Commercial and Industrial Property Tax (CIPT)

The Commercial and Industrial Property Tax (CIPT) is a significant reform in Victoria’s property tax landscape, which took effect on 1 July 2024. This reform marks a shift from the traditional land transfer duty (stamp duty) and landholder duty to an annual property tax specifically targeting commercial and industrial properties. Here’s a comprehensive overview of CIPT in Victoria:

Key Takeaways

  • For qualifying dutiable transactions or relevant acquisitions (such as share or unit transactions in landholding entities) occurring after 1 July 2024, which involve an interest of 50% or more in commercial or industrial land (based on AVPCC codes), stamp duty will be payable for the last time on the land. The CIPT will then become payable 10 years later at a rate of 1% (or 0.5% for BTR Land) of the taxable value of the land (usually the land tax site value).
  • Subsequent transactions involving the same land will not incur duty provided:
    • The original transaction that brought the land into the CIPT regime involved 100% of the land; or
    • The transaction occurs at least 3 years after the original transaction.
  • Land will also enter the new system if there is a subdivision or consolidation of titles where the parent title is subject to CIPT or if 50% or more of the land comprising the new title was subject to CIPT.
  • If the original transaction did not involve 100% of the land, duty will remain payable if there is a subsequent transaction within 3 years or until 100% of the land has been transacted.
  • Duty will continue to be payable on leases and the acquisition of economic entitlements (synthetic interests in land, often arising under development agreements) in the same way as currently applies (including if the land is subject to CIPT). Duty will also remain payable on property that does not have a qualifying commercial or industrial use (including foreign surcharge duty if residential).
  • The CIPT will not apply to transactions that occur under an agreement or arrangement entered into before 1 July 2024 or where the transaction would be eligible for a duty exemption (including corporate reconstruction and consolidation relief).
  • If a property enters the CIPT regime and later ceases to be used for qualifying commercial and industrial purposes as of 31 December of a year, the owner will not be liable for CIPT in the following year. However, a change of use duty will be imposed, calculated based on the duty that would have been payable on the previous transaction, reduced by 10% for every calendar year that has passed since that transaction.
  • Landholder duty thresholds will take into account land subject to CIPT, but landholder duty will not be charged on that land (though it will remain chargeable on landholdings other than CIPT land). Lodgement of an acquisition statement appears to remain a requirement, even where the entity only holds CIPT land (i.e., no duty payable).

Background and Introduction

The CIPT reform was introduced as part of the Victorian Government’s 2023-24 State Budget. The primary objective of this reform is to create a more predictable and stable revenue stream for the state by replacing the one-time land transfer duty with an annual property tax. This change is expected to have far-reaching implications for property owners, investors, and the broader real estate market in Victoria.

Key Features of CIPT

  1. Transition from Land Transfer Duty:
    • From 1 July 2024, commercial and industrial properties will transition to the CIPT system as they are sold. This means that the traditional land transfer duty will no longer apply to these properties. Instead, an annual property tax will be levied starting ten years after the transaction.
  2. Tax Rate:
    • The CIPT will be set at a flat rate of 1% of the property’s site (unimproved) value per annum. For build-to-rent (BTR) properties, a reduced rate of 0.5% will apply. This rate is separate from land tax, which will continue to apply to properties.
  3. Entry Transactions:
    • Duty will still apply to entry transactions, which are defined as eligible dutiable transactions or relevant acquisitions. However, a duty concession, such as a 50% concession for transfers of eligible commercial and industrial property in regional Victoria, may apply.
  4. Exemptions and Concessions:
    • Not every dutiable transaction or relevant acquisition is considered an entry transaction. Subsequent transactions involving properties that have already entered the CIPT system will generally be exempt from duty, provided the property continues to be used for commercial or industrial purposes.
  5. Transition Loan Program:
    • To assist with the transition to CIPT, the Victorian Government has introduced a transition loan program. Eligible purchasers can access a government loan to cover the duty payment on the entry transaction. The loan will be provided by the Treasury Corporation of Victoria (TCV) on commercial terms, with annual repayments over ten years.

Implications for Property Owners and Investors

The introduction of CIPT is expected to have several implications for property owners and investors in Victoria:

  1. Smoothed Tax Liability:
    • The shift to an annual property tax provides property owners with a more predictable tax liability compared to the one-time land transfer duty. This predictability can aid in financial planning and budgeting for property owners.
  2. Impact on Property Values:
    • The introduction of CIPT may influence property values, particularly in the commercial and industrial sectors. Investors may need to factor in the annual tax liability when assessing the profitability of potential investments.
  3. Encouragement of Long-Term Investment:
    • By spreading the tax liability over several years, the CIPT system may encourage long-term investment in commercial and industrial properties. This could lead to increased stability and growth in these sectors.
  4. Administrative Considerations:
    • Property owners will need to stay informed about their tax obligations under the CIPT system. This includes understanding the eligibility criteria for exemptions and concessions, as well as the terms and conditions of the transition loan program.

Comparison with Other Jurisdictions

Victoria’s CIPT reform is part of a broader trend towards annual property taxes in various jurisdictions. For example, New South Wales has also introduced a similar reform, replacing stamp duty with an annual property tax for certain property transactions. This trend reflects a growing recognition of the benefits of predictable and stable revenue streams for state governments.

Challenges and Criticisms

While the CIPT reform has been generally well-received, it is not without its challenges and criticisms:

  1. Initial Financial Burden:
    • The transition to CIPT may impose an initial financial burden on property purchasers, particularly those who are not eligible for the transition loan program. This could potentially deter some investors from entering the market.
  2. Complexity of the System:
    • The CIPT system introduces a new layer of complexity to the property tax landscape. Property owners and investors will need to navigate the various eligibility criteria, exemptions, and concessions, which may require professional advice and assistance.
  3. Impact on Small Businesses:
    • Small businesses that own commercial or industrial properties may be disproportionately affected by the CIPT reform. The annual tax liability could impact their cash flow and financial stability, particularly in the early years of the transition.

AVPCC codes

The Australian Valuation Property Classification Code (AVPCC) is a hierarchical code system used to describe land use. Each code can be up to four digits long and is categorized into primary, secondary, and tertiary classifications. These codes help in identifying the specific use of a property, such as residential, commercial, industrial, extractive industries, primary production, infrastructure and utilities, community services, and more.

For example, commercial and industrial properties fall within the AVPCC range of 200-399, while infrastructure and utilities are classified under 600-6993. You can typically find the AVPCC code for your property on your council rate notice or land tax clearance certificate.

Conclusion

The Commercial and Industrial Property Tax (CIPT) represents a significant shift in Victoria’s property tax system. By replacing the traditional land transfer duty with an annual property tax, the Victorian Government aims to create a more predictable and stable revenue stream while encouraging long-term investment in commercial and industrial properties. While the reform presents several benefits, it also poses challenges that property owners and investors will need to navigate. As the CIPT system takes effect from 1 July 2024, it will be crucial for stakeholders to stay informed and adapt to the new tax landscape.

For more detailed information, you can visit the State Revenue Office or the Department of Treasury and Finance websites.

Ian Cimino is the Principal at Cimino & Cimino lawyers.