On the 3rd December 2024, the State Taxation Further Amendment Act 2024 ('Amending Act') introduced significant changes to several taxes, foremost of which include the exemptions in the vacant residential land tax ('VRLT') (which take effect 1 January 2025) with the addition of companies and trustees to the holiday home exemption. The current exemptions in Division 9 of Part 4 of the Land Tax Act 2005 ('The Act') are equally as applicable and importantly, should receive consideration from individuals, vested beneficiaries as well as corporations and trustees of trusts.
There is a holiday home exemption when the property was owned in the trust prior to 28 November 2023, and used as a qualifying holiday home, but any property purchased in a trust post 28 November 2023 cannot under current legislation be exempt from VRLT except in its first year of purchase.
This article will give an in-depth discussion of each of the exemptions in Part 9 of the Act and how this will affect how you structure the purchase of your property.
1 – Holiday Home Exemption
Section 88A of the Act includes several prerequisites before VRLT may be exempt on a residential property. This includes:
- In the preceding tax year, the owner of the land or a vested
beneficiary of a trust (Discussed in 1A) to which the land is
subject:
- Used and occupied another property in Australia (whether in Victoria or elsewhere in Australia) as a principal place of residence; and
- Used and occupied the land as a holiday home for a period of at least 4 weeks; and (discussed in 1B)
- The Commissioner is satisfied that the land was used and occupied as a holiday home in that year (the preceding year). (discussed in 1C)
1A – Owner of the land or a Vested Beneficiary of a trust?
Section 10 provides the definition of what an owner of land is and includes the following:
- A person entitled to land for a freehold estate in possession;
- A person entitled to land under a lease of Crown land;
- A person entitled to land under a licence of Crown land if the person has a right, absolute or conditional, of acquiring the fee simple;
- A person who is a licensee of vested land under Part 3A of the Victoria Plantations Corporation Act 1993; and
- A person deemed by the Act to be the owner of land.
A vested beneficiary is provided under section 3 of the Act to mean a natural person, hence cannot be a corporation (however the amendments provide for this later), and has a vested beneficial interest in possession in the land or is the principal beneficiary of a special disability trust.
A vested beneficial interest is a common law concept which in relation to land and for the purposes of the Act requires a beneficiary who has a right to possess the land. This goes beyond merely listing a beneficiary as a class of person but rather requires the trust to entitle a person to that land.
1B – Used and occupied land in Australia as PPR – Used and occupied the land as a holiday home
This requires that the land or vested beneficiary of the land to have a principal place of residence in Australia. However, it should be noted that the greater the distance from the holiday home, the more relevant the factor in determining whether this is a holiday home or not for the purposes of ss 1B and 2. The principal place of residence is defined as the sole place of residence in section 3 of the Act and typically used to describe a person who occupies land as their home.
Additionally, the land needs to be occupied as a holiday home. Whether the land is a holiday home is subject to the discretion of the Commissioner of State Revenue and is discussed further in part 1C of this article.
1C – Discretion of the Commissioner of whether land is a holiday home or not
Subsection 2 describes the factors the Commissioner must have regard to in considering whether the land is being used as a holiday home. This includes:
- The location of the land;
- The distance between the location of the land and the owner's or vested beneficiary's principal place of residence; and
- The nature and frequency of the use of the land.
In considering the purchase of a holiday home, you should consider whether an ordinary lay person would consider that the land is being used as a holiday home in regard to the factors above. Hence, a home located in Richmond that is purchased by an owner whose principal place of residence is located at Toorak is unlikely to qualify the house in Richmond for the Holiday Home exemption.
Contrastingly, if that person purchased a home in San Remo and used it once a year for a getaway, in the view of the Commissioner, it is likely this property will qualify for the Holiday Home exemption.
2 – Corporations and Trustees of Trusts
The Amending Act has changed the Holiday Home exemption with the introduction of new provisions to section 88A of the Act. Hence, companies and trustees of land may satisfy the VRLT exemption for holiday homes provided certain conditions are met. From 1 January 2025, sole shareholders of landowning companies or trustees of trusts may be eligible if:
- The sole shareholder has continuously owned the home, or the home has been continuously subject to the same trust, since 28 November 2023, when the Government announced this measure;
- There have been no changes in beneficial ownership of the land since 28 November 2023, except for transfers between relatives or transfers for the purpose of making a change to the trustee;
One or more eligible natural persons used another property in Australia as their PPR in the preceding tax year and used and occupied the holiday home (whether continuous or aggregate) for 4 weeks in a calendar year as follows:
2A – Natural person who must occupy holiday home – Relatives and Specified Beneficiaries
Given the wide ambit of "relative" in the English language, the Act confines the definition of relative and therefore the natural person who may occupy the holiday home to:
- A spouse or domestic partner of the person;
- A lineal ancestor or lineal descendant of the person or of the spouse of domestic partner of the person (Grandparents or children);
- A brother or sister, or child of a brother or sister, of the person or the spouse or domestic partner of the person;
- A spouse of domestic partner of a child of the person;
- A spouse or domestic partner of a brother or sister of the person.
A specified beneficiary, of a discretionary trust, is defined in section 3 of the Act to mean a beneficiary who is specifically named in the trust deed or specifically declared in writing pursuant to the trust deed as a beneficiary to or in whom, by the terms of the trust, the whole or any part of the trust income or property may be distributed or vested.
This gives rise to further considerations. The first is that you should carefully review your trust deed to see who the specified beneficiaries are. While the deed may use different wording such as "primary beneficiary" or "principal beneficiary", the SRO ought to accept these beneficiaries as specified beneficiaries.
Further, the relative of a deceased specified beneficiary will still qualify for the holiday home exemption (assuming the specified beneficiary meets the requirements in s88A) under the new section 88AB. For example, if you occupy a home in San Remo as a holiday home where that holiday home has been beneficially owned by a close relative who is recently deceased, that home will still qualify for VRLT exemption under s88A.
2B – 28 November 2023 Deadline
Companies and trusts also need to note that only land owned prior to 28 November 2023 will qualify for the Holiday Home exemption from 1 January 2025. The home needs to be continuously owned from 28 November 2023 meaning that any change in ownership, brief or otherwise, means that the purported holiday home will not qualify for the exemption.
In regard to trusts, transfers between relatives or transfers for the purpose of making a change to the trustee following 28 November 2023 is permitted. As such, a transfer of a holiday home from a specified beneficiary to their spouse after 28 November 2023 is permitted.
2C – How to structure Trusts and Companies taking into regard the Holiday Home exemption
In the context of restructuring a company or trust, whether that be through a sale or not, the following should be taken into account if you want the Holiday Home exemption to apply to the property:
- Ensure that any transfer of shares or interests in a trust are between relatives. The definition of relatives is strictly confined under section 3 such that any transfers to (distant) relatives such as cousins, after 28 November 2023, will mean that the land will no longer qualify for the exemption;
- That a shareholder or beneficiary/unitholder owns at least 50% of the shares or beneficial interest in the trust and that the said shareholder or beneficiary/unitholder has their principal place of residence in Australia; and
- Transfer of shares or beneficial interests in trust to relatives (as defined in ss3) are permitted in addition to transfers for the purpose of making a change to the trustee.
3 – Exemption for land used for purposes of attending place of business or employment
Another notable exemption you may consider for the purposes of VRLT is exemption for land occupied for the purposes of attending a place of business or employment. Land is exempt from VRLT if the owner of the land or a vested beneficiary of a trust to which the land is subject is:
- Used and occupied other land in Australia as a principal place of residence; and
- Used and occupied the land as a residence for the purposes of attending the owner's or vested beneficiary's place of business or employment and that place is in the specified geographical area;
- Used and occupied the land as a residence for the purposes referred to in paragraph (b) for an aggregate period of 140 days.
Importantly, the Amending Act does not change this exemption to include companies or trustees of trusts such that residential properties owned by companies and trusts will not qualify for this exemption.
3A – Specified Geographical Area
Specified geographical area is defined in section 34D of the Act to mean all the areas of the municipal districts of the Councils listed in Schedule 2A. As such, this includes land that lies within the following councils:
- Banyule City Council
- Bayside City Council
- Boroondara City Council
- Darebin City Council
- Glen Eira City Council
- Hobsons Bay City Council
- Manningham City Council
- Maribyrnong City Council
- Melbourne City Council
- Monash City Council
- Moonee Valley City Council
- Merri-bek City Council
- Port Phillip City Council
- Stonnington City Council
- Whitehorse City Council
- Yarra City Council
3B – Use as a place of business or work
The property must have been used by the owner or a vested beneficiary as a place of business or employment.
For example, if you lived in Geelong but needed to travel to Melbourne CBD for at least 140 days in the year for your medical practice business and you own a residential property there, you will qualify for this exemption given you use that residential property in the CBD for the purpose of attending to your medical practice business.
4 – Land that has been transferred recently, becomes residential land or becomes residential land during the second year preceding tax year that has not been used or occupied or changed ownership
Other exemptions to the VRLT that may apply that you could consider include:
- Section 88C – Residential land transferred during year preceding tax year
- Section 88D – Land becomes residential land during year preceding tax year
- Section 88D – Land becomes residential land during second year preceding tax year and has not been used or occupied or changed ownership.
4A – Section 88C
The basic requirement for this exemption to be met is that land that has changed ownership in the preceding tax year is exempt from VRLT.
For example, if you purchase a property in 2024, that property will be exempt from VRLT in 2025.
4B – Section 88D
Land will be exempt from VRLT under this exemption if:
- At the commencement of the year preceding the tax year, the land was not residential land; and
- During the year preceding the tax year, the land becomes residential land.
So if you were to purchase a block of apartments which at 1 January 2024 was a warehouse before it was converted, that land will be exempt from VRLT in 2025.
4C – Section 88E
In addition to 4B, land will be exempt from VRLT from two years preceding the tax year the land was converted into residential land. A further requirement is that from that period to the tax year, the land must not have been used or occupied and the land must not have changed ownership.
5 – Residential Land
It should be noted that for the purposes of Part 2 Division 6 of the Act, residential land does not include vacant land that does not have a house on it. Section 34B of the act outlines that land is residential land if it is capable of being used solely or primarily for residential purposes or:
- A residence is being constructed or renovated on the land; and
- Before the commencement of the construction or renovation:
- The land was capable of being used solely or primarily for residential purposes; or
- There was a residence that was uninhabitable on the land; and
- On the completion of the construction or renovation, the land will be capable of being used solely or primarily for residential purposes.
6 – Conclusion
In regard to individuals, companies and trusts, these exemptions and changes introduced to the Amending Act are significant given the quantum involved with VRLT. As a reminder this is from 1-3% of the Capital Improved Value of the property.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.