‘Knock out land banking’: Pallas’ surprise move to free up empty lots

Taxes on vacant and undeveloped properties will be expanded ​in a state government bid to stamp out land banking and encourage development on vacant blocks.

Victorian Treasurer Tim Pallas shocked the property industry with the announcement as well as some in his own government who were not across the details of the first tax policy under Premier Jacinta Allan.

Treasurer Tim Pallas clarifies details of the expanded residential vacant land tax on Tuesday afternoon.Credit: Joe Armao

Pallas revealed the changes at a property industry breakfast on Tuesday, but a media release clarifying details of the tax was not sent out until 3.15pm, about seven hours after the treasurer announced it.

Pallas said the state tax on Melbourne homes left vacant for more than six months would be expanded statewide, while empty lots in established Melbourne suburbs would attract higher land tax bills if not developed after five years.

Assistant Treasurer Danny Pearson earlier in the day said he was not across the detail of the policy. However, it had been through cabinet and the premier confirmed during parliament’s question time that she knew of the announcement in advance.

Currently, only houses in Melbourne’s inner and middle-ring suburbs unoccupied for more than six months attract the vacant residential land tax, but the Allan government will expand the charge to include the whole state from January 1, 2025. Holiday homes and properties being renovated are among those exempt.

Residential land that has not been developed for five years in metropolitan Melbourne will also be included in the tax for the first time from January 1, 2026.

“This is for substantial lots of land that are to be provided in bulk to the community. That is, land banking, that’s what we’re trying to knock out,” Pallas said at a press conference to clarify details on Tuesday afternoon.

He did not provide details about the size or value of the land that would meet the threshold when asked.

Land banking is where a block is bought as an investment and not immediately developed but held or released slowly to maximise profits.

The Coalition seized on the decision to renew its claim that the Labor government taxes Victorians more often than people in other states are taxed. Labor will introduce the bill to state parliament on Wednesday.

“Victoria is broke and Labor’s only plan for economic growth is to tax Victorians more,” shadow treasurer Brad Rowswell said.

Two weeks after Labor handed down its housing statement with a target to build 80,000 extra homes a year, Pallas said the change would free up more vacant properties for rentals and newly developed homes.

Developers holding vacant land will be given another two-year extension if they have received a building permit in the initial five-year period under the proposed change.

Premier Jacinta Allan and Treasurer Tim Pallas in parliament. Credit: Joe Armao

The tax on unimproved Melbourne land was expected to bring in an extra $31 million a year, while the broadened scope of vacant homes was projected to collect another $6 million. It currently collects about $10 million a year, and another $4 million of exemptions were given out last financial year.

About 900 homes in Melbourne’s inner and middle rings were already captured by the tax, and another 600-700 were expected to be added statewide. About 3000 undeveloped properties in metropolitan Melbourne were projected to be taxed as part of the expansion.

“We can’t afford, really, to have vacant land in metropolitan Melbourne sitting idle. Our clear message to the landowners is to either develop land or sell it to someone who will,” Pallas told the industry breakfast.

“Similarly, we’re not putting in place a rule for landowners that we as a state are not going to apply to ourselves. We expect every government agency that is holding land to justify exactly why are they holding that land and not putting it into the marketplace.”

The change comes five months after Pallas unveiled new budget measures that lowered the threshold for land tax, forcing an extra 860,000 property investors and holiday home owners to pay the charge.

The vacant residential land tax is charged at 1 per cent of the total value of the property, including buildings on site.

“Sometimes taxes are used to amend behaviour,” Pallas said.

“It doesn’t massively advantage the budget. What it does is, it tries to send a message to people who have underutilised assets to think about utilising them, making them available, for people to move into as homes.

Daniel Andrews released his landmark housing policy last month with representatives from the property sector.Credit: Elke Meitzel

“We would much prefer not to get $1 out of tax that seeks to change behaviour. We’d prefer behaviour to change so that we can get people into homes.

“Of course the implementation of these arrangements have quite a long lead time as you’d appreciate. And we’ll work with industry to ensure that they are developed in the most effective way to amend behaviour without necessarily getting much in the way of revenue.”

The decision to reveal the policy without consultation was criticised by the housing industry, which signed an Affordability Partnership document with several senior ministers just two weeks earlier that promised to work together.

Property Council of Australia’s state executive director, Cath Evans, said she was shocked by the announcement because the Affordability Partnership agreement spelled out a closer relationship.

“The industry went into this partnership in good faith with the understanding that there would be consultation on any reforms going forward that affect the availability of housing stock,” she said.

“It’s clear that without that consultation being followed, there has not been good faith in the execution of that agreement to date.”

In 2022, the Andrews government dumped a planned housing development tax that would have raised $800 million a year to pay for social housing after negotiations with the property industry broke down.

The government’s affordability partnership and its accompanying housing statement was designed with the expectation of avoiding a similar situation.

A vacant parcel of land in Sunshine.Credit: Chris Hopkins

Real Estate Institute of Victoria chief executive Quentin Kilian said the announcement was “another regrettable demonstration of poor property policy development and shortsightedness” from the government by creating more uncertainty and discouraging investment.

The Victorian Greens welcomed the announcement but said the residential vacant land tax needed to be enforceable rather than self-reported. The minor party, which holds sway in the state upper house, also wanted the levy increased from 1 to 3 per cent of land value.

Party leader Samantha Ratnam on Monday wrote to Allan urging the new premier to introduce rent controls, which Allan has already ruled out.

The Victorian Council of Social Service (VCOSS) also welcomed the moves to stop land banking.

Asked whether the government was confident it could withstand supply-chain constraints, Pallas told the industry gathering he was not confident the shortages had been resolved.

“Are we confident the supply chain issues are resolved? No. There’s still a lot more work to be done in this space. I think the peak in price, from what I’m hearing from the industry, has occurred but it’s a slow downhill slope,” Pallas said.

He said the housing statement was not a “watershed moment”. “This will require a much closer engagement with the industry, much more substantial interactions with industry about what it needs, and indeed how we continue to develop a partnership between us going forward.”

In a press conference on Tuesday afternoon, he conceded Victoria needed more construction workers.

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