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By Michael Yardney
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Victorian State budget bad news for renters, and more tax for investors

Property investors and big businesses are furious that are being used as an ATM to foot the bill for the Victorian government's COVID-19 debt, as part of a 10-year fiscal repair plan unveiled in the 2023-24 Victorian Budget

The budget treasurer Pallas handed down includes a COVID-19 debt levy that rakes in $8.6 billion in extra taxes over four years, more than half of which will be paid by investors, holiday home owners and commercial property holders, and $20 billion over its 10-year life.

The threshold for Victoria's land tax — which does not apply to the family home — will be cut from $300,000 to $50,000.

This means an estimated 860,000 Victorian investment property owners will pay $4.7 billion in extra taxes over four years.

Of the 860,000 investment property owners in Victoria, 380,000 have not been subject to land tax before.

For these owners of investment properties, this means new and additional land tax which risks supply outcomes and puts upwards pressure on rents.

The government has not anticipated the unintended consequences that will result in fewer investors meaning higher rents because of the undersupply of rental accomodation.

For many commercial property owners, the budget means paying extra tax without recognition of the rent relief provided during lockdowns to get small business tenants through to the other side to ensure their survival.

Covid Investment

Here's what the REIV had to say

The Real Estate Institute of Victoria (REIV) has criticised the land tax increases announced in the State Budget, saying they will only worsen the current rental crisis facing Victorians.

Quentin Kilian, CEO, REIV, said the decision is a backward step that fails to address the shortage of affordable rental housing that’s impacting Victorian renters.

“This is a tax on families – not the big end of town. The Government is seeking to recoup the budget debt off short-term solutions that will hurt mum and dad property investors and Victorian renters, while exacerbating the structural housing supply issues facing the state”, he said.

Small businesses will also be impacted as land tax is not just payable on residential but also on commercial and industrial property.

According to Australian Tax Office data, more than 70 per cent of Victorian property investors own only one rental property, with 43 per cent of that group earning under $100,000 p.a.

“This announcement will ultimately drive mum and dad investors out of the market as the cost of maintaining a rental property outweighs future proofing family finances. The biggest impact will be felt by people with smaller holdings as the tax free threshold drops from $300,000 to just $50,000, disproportionately impacting everyday Victorians investing to secure their future.

“Larger land taxes are a disincentive for investors which will ultimately drive rental prices upwards as supply fails to catch up to demand. Renters already doing it tough – are also set to suffer under this new levy. This is not good news for Victorians, he said.

Mr Kilian said the REIV urges the government to urgently reconsider its position and review ways in which buying and holding property can be incentivised, rather than targeted by growing costs.

“More needs to be done to future proof sustainable, accessible, and affordable housing for all Victorians”, he concluded.

Here is a summary of the Victorian Budget as provided by the Property Council of Victoria

COVID Debt Repayment Plan

Significant new temporary levies are being introduced to drive the elimination of $31.5 billion of COVID-related debt within the next 10 years.

These changes are “expected” to apply for 10 years, until 30 June 2033

This is made up of several components including:

Land tax increases

A range of adverse changes are being made to land tax to generate debt repayment funds. These changes, to apply from the 2024 land tax year, are:

  • A reduction in the tax-free threshold from $300,000 to $50,000;
  • Fixed charges starting at $500 for landholdings between $50,000 and $100,000, and $975 for landholdings above $100,000;
  • An increase in rates of 0.1 percentage points for all rates above the $300,000 threshold for general taxpayers, and the $250,000 threshold for trust taxpayers

Payroll tax levy
Identical to the design of the mental health levy introduced in 2021, businesses with a national payroll above $10 million a year will temporarily pay an additional 0.5% in payroll tax from 1 July 2023. This increases to 1% for businesses with national payroll of above $100 million a year.

All existing payroll and land tax exemptions and concessions will continue.

The remainder of the debt repayment will come from government savings and efficiencies, with an estimated 3000-4000 job reduction in the Victorian Public Service in primarily back office and corporate functions, and the Victorian Future Fund.

Cgt Tax2

Other tax changes

The existing Absentee Owner Surcharge will increase from 2 per cent to 4 per cent, taking effect from 1 January 2024, aligning with NSW and generating an extra $283 million a year from 2023-24 onwards.

Business insurance duty will be reduced by 1 percentage point per year until its abolition in 2033 and tax-free thresholds for payroll tax will increase from $700,000 to $900,000 in July 2024 and then to $1 million in July 2025, adding protection for small business owners in a tight fiscal environment.

This Budget also saw an increase in the Wagering and Betting Tax rate to 15 per cent from 1 July 2024, again aligning with NSW taxation rates.

A summary of all proposed tax changes announced today can be found at the State Revenue Office website.

Commercial stamp duty

The feature reform of the Budget is a plan to gradually abolish stamp duty on all commercial and industrial properties in Victoria, from 1 July 2024, with the tax to be replaced by an annual property tax.

Limited details have been provided, as further detail is to be worked through about the transition and implementation, but what has been confirmed is:

Properties that transact after 1 July 2024 will have the option to pay duty as an upfront lump sum, or in 10 equal instalments over 10 years (with interest). From year 11, an annual property tax of 1% of the unimproved land value will apply.

For subsequent transactions on that land, no duty will be paid, and the annual property tax model will apply immediately.

For existing properties or properties purchased before 1 July 2024, no change applies to current arrangements, and no annual property tax is payable.

Tax

State of the economy

Victoria is set to experience commendable growth rate of 2.75 per cent in 2022-23. However, the outlook for the next financial year is less optimistic, with economic growth expected to fall to 1.5 per cent, before recovering and stabilising from 2024 onwards.

Population growth forecasts have lifted to 1.9 percent in 2023-24, reflecting increased migration levels, before moderating at 1.7% per year by 2025-26.

In the same year, the Government forecasts the Budget will return to an operating surplus of $1 billion, increasing to $1.2 billion by 2026-27.

However, this positive development is countered by the increase in the government's net debt, projected to reach $162.2 billion by 2025-26 and $171.4 billion by 2026-27.

Nominal GSP ($b) Land Tax ($m) Stamp Duty ($m) GAIC ($m) Windfall Gains Tax ($m)
F23-24 599.2 6079 7360 328 40
F24-25 631.7 6144 8080 336 59
F25-26 665.3 6409 8807 344 84
F26-27  700.7  6789  9375  330 97

Victoria is broke

Planning and land - getting started on reform

Following the Government’s recent commitments to developing a planning reform package before the end of the year, the Budget confirms $23.4 million has been allocated over the next two years to resource the development of a reform program, plus support for councils to “increase housing supply and density in established areas”.

A further $9 million is set aside for the implementation of a refreshed ‘Plan Melbourne’, including supporting housing growth around existing infrastructure and further revitalisation of central Geelong.

$14.7 million in allocated to the Department of Premier and Cabinet’s land and precincts program, including an expansion of the Land Coordinator General to develop a new whole of government land register database. This will support the fuller utilisation of government-owned land to deliver positive housing and development outcomes.

Regulatory reform refresh

A new Economic Growth Commissioner will be set up within Treasury to undertake Government-commissioned inquiries into barriers to growth and reform opportunities across all of government.

At this stage, it is not confirmed if this will be in addition to or replace the existing Better Regulation Victoria body, with further detail to be confirmed in coming months.

Taxes

Energy transition and the State Electricity Commission

To support the recently announced interim emissions targets and Victoria’s overall net zero ambition, a further $5.1 million has been invested into the gas substitution roadmap, allowing transition into electrification for both existing properties and new builds.

Currently, the Victorian gas sector contributes to around 17% of our state’s net greenhouse gas emissions.

To follow up on the Government’s significant election commitment to reintroduce the State Electricity Commission (SEC), a $1 billion investment will be made towards delivering 4.5 gigawatts of power through renewable energy and storage projects – the equivalent replacement capacity of coal-fired power station Loy Yang A, set to close in 2035.

No clarity on infrastructure yet

Earlier this month, the Federal Government announced a 90-day independent review of the Infrastructure Investment Program to keep focus on essential projects that contribute to productivity, supply chains and overall economic growth.

While the Commonwealth has not provided a definitive list of jointly-funded projects under review for Victoria, some projects such as Melbourne Airport Rail Link have been paused until the outcomes of the review are clear. As such some existing infrastructure commitments are “to be confirmed” pending the federal review.

Existing commitments to the Suburban Rail Loop and other key infrastructure projects underway are maintained.

New infrastructure commitments include:

  • $650 million for the Melton Line upgrade, increasing passenger capacity by 50 per cent
  • A new railway station at Tarneit West
  • $694 million in road upgrades
  • An additional $322 for stage two of the South Dynon train maintenance facilities, and
  • $3.5 million for the Mode Shift Incentive Scheme, taking it through to the start date of the Port Rail Shuttle Network.

Proptax

Suburban and regional development

An allocation of $10 million is provided for the Growing Suburbs Fund, an initiative aimed at supporting the infrastructure and community development needs of growing suburban areas within the state.

The funding will enable local councils in designated growth areas to undertake vital projects that enhance the liveability and quality of life for residents. The Metropolitan Partnerships program is also continued to drive effectively engagement with local communities, businesses, and various stakeholders to shape the future development of the metropolitan region.

A funding boost of $32.5 million for Visit Victoria aims to bolster regional tourism efforts and attract visitors to the diverse destinations throughout the state, and a $10 million Tiny Towns Fund will be launched for regional and outer suburban communities of up to 5,000 people, backing projects that drive tourism and community pride.

Health and education remain key focus

$618 million is dedicated to the construction of nine new government schools, early works for three additional schools, and new stages at two schools. A further $450 million is allocated for enhancing facilities in Catholic and independent schools, recognising the importance of supporting non-government schools.

An initial investment of $320 million will be made for the Hospital Infrastructure Delivery Fund which will prepare for works including upgrading the Monash Medical Centre, expanding the Dandenong Hospital, Northern Hospital and Austin Hospital emergency departments and outpatient clinic at the Wonthaggi Hospital.

Source of Budget summary - Property Council

About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.
2 comments

Thank you for the write up Michael. The cost of holding IPs while interest rates, council rates and insurance for PPOR continues to climb has started to put pressure on small investors like me. It’s a never ending stream of direct debits. Andrew ...Read full version

1 reply

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