The Victorian Government has announced a series of new taxes on property owners and developers in its 2023-24 budget, causing significant media attention. However, what impact will these changes have on you as a property developer? MFEG has analyzed these changes and cut through the media noise to summarise the changes and their likely implications for property developers.
Starting from July 1st, 2024, Stamp Duty on commercial and industrial property will be abolished and replaced with a property tax equivalent to 1% of the unimproved land value.
This is a positive change for property developers, eliminating a substantial upfront cost associated with property acquisition. While there may be some deterrence for investors due to reduced rental returns, this should not significantly negatively impact property values since the tax does not apply to property improvements. Valuers will benefit from the increased assessment of properties based on unimproved land value, and real estate agents will enjoy a greater incentive for property transactions (since stamp duty is a transaction cost while the new tax is a holding cost).
The Government plans to introduce a temporary land tax surcharge from July 1st, 2024, ranging from $975 for properties valued up to $300,000 and 0.1% of taxable landholdings exceeding $300,000.
This tax will further discourage property investors, who already face high land tax rates, potentially impacting the property development market. Foreign investors, who already face higher taxes than local investors, will be heavily affected and may be entirely deterred from the market. On the other hand, building properties for owner-occupiers exempt from land tax will continue to be incentivized.
The main adverse effect for developers from the surcharge will be increased holding costs, particularly for larger sites. Feasibility models will need to factor in this surcharge to ensure profitability.
Another new tax affecting property developers is a temporary land tax surcharge that will be in effect for ten years starting in 2024. The surcharge rates range from $500 for taxable landholdings between $50,000 and $100,000 to $975 for taxable landholdings between $100,000 and $300,000. The land tax rate for taxable landholdings over $300,000 will increase by 0.10 percentage points.
The Government has raised the absentee owner surcharge rate from 2% to 4% and reduced the minimum threshold for non-trust absentee owners from $300,000 to $50,000.
This measure primarily affects foreign investors who own property in Victoria but do not reside there (absentee owners). With many of these investors holding property around the CBD, this change will have a significant impact on the market. Foreign developers or companies with predominantly foreign interests will face challenges in making their projects viable. Local developers may find that sites become less competitive, potentially presenting more favourable opportunities.
For property developers, the new tax changes bring both advantages and disadvantages. Local developers are incentivized to build and sell owner-occupied residential properties, while high land tax levels discourage wealthy and foreign investors. The commercial and industrial market will experience a major shift with the elimination of stamp duty, potentially creating attractive opportunities in this sector.
The increase in holding costs on land must be carefully considered in feasibility models to ensure projects remain profitable, and long-term land holdings may become more challenging. Savvy developers who thoroughly analyze the market, understand their target demographic, and meticulously calculate their numbers may benefit from the tax advantages over foreign purchasers, potentially leading to exciting opportunities in the coming years.