Commercial and industrial property tax reform – further developments

Introduction

The State Taxation Further Amendment Bill 2024 (Bill) was introduced in the Victorian legislative assembly on Wednesday 30 October 2024.

The Bill includes amendments to the Duties Act 2000 (Vic) (Duties Act) to support the implementation of the new commercial and industrial property tax regime (CIPT regime), which commenced operation on 1 July 2024.  Our related insight into the CIPT regime is available here.

In addition to the CIPT regime related changes, the Bill also contains a range of other amendments to Victorian state taxes, including stamp duty, payroll tax and land tax.  This alert only addresses the CIPT regime related aspects of the Bill.

Key highlights

• Currently, the Duties Act only provides limited exemptions where land that has entered the CIPT regime is subsequently transacted.
• The Bill proposes that the exemptions be expanded to cover certain transactions involving dutiable leases, economic entitlements and assets fixed to the CIPT land.
• Determining eligibility for the expanded exemptions may be a complex and onerous process. It will, in many cases, require extensive diligence regarding the history of the underlying property.

Brief outline of the CIPT regime

The CIPT regime operates to gradually abolish duty on the transfer of land that has been allocated with a qualifying use, and replace that revenue base with an annual commercial and industrial property tax.

Land with a qualifying use^[1] ‘enters’ the CIPT regime when certain dutiable transactions or relevant acquisitions under the Duties Act occur in respect of that land.  Land may also enter the CIPT regime through certain subdivisions and consolidations of land already within the ambit of the regime.

Once land has entered the CIPT regime, it is intended that subsequent transactions in respect of the land will be exempt from land transfer duty and landholder duty so long as the land continues to have a qualifying use.

However, under the CIPT regime as it stands, subsequent transactions involving dutiable leases, fixtures,^[2] economic entitlements or dutiable goods are currently not exempt. Before the CIPT regime commenced on 1 July 2024, the Victorian Government flagged that this was an unintended outcome.

As such the intent of the current Bill is to exempt transactions involving dutiable leases, fixtures or economic entitlements related to land that has entered the CIPT regime (referred to as ‘tax reform scheme land’), where appropriate duty was previously paid on or after the land entered the regime. A further exemption is also introduced to exempt the transfer of dutiable goods transacted as part of an arrangement where land entered the CIPT regime.

While this intent may appear simple, the proposed amendments to effect it are not.

Amendments to the CIPT regime

‘Standard’ and ‘Non-standard transactions’

The Bill makes several amendments to the Duties Act, the substance of which includes distinguishing between ‘standard transactions’ and ‘non-standard transactions.’

Standard transactions are those that were previously identified as eligible ‘tax reform scheme transactions’ such as the transfer of tax reform scheme land, or a declaration of trust over tax reform scheme land.

Non-standard transactions are:

• the grant, transfer, assignment or surrender of a ‘dutiable lease’ over tax reform scheme land. Broadly, a ‘dutiable lease’ is a lease for which any consideration other than rent reserved is paid or agreed to be paid in respect of certain other rights, including for example a right to purchase the land;
• a dutiable transaction that relates to fixtures located on tax reform scheme land; and
• the acquisition of an economic entitlement in relation to tax reform scheme land. Broadly, an economic entitlement includes arrangements relating to certain economic rights in respect of land, such as rights to income, profits or capital growth.

‘3 years after entry’ exemption

Under the proposed changes, non-standard transactions may be exempt from duty provided that at least 3 years has passed between:

• the entry date for the tax reform scheme land to which the non-standard transaction relates; and
• the date on which a contract or other agreement or arrangement for the non-standard transaction was entered into.

The ‘3 years after entry’ exemption available in respect of standard transactions has also been amended to align with this time period.

Previously, an exemption was available where the subsequent transaction occurred at least 3 years after the entry date (the focus was on the date that the subsequent transaction occurred).  The new requirement shifts focus to the date on which a contract or agreement for the subsequent transactions is entered into.  Contracts or arrangements entered into within the 3 year period but completed outside the 3 year period will no longer qualify for exemption.

Value conditions for exemption

In addition to the 3 year time period, the upfront exemption for duty in respect of non-standard transactions is also subject to a ‘value condition’. Broadly, this requires that the dutiable value of the tax reform scheme land used to calculate duty payable on the entry transaction (and on the acquisition of any further interests in the land):

• was not reduced by a lease over the land or part of the land;
• did not exclude the value of an interest in certain fixtures located on the land; or
• was not reduced by an economic entitlement in relation to the land.

The apparent rationale for these additional requirements is to recognise that “non-standard transactions may be structured so as to reduce the duty payable on the entry transaction”.  It reflects an intention that subsequent non-standard transactions should only be exempt where “appropriate duty is paid in relation to the tax reform scheme land on the entry transaction and when any further interest in the tax reform scheme is acquired”.

‘Fully assessed for duty’ exemption

Changes have also been made to allow non-standard transaction to access the exemption available when the entry transaction relates to a 100% interest.  This is relevant to non-standard transactions which occur within 3 years after an entry transaction.

Like the changes allowing for non-standard transaction to be eligible for the ‘3 year after entry’ exemption, the eligibility to the ‘fully assessed for duty’ exemption is also subject to the value condition outlined above. 

The value condition does not apply to standard transactions.

‘Same interest’ exemption

Under the current provisions, there are some circumstances where an exemption or partial exemption from duty can apply to a subsequent transaction that occurs within 3 years of the land becoming tax reform scheme land.

Broadly, this provides an exemption for a subsequent transaction to the extent that the dutiable property the subject of the subsequent transaction is the same or substantially the same as the entry interest for the land, or any further interest acquired in the land, upon which duty has already been paid.  This is relevant where, for example, an entry transaction for land relates to a less than 100% interest in the land and that same interest is subsequently transacted.  Although the transfer of a 50% or greater in land causes 100% of the land to enter the CIPT regime, the land does not become fully exempt from transfer duty on subsequent transactions until 100% of the property has been transacted or the 3 year entry rule is satisfied. The ‘same interest’ exception ensures that the interest which triggered entry into the CIPT regime (and on which duty was paid) is not subject to duty again.

This ‘same interest’ exemption is not available to non-standard transactions.  Amendments have been made to it to ensure that it only applies to standard transactions.

Commissioner’s discretion

A new Commissioner’s discretion has been included to allow the Commissioner to reduce the duty payable on a non-standard transaction relating to tax reform scheme land that would otherwise be ineligible for the ‘3 years after entry’ or the ‘fully assessed for duty’ exemption due to them not satisfying the ‘value condition’.

In exercising this discretion, the Commissioner must have regard to:

• the quantum of the entry interest and any further interest acquired in the land;
• the extent to which the value of the land on the entry transaction and on the acquisition of any further interest in the land:
  • was not reduced by a lease over the land or part of the land;
  • did not exclude the value of an interest in certain fixtures located on the land; or
  • was not reduced by an economic entitlement in relation to the land; 
• if a specified transaction occurred on or after 1 July 2024 but before the entry transaction for the land, the period of time that elapsed between the specific transaction and the entry transaction occurring;
• if a specified transaction occurred after the entry transaction for the land but before the non-standard transaction, the duty that was paid on that specific transaction; and
• any other matters that the Commissioner considers relevant.

By way of example, for land which enters the CIPT regime at a value reduced by a lease, an economic entitlement, or at a value which excluded certain fixtures on the land, the Commissioner’s discretion will be required to be sought before any whole or partial exemption can be obtained for each subsequent non-standard transaction in respect of the land.

Exemption for dutiable goods

Under the current provisions, there is an anomaly where no duty may be payable in relation to tax reform scheme land, but goods that were transferred together with that land would remain to be subject to duty.

This new exemption operates to provide a duty exemption for goods where they are the subject of an arrangement involving the tax reform scheme transaction that is exempt from duty.

Changes in use

‘Change in use duty’ is intended to apply when a dutiable transaction relating to tax reform scheme land was exempted from duty, but after that exemption was applied, there is a change in use of the land such that it no longer has a qualifying use and the person who had the benefit of the exemption, still holds the land.

The Bill also contains changes to the change in use duty, to accommodate the expansion of the availability of duty exemptions to non-standard transactions.

Interaction with landholder provisions

Amendments have also been made to the landholder provisions to exclude from landholder duty land holdings (other than dutiable leases) that are tax reform scheme land where ‘3 years has elapsed’ with the same revised timing with reference to contracts or other agreement or arrangements as outlined above.

There is also a new exclusion or partial exclusion, that intends to apply to landholdings that are related to non-standard transactions that would be eligible for a transfer duty exemption. 

These are:

• a ‘dutiable lease’ over tax reform scheme land; or
• an interest fixtures located on tax reform scheme land; or
• a ‘deemed’ interest in tax reform scheme land that is taken to be beneficially owned due to an economic entitlement.

Similar to the exemptions for transfer duty outline above, this new exclusion is also effectively subject to the same ‘value conditions’ and there is a new discretion from landholder duty in relation to these types of land holdings that mirrors the Commissioner’s discretion from transfer duty outlined above.   

Commencement

The amendments to the CIPT regime will commence the day after which the Bill receives Royal Assent. The Legislative Assembly next sits on 12 November.

Concluding comments

While the inclusion of non-standard transactions is a much-desired amendment to the CIPT regime, the provisions to effect this are complex and this is due, in part, to the fact that the existing CIPT provisions are complex. There are clearly more onerous requirements to be satisfied in relation to non-standard transactions as compared to standard transactions.

Further, when transacting land which is subject to a dutiable lease, economic entitlement or which has valuable tenant’s fixtures, the transition to the CIPT regime will be more complex, with various additional requirements to navigate.