that will replace stamp duty (which, by the way, is now called land transfer duty '€“ because documents aren't "stamped" with duty anymore) on commercial and industrial property acquisitions. It will be known as the "CIPT" (commercial and industrial property tax). The State government has promoted the economic benefits of the change as freeing up capital for business and encouraging business to invest in buildings and infrastructure, thus accelerating business growth and boosting jobs. The new scheme applies only to commercial and industrial property, and eligible student accommodation.'  It does not apply to:

• residential property; or
• primary production land; or
• land used for community or sport, and heritage and cultural purposes.

What is "commercial and industrial" property?

This is determined by reference to property classification codes allocated to every property in Victoria for valuation purposes, known as the Australian Valuation Property Classification Codes (AVPCCs).'  Here is a brief summary of what is included in these codes:

Codes	Category	Examples of properties covered
200s	Commercial	Commercial development land, offices, retail, hotels, hospitality, entertainment, tourism, car parks, advertising
300s	Industrial	Industrial development land, manufacturing, warehouse/distribution/storage, refinery, abattoirs
400s	Extractive industries	Minerals, quarries, mines
600s	Infrastructure and utilities	Electricity generation and distribution, waste disposal/treatment/recycling, water treatment and supply, transport (road, rail, air, marine)

  If a property includes some land covered by the scheme and other land that is not, the test for inclusion in the scheme will be the "primary" use of the property. The new scheme will replace stamp duty which is currently charged on every sale of commercial and industrial property based on its sale price or capital improved value, whichever is higher (the top rate is 6.5% above a value of $2m) with an ongoing annual tax at 1% of site value (0.5% for "build to rent" projects). The CIPT will be charged in addition to normal land tax.'  It will be levied on a calendar year basis (the same as land tax) and assessed based on the site value for the property as at 31 December on the preceding year.

This is how the scheme will work

• CIPT only applies to commercial and industrial property that has "entered" the new tax reform scheme, but the commencement of CIPT is delayed for 10 years (see below);
• A property will "enter" the scheme when the first sale occurs on or after 1 July 2024 (we will refer to it as scheme land). Normal duty is payable on this transaction, which is referred to as the "entry transaction". The contract must be entered into on or after 1 July 2024 so settlements on or after that date, but which arise from contracts entered into before then, are not included;
• All future sales of the property are duty free; and
• CIPT commences 10 years after the "entry transaction" regardless of whether, or how often, the property has changed hands since it first entered the scheme.

If a transaction that would otherwise bring a property into the scheme is exempt from duty, then the property will not enter the scheme, meaning CIPT will not apply. Examples of duty exempt transactions include certain transfers of property included in a deceased estate, transfers that result from change of trustee or distributions to beneficiaries of a trust, and land purchased by Councils and eligible charities for community purposes. These scenarios help explain how the new scheme will operate:

'	'	Stamp duty	CIPT commences
First sale	1 July 2025	Yes	1 January 2036
Second sale	1 April 2030	No	1 January 2036
Third sale	1 August 2036	No	CIPT applies
Fourth sale	1 May 2040	No	CIPT applies

As illustrated above, a person who buys commercial or industrial land that is not yet in the scheme, pays stamp duty but does not have to pay CIPT for a period of 10 years (we will refer to it as the CIPT holiday). A person who buys commercial or industrial land that is already in the scheme (let's call it scheme land) pays no duty and gets the benefit of what is left of the 10 year CIPT holiday. If they buy the land after the 10 year CIPT holiday has ended, then CIPT applies to the property as purchased, in the same way that normal land tax does now. A person who currently owns commercial and industrial property and intends to keep it for the long term will not pay CIPT. When it is eventually sold (thus entering the scheme) the purchaser will pay duty and then get the benefit of the 10 year CIPT holiday.

Can the owner of CIPT land pass on the tax to its tenant?

Yes, provided that the lease is not a retail lease (the Retail Leases Act 2003 will be amended to prevent this).

How will the new tax affect value and pricing?

Time will tell. But consider this scenario '€“ two identical warehouse properties next to each other, one is not in the scheme and the other has been in the scheme for 5 years. A buyer of the scheme land will not have to pay duty and will get the benefit of the remaining 5 years of CIPT holiday. A buyer of the non-scheme land will have to pay duty but will get the benefit of the full 10 year CIPT holiday. Another scenario '€“ one warehouse is leased to a retail tenant and the CIPT cannot be recovered from the tenant. The other warehouse is leased to a commercial tenant and the CIPT is included in the outgoings paid by the tenant. The net holding costs for the owner with the retail tenant are higher than for the owner with the commercial tenant. This may affect the value of the freehold property.' '  Also, market rentals may also be impacted by whether or not the tenant is required to bear the cost of the CIPT.

Will CIPT be adjusted at settlement?

If a person buys scheme land after the 10 year CIPT holiday has ended (i.e. after CIPT becomes payable), the CIPT will not be adjusted at settlement. So, if the owner has paid the CIPT for a full year it will not be able to obtain a pro-rata adjustment at settlement. However, this only applies to properties that are acquired for a price of $10 million or less.

What if only a partial interest is acquired?

If the interest acquired is less than 50% then duty is paid in the normal way and nothing else changes - the property does not enter the scheme. However, if the interest acquired is 50% or more then the whole property enters the scheme, triggering the commencement of the 10 year CIPT holiday. Duty on the interest acquired is payable, in the normal way.'  It's also important to be aware that partial interests acquired over a 3 year period will be aggregated to determine whether the property enters the scheme. The following example illustrates how this works:

Date	Interest acquired	Duty payable	Aggregate	Property enters the scheme
1 August 2024	10%	Yes		No
1 July 2025	25%	Yes	35%	No
1 January 2026	12%	Yes	47%	No
1 July 2027	10%	Yes	57%	Yes

 

What about acquisitions of indirect interests, such as shares in a company or units in a trust?

If commercial or industrial property is held in a company or a trust, then the same basic principles apply such that acquisitions of these indirect interests which amount to 50% or more will also result in the property being brought into the scheme.

Can non-scheme land be consolidated with scheme land?

Yes, but if the scheme land represents 50% or more of the total consolidated land, the whole parcel becomes scheme land. This means that the non-scheme portion of the land will become subject to CIPT.

What if a property that is in the scheme later changes its use, so that it no longer qualifies to be in the scheme?

In this case, the property drops out of the scheme, meaning that the CIPT ceases to apply, but the property also falls back into the normal stamp duty regime. Should this happen, there is provision for a "claw back" of duty that should have been paid on previous "duty free" acquisitions. However, a discount is applied at the rate of 10% for every year since that previous transaction.'  For example, if that transaction occurred 7 years ago then the "claw back" duty payable would be 30% of the full rate. Note that there is a strict obligation on the owner to notify the State Revenue Office of the change of use within 30 days. Finally, you may have heard about "transitional loans". The State government is offering a loan to eligible persons to fund the duty that is to be paid on the first sale of a commercial and industrial property after 1 July 2024 that brings it into the scheme. It only applies to properties acquired for a price up to $30 million, and the interest as well as other loan terms and conditions will be "commercial". The loan will be a first charge against the property, which may present difficulties for buyers who are relying on bank funding for the purchase. As with all tax laws, there are very stringent anti-avoidance provisions within the new CIPT legislation. We emphasise the new legislation is complex, especially for partial interest transactions and indirect interests, and we strongly recommend that you seek legal advice before committing to any sale or acquisition of a commercial or industrial property on or after 1 July 2024.