Vacant Residential Land Tax: Exploring issues around residential construction

In our April article we explored in broad terms changes to the Victorian Vacant Residential Land Tax (VRLT) (article here), specifically, when a residential property is considered to be ‘vacant’ and the exemptions for holiday homes and workplace/businesses. This article focuses on other categories of residential land that could potentially be exposed to VRLT.

Uninhabitable residence

Properties with an uninhabitable residence may be subject to VRLT if the residence remains uninhabitable for 2 years or more. According to the State Revenue Office (SRO), whether a residence is uninhabitable depends on the nature and state of the residence during the calendar year. Generally, a residence is considered uninhabitable if it is incapable of being used for residential purposes or significant work would be required to return the residence to a state in which it could be used for residential purposes.

If the required work is minimal, the property would be considered capable of being used for residential purposes and therefore treated as vacant if it has not been used and occupied in the prescribed manner for greater than 6 months in a calendar year.

In light of the above, we explore some common example situations encountered by property owners.

Scenario 1: Residential apartment and combustible cladding

Most readers would be aware of the combustible cladding nightmares many Victorian apartment owners face. Imagine in our example scenario from our April article, where the Docklands building containing Mr. and Mrs Jones’ second property is now subject to a state-wide cladding audit say on 1 January 2024. Following the audit, the Docklands apartment building is deemed high-risk for combustible cladding and prioritised for rectification. The owners corporation then advises the apartment owners of the cladding rectification works, which require the whole of the building be vacated for health and safety reasons. The Victorian Building Authority (VBA) has advised the owners corporation that the work would take up to 3 years. The entire Docklands apartment building is vacated in August 2024. Building permits for rectification works are issued in October 2024, and the rectification works commence in December 2024 with an estimated time of completion in October 2027.

When is the Docklands apartment considered vacant?

Arguably, given the nature of the works and the health and safety risks, the Docklands apartment building would be considered uninhabitable once it is deemed high risk. In the context of Mr. and Mrs. Jones, VRLT will not be imposed in relation to their apartment in the 2025 and 2026 land tax years. However, the apartment will be considered ‘vacant’ for the 2027 land tax year because, as at 31 December 2026, more than 2 years will have elapsed since the residence became uninhabitable. It is then necessary for Mr. and Mrs Jones to apply to the SRO for an extension to the 2-year period, outlining the reasons for the delay that prevented their apartment from being made habitable. The request for extension should cover the whole of the 2027 tax year (assuming that the necessary works would be completed by October 2027 and the apartment would not be capable of being used for greater than 6 months in that calendar year).

What are the rates if the work takes longer than 2 years without a valid extension of exemption period?

The 2024 Amendment stipulates that properties that have been left vacant after the exemption period will be subject to VRLT at 1% of the Capital Improved Value (CIV) annually until 2024. From 1 January 2025, when the new changes take effect, properties that take longer than 2 years to become habitable could be taxed at a rate higher than the 1% of CIV (possibly 2% or 3% of CIV) if the property has been considered vacant for multiple years.

Construction and renovation

There are two scenarios for houses under construction. One involves construction or renovation of an existing house, which also follows a 2-year timeframe, which starts from when the construction or renovation commences (i.e., the date when the building permit is issued). The other scenario involves the construction of a new residential house on vacant land, which are discussed below.

Unimproved/underdeveloped land

Under current law, unimproved or underdeveloped land is not subject to VRLT. However, effective from 1 January 2026, such land located within the Metropolitan Melbourne region as defined in Schedule 2B of the Land Tax Act 2005 (Vic) (Metropolitan Melbourne) will be treated as vacant if it is earmarked primarily or partially for residential construction projects and remains undeveloped for a continues period of five or more years.

Note VRLT does not apply to land that is incapable of being used or developed for residential purposes for example in the situation where the land is in a non-residential zone or under development for a non-residential use.

Scenario 2: Land acquired for construction or renovation

Consider a scenario where Mark acquires a property on the Mornington Peninsula on 1 January 2024. Mark’s intention is to demolish the existing house and construct a new residential building. The building permit for demolition and construction is issued in June 2024, and construction is set to complete in December 2026, with the occupancy certificate to be issued in August 2027.

Is the Mornington Peninsula land subject to VRLT in the 2027 land tax year?

Considering Mark doesn’t elect the Mornington Peninsula property as his principal place of residence (PPR), the property will not be subject to VRLT in the 2025 and 2026 land tax years because of the 2-year timeframe. However, by 31 December 2026, more than 2 years will have elapsed since the building permit has been issued, and construction is yet to be completed. Therefore, the property will prima facie be subject to VRLT in the 2027 land tax year unless the Commissioner is satisfied that there is an acceptable reason for the construction not being completed.

If Mark decides to occupy the house as his PPR within 6 months after construction is completed, and the land qualifies for the ‘unoccupied land subsequently used as PPR’ exemption, then the land will be exempt land and will not be subject to VRLT in the 2027 land tax year. Mark will need to apply to the SRO for the PPR exemption.

We note that one of the qualifying conditions for the PPR exemption is that the construction or renovation must be completed within 4 years after commencement (this is generally the date when the planning permit is issued), which caps the number of years this exemption can be obtained.

What are the rules for the Mornington Peninsula land if it is a vacant block of land?

If the Mornington Peninsula land is a vacant block of land, and Mark already owns his home elsewhere (meaning the PPR exemption does not apply to exempt the land), under the current law, vacant land that is zoned residential and located in Metropolitan Melbourne is not subject to VRLT. However, effective from 1 January 2026, the vacant block in Mornington Peninsula will be subject to VRLT if it remains vacant for a continuous period of 5 years or more. The applicable tax rate for such residential land is a flat rate of 1%

Suppose Mark commences constructing a house on the vacant land in December 2028. The land will be subject to VRLT if the construction is not completed within 2 years from when the building permit is issued.

VRLT affecting residential property developers

For property developers planning to develop a residential property on a vacant block of land, the VRLT rule applies differently depending on where the land is located.

If the vacant block of land is zoned for residential development and is located in Metropolitan Melbourne, the land will be considered ‘vacant’ if it remains undeveloped for more than 5 consecutive years at the end of the year preceding the tax year, starting on 1/1/2026. The applicable tax rate for such residential land is a flat rate of 1%.

If the land is located in Victoria but outside Metropolitan Melbourne (as defined), the land is not subject to VRLT until construction begins. The construction or renovation of a residence on land is considered to have commenced when a building permit for that construction or renovation is issued. While a residence is being constructed on the land, it will follow the general VRLT rule for residential land, including the 2-year construction phase exemption and exemption for transfer of ownership.

Once the construction of a new residential house is finished, the builders have up to three years to sell these properties (i.e., land that turns into residential land). They will need to make an annual exemption application each year that the property remains unsold after the land becomes residential. If the property is not sold and left vacant by the third year, the owners of the property will need to demonstrate that they made genuine attempts to sell the land at or below the price they expected to receive when construction commenced on the land. If the property is still not sold after this period, it will be subject to a concessional rate of tax of 1% from the following year. The year of ownership transfer (according to the settlement date) would be exempt from the VRLT.

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