As you may have picked up in recent media, the Victorian Government has passed new legislation which will, over time, replace transfer (stamp) duty with a new tax scheme for commercial and industrial properties – the Commercial and Industrial Property Tax (‘CIPT’) scheme.
The Commercial and Industrial Property Tax Reform Act 2024 (Vic) (‘CIPT Act’) came into effect from 1 July 2024 and affects all contracts of sale for commercial and industrial property which are signed and settled after 1 July 2024.
Read on to find out the key facts which organisations need to know about the new scheme.
How does the CIPT work?
CIPT will be an annual payment in addition to existing rates and taxes on the land. The rate of CIPT will be equal to 1% of the unimproved value of the land. CIPT will apply:
- to properties with a “Qualifying Use”;
- after a 10-year transition period following an “Entry Transaction”; and
- where no exemption applies.
CIPT will commence to be payable by the owner of the land at the time when the 10-year transition period expires.
Qualifying Use – which properties are caught by the CIPT net?
‘Qualifying Use’ is defined in the CIPT Act as a property which:
- has a commercial or industrial property classification under the Australian Valuation Property Classification Code (200-499 or 600-699); or
- is used for student accommodation.
These codes will be displayed on the property’s council rates statement, or a land tax clearance certificate provided by the State Revenue Office.
Properties with a mixed use will be within the CIPT net where the property is used primarily for a Qualifying Use.
What is an Entry Transaction?
Properties with a Qualifying Use will enter the CIPT scheme where one of the following four property dealings occurs after 30 June 2024:
- Transfer of more than 50% of the land
More than 50% of the total land ownership is transacted and transfer duty is payable (where the parties entered into the agreement to transfer the land after 30 June 2024).
- Change in ownership of landowner
More than 50% of the ownership of a landowning entity is transacted and landholder duty is payable (where the parties entered into the agreement to transfer ownership of the landholder after 30 June 2024).
- Consolidation
A plan of consolidation is registered, in which 50% or more of the consolidated land is already subject to the CIPT scheme. The remainder of the land will be brought within the scheme when the plan of consolidation is registered, and will be deemed to have the same CIPT entry date as the existing CIPT land.
- Subdivision
A plan of subdivision is registered, where the parent title was already subject to the CIPT scheme (noting the subdivision won’t bring the child lots into the CIPT scheme since they were already in it, but the child lots will retain the same CIPT entry date as the parent title).
Importantly for organisations with non-profit status, the sale of land with a Qualifying Use is not an entry transaction where the sale is exempt from duty pursuant to the Duties Act 2000. For example, where a charitable entity purchases land with a qualifying use and is entitled to an exemption from transfer duty, that purchase is not an entry transaction and therefore will not trigger entry into the CIPT scheme.
Selling or purchasing CIPT land?
The following process will apply to any sale of land with a Qualifying Use where the contract of sale was signed after 1 July 2024 and no exemption is available:
- At settlement of the Entry Transaction, transfer duty will be payable one final time.
- A 10-year transition period commences from the date of settlement. During the transition period, no CIPT or transfer duty is payable in relation to the property. In theory, the property could be transacted multiple times during the transition period without payment of transfer duty, as long as it continues to be held for a qualifying use.
- CIPT will first be payable for the calendar year commencing immediately after the 10 year anniversary of the original qualifying settlement. As an example, if the Entry Transaction settlement occurs on 30 June 2025, CIPT will start to be payable in 2026.
- From there onwards, CIPT will be payable annually at a rate of 1% of the unimproved value of the land.
Importantly, vendors cannot adjust CIPT under the contract of sale or otherwise make the purchaser liable to reimburse the vendor for any CIPT liability, except where the sale price exceeds the ‘high value threshold’ (currently set at $10 million).
Landlords also must not require any residential or retail tenants (as defined by the Residential Tenancies Act 1997 and Retail Leases Act 2003 respectively) from paying or reimbursing the CIPT. However, there is no restriction from recovering CIPT from non-retail commercial tenants.
Transition loan scheme
The Victorian Government is offering transitional loan schemes to finance the payment of transfer duty on the Entry Transaction. This is an optional program to allow purchasers to spread out the cost of transfer duty over a 10 year period at a fixed interest rate.
The loan will be secured with a statutory charge over the property and must be repaid over the 10 years following settlement (i.e. the transition period).
Change in use
If, during the transition period, the property ceases to be used for a qualifying use (e.g. it is redeveloped into residential premises), no CIPT will be payable. However, the next sale of the property will be subject to the usual transfer duty.
If the transition loan scheme applies to the property, the loan must be repaid immediately upon the change of use or sale of the property.
Exemptions from CIPT
CIPT is chargeable on land which, at 31 December in the preceding year:
- was subject to the CIPT scheme;
- was no longer in its 10-year transition period;
- had a Qualifying Use; and
- was not eligible for any exemptions from land tax under the Land Tax Act 2005.
Therefore, properties which qualify for an exemption from land tax (such as properties used and occupied exclusively for charitable purposes) will also receive an exemption from paying CIPT.
How we can help
The Commercial Real Estate team at Moores has extensive experience in all types of property dealings and can provide tailored advice on how CIPT may impact on your organisation’s properties.
Contact us
Please contact us for more detailed and tailored help.
Subscribe to our email updates and receive our articles directly in your inbox.
Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.