Landmark reform to abolish stamp duty on commercial and industrial property

Cited as encouraging investment in Victorian businesses, supporting jobs and improving productivity, the Victorian State Government has announced plans to abolish stamp duty and transition to a new annual property tax system for commercial and industrial property from 1 July 2024.

Key points

• The reform will not affect current owners of commercial and industrial property or buyers before the reform comes into effect. A property will only be subject to the new arrangement once it is sold after the introduction of the reform.
• After 1 July 2024, a purchaser of commercial or industrial land can elect to either pay the final stamp duty liability (in a lump sum) or transition to an annual payment of fixed instalments of that duty plus interest over 10 years with a government facilitated loan.
• The annual property tax will be payable from 10 years after the property is sold and will be levied at a flat rate of 1 percent of the property's unimproved land value.

The devil will be in the detail

Details of the reform are expected to be released following targeted consultation by the State Government in the coming months to assist in the introduction of the changes from 1 July 2024.

As with all major reform, many technical and practical questions arise. Among those are:

• What is the interplay with landholder duty liability (i.e. the acquisition of a land-rich company)?
• Will the 'property tax' be payable in addition to land tax?
• Given the reform will not apply to residential land, how will it be imposed on mixed-use properties that include commercial and residential?
• Will landlords seek to pass the property tax on to tenants and how will commercial and industrial leases allocate this property tax (i.e. will it create upward pressure on rents and/or outgoings?)? How will this impact retail leasing?
• If a 'first purchaser' after 1 July 2024 has elected to pay the final stamp duty liability over 10 years with a government facilitated loan, how will that deferral be dealt with on a subsequent sale of the property (within that 10-year period)?

In summary

Landmark reforms come with much fanfare and, of course, many questions.
This proposed reform can free up significant upfront costs in the form of stamp duty charges, enabling property owners to use that capital in other areas such as future developments, capital works, lease incentives and other value-add strategies.

As details of the reform come to light, it will become a critical part of a purchaser's due diligence after 1 July 2024, to understand when the property last transacted, any legacy duty liabilities, when the property tax will commence for the new owner and how any lease of the property will deal with the recovery (if possible) of the property tax.