Tax slug for Victorians with investment properties or holiday homes

Victorians with second homes or investment properties will pay a new flat rate tax of up to $975, plus an additional levy on the value of their land from January 1, 2024.

The “temporary” measure will last for the next 10 years as part of the government’s plan to pay down its COVID debt.

The landholdings component of the COVID debt levy in this year’s Victorian budget will raise $4.7 billion by decreasing the tax-free threshold for general land tax rates for properties that are not a principal place of residence.

The government expects 860,000 Victorians will be affected, of which 380,000 will be first-time taxpayers.

Property groups have slammed the new measure as a tax on mum-and-dad investors and warned it will raise rents.

Treasurer Tim Pallas said the levy “will apply primarily to those who own a second property or multiple properties” and said the family home will remain exempt.

The tax-free threshold for general land tax rates for properties that are not a principal place of residence will decrease from $300,000 to $50,000.

Under the new system, owners of applicable properties with landholdings between $50,000 and $100,000 will pay the fixed charge of $500. Taxpayers with landholdings between $100,000 and $300,000 will pay $975.

For owners of applicable properties valued at above $300,000, and trust taxpayers with property holdings above $250,000, land tax rates will increase by $975 plus 0.1 percentage point of the value of their landholding above $300,000.

Land tax is currently 0.2 per cent on a property with $600,000 land value.

Credit: Matt Golding

All current land tax exemptions will continue to apply, including those on the principal place of residence.

“The COVID debt levy is targeted at those with the greatest ability to pay following the pandemic,” Pallas said.

He said over the past 10 years, the average site values of residential land had increased 84 per cent and Melbourne’s advertised rental prices grew by 25 per cent.

“These higher rents are driven effectively by the laws of supply and demand at play, and they are delivering a windfall to landlords,” he said. “We think that it’s fair that Victorians with multiple properties make a modest contribution to repaying COVID debt.”

Pallas said the average increase on these arrangements would be $1300 a year, around $3.50 a day, based on someone with landholdings with the value of $650,000.

Land tax only applies to the unimproved value of the land, so Pallas said a property with that land value would probably be worth about $1.3 million.

Pallas denied that the land tax increase would have an adverse impact on rent and said the cost impost was “relatively small on landlords in the grand scheme of things”.

“This is a function of supply and demand in the marketplace,” he said. “If you have two identical properties, same value, same place, one with a mortgage on it, and one without a mortgage on it, do you think the mortgagee is going to be able to go into the rental market and claim more, as opposed to the unencumbered property? Of course they won’t, because it’s a function of what the market will pay for the property.”

Revenue from the levy on landholdings is expected to be $1.1 billion in 2023-24. It is expected to grow by an average of 2.1 per cent a year over the forward estimates. The levy will apply until June 30, 2033.

The government estimates the COVID debt levy will bring in $1.17 billion in 2024-25, $1.19 billion in 2025-26 and $1.22 billion in 2026-27.

Some of the cost of the change will ultimately be borne by the federal government through reduced income tax revenues.

Landlords and business operators can claim taxes and charges, including land tax and council rates, as tax deductions, as they are a cost of earning an income from their property.

In Victoria alone, there were almost 550,000 people with rental properties in 2019-20, the last available year of statistics held by the Australian Taxation Office. Of that group, 393,500 people had just one rental property.

“Make no mistake, renters will end up footing the bill. This will exacerbate Victoria’s rental stress.”

Elinor Kasapidis, CPA Australia

Together, they held more than 935,000 rental properties across the country.

People who lost money on their rental property claimed $426 million in council rates against their asset and $237 million in land tax. People who broke even or made a profit on their property claimed $403 million in council rates against their income and $240 million in land taxes.

Property and business groups slammed the tax increase and warned of the impact on the rental market.

Elinor Kasapidis, senior tax policy manager at accounting body CPA Australia, said Victoria was the nation’s least attractive state to buy an investment property and the government was “failing to read the room”.

“We are appalled by this decision,” she said. “We encourage the government to reconsider.”

Kasapidis said many landlords would be unable to afford the additional cost of the COVID debt levy.

“On top of wall-to-wall rate hikes for nearly a year, this additional cost will push some mum-and- dad landlords into the red,” she said. “To foot this bill, they will be forced to increase rents at a time when there is a national housing affordability crisis. Make no mistake, renters will end up footing the bill. This will exacerbate Victoria’s rental stress.”

Cath Evans, Victorian executive director of the Property Council, also criticised the land tax increase, which she said would hit “mum-and-dad investors”.

“There will be a two-fold impact with a reduction of supply to the rental market as those investors reconsider their investment strategy, and secondly an increase in rental rates,” she said. “As costs increase, landlords typically have to pass them on to the tenants. It is not what we need given the overall crisis in housing supply at the moment.”

However, Joel Dignam, executive director of tenants advocacy group Better Renting, backed the government’s land tax increase.

“The reality is that landlords are charging high rent increases at the moment because of low vacancy rates,” he said. “We’d much rather see that money go to the state budget than to some wealthy investors’ pockets.”

Dignam said he did not believe the land tax increase would lead to an increase in rents.

“When landlords are setting rents they are looking at what they can get for the property, they don’t pull out a spreadsheet and look at their own costs,” he said. “There are plenty of landlords out there who have paid off their property and are still charging the maximum rent. If landlords do increase rents it’s a good argument for having stronger protections against rent increases in Victoria.”

The government has imposed the extra fees on the back of a decline in land transfer duty revenue in 2022-23, which it attributed in the budget papers primarily to “falling settlement volumes after heightened property market activity in 2021-2022”.

Revenue from land transfer value is forecast to decrease to $7.4 billion in 2023-24, following a decline of 20.7 per cent in 2022-23.

Land transfer duty revenue is then expected to grow by an average of 8.4 per cent per year over the forward estimates.

The budget papers expect residential property prices to resume growth over 2024, with Victorian dwelling prices forecast to grow by 6 per cent.

An increased absentee owner surcharge will also be applied in addition to the general or trust land tax rates for property owners who are not Australian citizens or permanent residents, or do not ordinarily reside in Australia.

From January 1, 2024, the absentee owner surcharge will increase from 2 per cent to 4 per cent and the tax-free threshold for non-trust absentee owners will decrease from $300,000 to $50,000.

A windfall gains tax will apply from July 1, 2023 to large windfall gains associated with planning decisions to rezone land that create an uplift in land valuations on a capital-improved value basis above $100,000.

The tax will apply to the uplift in value, phasing in from a value uplift of $199,000 and reaching a maximum effective rate of 50 per cent for value uplifts above $500,000.

With Shane Wright

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