Vacant Residential Land Tax - Is your property portfolio caught in the net?

Introduction

Recent changes to the Vacant Residential Land Tax mean that it will now include all residential land located within Victoria and not just residential land located within inner and middle Melbourne (as has previously been the case). These changes will be implemented starting from 1 January 2025 based on the use of the property from 1 January 2024.

What is considered "Residential Land"?

Land that is capable of being used solely or primarily for residential purposes will be considered to be “residential land” for land tax purposes. If the residence is undergoing construction or renovation works and, either before or after construction works are completed, the land was used primarily for residential purposes, the land will still be treated as residential land. This is a very broad definition that could capture any land that could be put to a residential use.

When is Residential Land considered vacant?

Residential Land will be considered to be vacant if it has not been used or occupied for a continuous or aggregated period of six months or more by an Eligible Occupant in any given year. Residential land will also be considered to be vacant if the construction or renovation works on the property have not been completed and more than two years have elapsed since the construction or renovation has commenced.

Who qualifies as an Eligible Occupant?

An “Eligible Occupant” includes any of the following (subject to the exemptions below):

• Owner, or owner’s permitted occupant, using the property as their Principal Place of Residence(“PPR”);
• An owner’s permitted occupant can be a beneficiary of a discretionary trust;
• A person under a formal short-term letting arrangement for an aggregated period of six (6) months or more in any given year (e.g. Airbnb); and
• A person under a formal short-term or long-term letting arrangement (e.g. traditional lease arrangement).

Are there any applicable exemptions?

Generally, a residential property that is exempt from ordinary Land Tax will also be exempt from Vacant Residential Land Tax. Other exemptions are listed below:

• A change in ownership of the residential property;
• The property became residential land during the relevant calendar year;
  • This exemption is a once-off exemption;
  • Should the Certificate of Occupancy for the residential property be granted prior to 31 December 2024, VRLT will not apply in 2025;
  • A two-year period of exemption can apply if from the time of the property becoming residential property, the property has not been used or occupied during that two (2) year period. For example, should the Certificate of Occupancy for the dwelling be granted prior to 31 December 2024, VRLT will not apply in 2025 and 2026 if all factors are satisfied.
• The property is not vacant:
  • For the residential property to be considered as non-vacant, the residential property must be leased and occupied for more than six (6) months in a calendar year (does not have to be continuous);
  • Leading the vacant residential property through online platforms (such as Airbnb or Stayz) will also be considered valid occupancy, as long as the aggregated period of actual occupancy (not just listing) is longer than six (6) months;
  • If the residential property is occupied by an owner's permitted occupant as their PPR, this will also be a valid occupancy;
  • Intermittent or casual use of the Property will not be sufficient to seek the exemption.
• The property is used as a holiday home**
  • To claim the holiday home exemption, the Land Owner will need to use the residential property as a second home for at least four (4) weeks in the relevant calendar year, and have a separate PPR; and
  • There are several factors that the State Revenue Office ("SRO") will consider to be satisfied that the residential property is a genuine holiday home.
    • Distance between the residential property and the Land Owner's PPR
    • Nature and frequency of the use of the residential property by the Land Owner
    • Records of attendances on the residential property along with relevant utility bills for provision of the SRO if an audit is undertaken by the SRO
  • The property is being used for the purpose of attending a workplace of business**
    • To claim this exemption, the owner will need to use the residential property for at least 140 days of the year for the purpose of attending their workplace or business;
    • The Land Owner has a PPR in Australia; and
    • Residential properties owned by companies, associations or organisations are generally not eligible for this exemption.

**The above exemptions will not be applicable if the residential property is owned by a Trust or Company.

How much will Land Owners be taxed?

The annual VLRT is set at 1% of the capital improved value (“CIV”) of taxable land. For example, if the CIV of your vacant residential property is $700,000.00, the VLRT will be $7,000.00 each year it is vacant. The VLRT will also increase by 1% each year that a property continues to be vacant, until it reaches a cap of 3% of the CIV.

What do Land Owners need to do?

If you own residential property that was, or will be, vacant for more than six (6) months during the calendar year (1 January 2024 – 31 December2024), you are required to notify the SRO about the vacant property by 15 January 2025 using SRO’s online portal. If you fail to notify the SRO by the deadline, penalty tax and interest may apply as the SRO completes audits. If there is a need to restructure your holdings to address the new requirements and your actual use of the property, then you will need to obtain advice and complete this within the 2024 calendar year.

How Sharrock Pitman Legal can help?

Navigating through these VRLT changes is difficult, especially when considering if any exemptions are applicable, how your structuring impacts your tax liability, your notification obligations or if you need to consider restructuring your holdings. With a team of experienced lawyers in property law – including an Accredited Specialist in Property Law, if you find yourself needing advice on how the VRLT would affect you or you need advice on how to restructure the manner of holding of various properties, we are here to help.  

Please do not hesitate to contact us on 1300 205 506 or email property@sharrockpitman.com.au.

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The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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