Vacant residential land tax – act now or get a bill from the SRO

UPDATE: The article below outlined changes to the VRLT, notably the limitation of the holiday home exemption to individual property owners. Following the Victorian 2024-25 Budget announcement in May 2024, the State Tax Amendment Bill 2024 was introduced to expand the scope of the VRLT holiday home exemption. If the Bill is enacted in its current form, residential properties owned by trusts and companies continuously since 28 November 2023 could qualify for the holiday home exemption if all the qualifying conditions are met. Note, the article below was written prior to the proposed extension of the VRLT holiday home exemption to trusts and companies.

A recent report by the Victorian Parliamentary Budget Office indicates that there has been a significant underreporting of residential properties that are considered to be “vacant”, and thus are subject to vacant resident land tax (VRLT) since the tax was introduced effective from 1 January 2018.

VRLT applies only in Victoria and is an additional tax imposed separately from the standard land tax. VRLT in its current form applies to “vacant” residential properties in inner and middle Melbourne. However, effective from 1 January 2025, the catchment area for VRLT has been expanded to the whole of Victoria. With this expansion, about 10,000 vacant properties (0.4% of all Victorian properties) could fall within the VRLT catchment area. As the VRLT for a given tax year is based on the property’s use in the previous year, property owners with more than one property need to be across these changes.

What are the changes?

There are significant changes to the VRLT that takes effect from 1 January 2025 and 1 January 2026, and these can broadly be summarised as follows:

• Effective from 1 January 2025:
  • VRLT will be extended to apply state-wide to all residential properties considered to be “vacant”;
  • the rate of tax will no longer be fixed at 1%. Instead, a new progressive rate of tax at 1%, 2% or 3% will apply on the Capital Improved Value (CIV) depending on the number of consecutive tax years that a particular residential property is liable for VRLT;
  • the holiday home exemption has been extended to enable the use and occupancy requirement be satisfied by a relative of the owner or vested beneficiaries. As this tax is based on how the property is used and occupied in the preceding year, property owners owning more than one property should be mindful of how their property is put to use during 2024 for access to this exemption; and
  • new residential properties will be exempt from VRLT for a period of up to 3 years after the land first becomes residential in nature, provided the property owner has made genuine effort to sell the land at or below the price that they expected to receive when construction commenced.
• Effective from 1 January 2026:
  • unimproved land (i.e., vacant residential land) in metropolitan Melbourne will be subject to VRLT if it remains unimproved land for at least 5 years and is capable of residential development; and
  • an exemption will apply to vacant land that is contiguous to the owner’s principal place of residence (PPR), provided the land enhances the PPR and is used solely for the private benefit and enjoyment of the owner.

Property owners who are liable for the VRLT must notify the SRO through an online portal by 15 January each year. If the property qualifies for an exemption, the owner must indicate the appropriate exemption.

How does the SRO know that your property is vacant?

The SRO collects data from two primary sources: electricity and water usage. It performs data matching activities to ensure compliance, using a wide range of data sources for its data matching techniques. These may include data exchanges with third-party utility companies or government agencies, to the extent permitted by law. For example, a study by Prosper Australia indicated that the average water consumption per person in Victoria in 2018-19 was 155 litres per day. Hence, a reasonable and conservative benchmark for assessing vacancy might be less water use than this, perhaps setting a criterion of 50 litres or less per day water use over a 12-month period.

The SRO has announced that it plans to increase compliance efforts in this area and administrative penalties may be imposed if the outcome of the investigation results in the property being classified as vacant. Administrative penalties may be imposed at the following rates:

• 5% if the owner voluntarily informs the SRO about vacant residential properties before an investigation;
• 20% if the owner informs the SRO about vacant residential properties after an investigation; and
• up to 90% if the SRO believes that the owner intentionally disregarded the law and hindered the investigation.

VRLT is a complex area of the law. To illustrate how the law works including the specific exemptions outlined above, we provide the following example scenarios.

Holiday home/Workplace/Business exemptions

Mr and Mrs Jones own a home in Geelong which is their PPR. They also own an apartment in Docklands. Their daughter, Jenny, lives in the Dockland apartment while attending Melbourne University.

Will the Docklands apartment be subject to VRLT for the 2025 tax year?

As noted above VRLT is imposed if the property is considered to be vacant. This is a tax that is additional to the standard land tax. Determining when a property is vacant in a land tax year requires reference to the use of the land in the preceding year. Broadly, a property is taken not to be vacant if it has been lived in for more than 6 months in a calendar year by either the property owner, or a permitted occupant as their PPR, or, alternatively, occupied by a natural person under a lease or short- term letting arrangement made in good faith and not for the purpose of avoiding the tax.

Based on the above, if the apartment in Docklands is Jenny’s PPR for more than 6 months during the 2024 calendar year, then the property is not considered to be vacant. In this case it will be exempt from VRLT in the 2025 tax year. Whilst the natural assumption is that Jenny is a permitted occupant due to their familial relationship, documenting the arrangement may be prudent in case of disputes with the SRO.

Suppose Jenny defers her study in 2024 to travel and departs Australia on 1 January 2024. The apartment in Docklands is then advertised for short term stays for the whole of 2024. If the apartment is not physically let for short-term rentals for more than 6 months during 2024, it will be subject to VRLT in the 2025 tax year. This is so notwithstanding that the apartment was available for rent throughout the 2024 calendar year.

What if the Docklands apartment was advertised for long term rental?

The same issue as identified above will also apply. For example, if the apartment commenced to be tenanted say on 1 July 2024, and given that Jenny has ceased living in the apartment on 1 January 2024, for the 2024 calendar year, the maximum period that the apartment will be used for the requisite purposes is 6 months. However, the used and occupied test looks at greater than 6 months, thus, the apartment will be considered to be vacant for the 2025 tax year and will be subject to VRLT in that year.

So, to manage the imposition of the VRLT on the Docklands apartment what are Mr and Mrs Jones’ options?

In order for the holiday home exemption to apply, the property owner must have a different PPR in Australia, and they or their relative must use and occupy the property (that may potentially be subject to VRLT) (herein referred to as the “second property”) for a period of at least 4 weeks in the preceding year.

Alternatively, if the property owner uses the second property for the purposes of attending their business or employment for an aggregate of at least 140 days in the preceding year, then the second property will also be exempt from VRLT in the current tax year.

Accordingly, in order for the Docklands apartment be exempt from VRLT in 2025, it must either qualify for the holiday home or workplace/business exemptions. In  the situation where  the Docklands apartment will be tenanted under a long term lease from 1 July 2024, the apartment will need to be occupied by either the owners (Mr or Mrs Jones) or their relative(s) for holiday use for a cumulative total of at least 4 weeks within the first half of 2024. In this case the Docklands apartment will not be considered to be vacant for 2025 and hence will be exempt from VRLT in that tax year.

Alternatively, if Mr Jones’ job requires him to work in Melbourne CBD for certain days of the week, the use of the Docklands apartment for work purposes will be counted towards the 140 days threshold for the business/employment exemption.

Examples of required evidence

Taxpayers are the ones that bear the onus of proving that a property that they own is exempt from VRLT. Whilst water and electricity usage may be a form of evidence showing physical occupancy of the Docklands apartment, for access to the holiday home exemption, it would also be prudent for the property owners to maintain some form of usage diary. In the case of the property being occupied by a relative of theirs, the evidence may also extend to written/text communications etc. to establish that the occupant is the prescribed person.

What about properties held in a company or trust structure?

Properties held in an investment vehicle (e.g., company, trust) are generally not eligible for either the holiday home or workplace/business exemptions. Thus, residential properties in an investment structure must satisfy the more than 6 months condition in the manner the property is used and occupied in the preceding year so as to prevent it from being considered vacant.

Where to from here?

The above example scenario arguably represents the most common situation encountered by property owners. Developers with residential projects should understand the changes in order to manage their projects to mitigate the risks of VRLT imposition. Finally, purchasers should also be mindful of any outstanding tax owing on the property, including VRLT, before settlement as the SRO can put a charge on the land where VRLT remains unpaid.

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