Victorian 2023-24 Budget

On 23 May 2023, the Treasurer of Victoria delivered a Budget focused on repaying the billions of dollars the state of Victoria borrowed during the COVID-19 pandemic. This Tax Insight focuses on the various proposed amendments to state tax rules, which are expected to raise an additional $8.6 billion over the next four years.

1. Abolition of lump-sum duty system for commercial and industrial properties

The current lump-sum stamp duty system for commercial and industrial property will transition to an annual property tax.

From 1 July 2024, a purchaser of commercial or industrial property can either:

(a)   Pay the property’s final stamp duty liability upfront (i.e., progressive rates of up to 6.5%); or

(b)   Transition to the annual payment system by opting to pay the final stamp duty liability over 10 years through a ‘government-facilitated transitional loan’ equal to the stamp duty and interest.

After ten years has elapsed from the date the ‘final’ stamp duty liability was triggered, the landowner will pay an annual property tax equivalent to 1% of the unimproved value of the land. Any subsequent purchase of the property will be exempt from duty, although where the initial buyer opted for the ‘government-facilitated transitional loan’ option and less than ten years has elapsed, the subsequent buyer will be obligated to pay off the loan before transitioning to the 1% annual property tax.

The cumulative increase in the size of the Victorian economy as a result of this measure is expected to be up to $50 billion in Net Present Value terms.

We note there are limited details of the proposed transition from a stamp duty to property tax regime, including how it may impact indirect transfers of property such as declarations of trust, economic entitlements and share transactions which are currently subject to landholder Duty. There is also no detail given as to how commercial and industrial properties will be defined for property tax purposes, including where a single property has mixed uses (e.g., a combined commercial and residential building). Given the implementation of the property tax will be subject to further consultation, we presume these more complex issues will be dealt with at a later date.

2. Ten-year payroll tax and land tax surcharges

The Victorian Government’s COVID Debt Repayment Plan includes payroll tax and land tax charges that will apply for a period of ten years from their respective commencement dates.

The temporary payroll tax surcharge will apply from 1 July 2023 and require businesses with national payrolls over $10 million to pay a 0.5% payroll tax surcharge. A further 0.5% payroll tax surcharge will apply to businesses with national payrolls over $100 million (i.e., total surcharge of 1.0%).

Additionally, a temporary land tax surcharge will apply (in addition to existing land tax) from the 2024 land tax year. This will involve the tax-free threshold for general land tax rates temporarily decreasing from $300,000 to $50,000 and a flat surcharge and/or increased rate of land tax applying depending on the value of the property concerned.

These measures are, collectively, forecast to raise $8.6 billion over the next four years.

3. Payroll tax amendments

The payroll tax-free threshold will increase from $700,000 to $900,000 effective 1 July 2024, before increasing a further $100,000 to $1,000,000 effective 1 July 2025. The downside for businesses is that the deduction associated with the tax-free threshold will phase out for every dollar of taxable wages above $3 million, meaning businesses with Australia-wide taxable wages above $5 million will effectively no longer have access to the payroll tax-free threshold in Victoria.

Additionally, the payroll tax exemption for ‘high-fee non-government’ schools (being those that charge annual fees of more than $7,500) will be removed from 1 July 2024, bringing the payroll tax treatment of such schools in line with government schools.

4. Doubling of foreign owner land tax surcharge

Foreign owner land tax surcharge will double from 2% to 4% per annum, with the tax-free threshold for non-trusts reducing to $50,000 (as noted above). For trusts, the tax-free threshold remains at $25,000. This will bring Victoria’s foreign land tax surcharge rates into alignment with those of New South Wales.

5. Phased abolition of business insurance duty

Business insurance duty, which applies to various forms of business insurance (e.g., professional indemnity) will be abolished in a phased manner from 1 July 2024 to 30 June 2033, with the rate of duty (currently 10%) reducing by one percentage point each year.

Policies relating to personal insurances such as those imposed on motor vehicles, homes and home contents will continue to attract insurance duty at the current 10% and are not being reduced or abolished as part of this Budget.

Some further, less material announcements were also made in relation to land tax and landholder duty. 

TAKE AWAY

The state tax reforms announced by the Treasurer of Victoria will add increased cost and complexity to doing business or managing property in Victoria.  If you would like to discuss how the reforms will impact you or your business, please reach out to any of the following contacts:  Sam Mohammad, Mira Brewster or Theresa Myburgh.