Prohibition on adjustment for land tax: a game changer in Victorian property transactions
In a bid to streamline property transactions and enhance transparency, the State of Victoria is set to implement significant changes in its taxation laws. Among these changes, a noteworthy development is the prohibition on adjustment for land tax and existing windfall gains tax liabilities in contracts for the sale of land. This article delves into the intricacies of this transformative move and its potential impact on the property market in Victoria.
The prohibition on adjustment for land tax: an overview
The proposed amendments to the Sale of Land Act 1962, Property Law Act 1958, and Windfall Gains Tax Act 2021 will bring about a pivotal change in property transactions in Victoria. As of 1 January 2024, settlement adjustments for land tax or existing windfall gains tax liabilities will be prohibited in all contracts for the sale of land within the state.
Historically, contracts for land sale in Victoria typically mandated that the vendor pay the land tax liability apportioned to the period leading up to the day of settlement, while the purchaser was responsible for the land tax for the remainder of the year as an adjustment to the purchase price. These apportionment would generally occur on a single holding basis. However, this practice led to issues of transparency, as the apportioned land tax was not directly reflected in the purchase price, often resulting in purchasers paying land tax for which they had little or no actual liability post-settlement.
The purpose behind the change
The Victorian Treasurer has emphasised the need for these amendments. The primary objective is to increase transparency and protect property purchasers from unjust land tax burdens. The current system allows land tax to be shifted onto purchasers, who may not have any significant land tax liability once the property transfer is complete.
The prohibition on adjustment for land tax and windfall gains tax is a move toward a fairer, more transparent property market in Victoria. This change aims to ensure that the burden of these taxes remains with the appropriate party, without affecting other rates, taxes, assessments, or outgoings associated with property transactions.
The Treasurer has noted in his second reading speech:
“Under a typical contract of sale of land, land tax payable in relation to the year of sale is apportioned between the vendor and purchaser. Contracts generally provide that the vendor will pay for land tax (and other outgoings) up to, and including, the day of settlement, and that land tax for the remainder of the year is contributed by the purchaser as an adjustment to the purchase price. This practice can reduce transparency, as the apportioned land tax is not directly reflected in the purchase price, and often results in land tax being passed on to purchasers who are subject to little or no actual land tax liability once the property has been transferred.”
Legal implications and penalties
As of 1 January 2024, it will be illegal for vendors to include clauses in contracts that attempt to apportion any land tax or existing windfall gains tax liabilities to purchasers. Violating this prohibition on adjustment for land tax will result in penalties of 60 penalty units for individuals and 300 penalty units for a body corporate.
An important point to note is that the prohibition on adjustment for land tax and windfall gains tax does not apply to other rates, assessments, premiums and outgoings, maintaining the fairness and legality of the process.
Transitional provisions and implications
One notable absence in the proposed changes is transitional provisions to address contracts entered into before 1 January 2024, with settlement scheduled after this date. As a result, it remains uncertain whether adjustment clauses in such contracts will be affected by the new regulations and rendered unenforceable. This absence of transitional provisions could potentially lead to complexities in property transactions scheduled during this transitional phase.
Game-changing property tax reforms in Victoria
The changes in land tax adjustments are just one aspect of the comprehensive property tax reforms set to transform the landscape of property transactions in Victoria. These reforms also include significant alterations to the Vacant Residential Land Tax, extending its reach and introducing new prohibition on adjustment for land tax and windfall gains tax as outlined above.
The expansion of Vacant Residential Land Tax
Effective from 1 January 2025, the vacant residential land tax will be expanded to encompass all vacant residential land in Victoria that remains unoccupied for more than six months in a calendar year. This marks a significant extension of the tax’s applicability, as it previously only applied to residential dwellings not occupied for six months or more in 16 inner-metro Melbourne areas.
Extension to include undeveloped vacant land
The reforms take another leap from 1 January 2026, extending the vacant residential land tax to undeveloped residential land in established areas of metropolitan Melbourne that have remained undeveloped for five or more years. This change implies that vacant land, even without a dwelling, will be subject to the vacant residential land tax if it has remained undeveloped for the specified duration.
The impending changes to Victoria’s property tax landscape, particularly the prohibition on adjustment for land tax and windfall gains tax, represent a significant shift toward transparency and fairness in property transactions. While these reforms aim to protect purchasers from undue tax burdens, they bring complexities and uncertainties in the transitional phase. As the state works to streamline its property market, property buyers, sellers, and industry professionals must adapt to the changing regulatory landscape, making informed decisions in this evolving environment.
For professional guidance and assistance with the prohibition on adjustment for land tax, please contact Haitch Conveyancing at (03) 8590 8370 . We are a team of experienced property lawyers who can help you understand the implications of all aspect of property transactions in Victoria. We are an online property law and conveyancing firm that can assist when buying or selling property.