Proposed revisions to vacant residential land tax: Implications for holiday home owners
In a recent development, the Victorian government has unveiled a series of significant alterations to the Vacant Residential Land Tax (VRLT), potentially impacting holiday home owners across the region. These proposed changes, if implemented, necessitate careful consideration and strategic planning by individuals who possess holiday properties in Victoria.
What is VRLT?
The Vacant Residential Land Tax (VRLT) is an annual tax enforced by the State Revenue Office, distinct from the standard land tax. VRLT is assessed at a rate of 1% of the capital-improved value of the property. For instance, a property with a capital improved value of $1.5 million would incur an annual VRLT of $15,000. It is important to note that VRLT differs from standard land tax, which is based on the ‘site value’ (unimproved value) of the property.
Current operation of VRLT
Presently, VRLT applies only to properties located in the inner and middle suburbs of Melbourne. A property becomes liable for VRLT in any calendar year if it meets the following criteria:
- It is of a residential nature (i.e., it is currently suitable for residential use, under renovation for residential purposes, or undergoing the construction of a new residence).
- It has been vacant for more than six months in the preceding calendar year (the six-month period does not need to be continuous).
- It does not qualify for any of the legislated exemptions.
Exemptions from VRLT include:
- Holiday homes – Properties used as holiday homes and occupied by the owner for at least four weeks in the preceding calendar year. The owner must have a principal place of residence (PPR) elsewhere in Australia, and this exemption applies to only one property.
- Business use – Properties used by the owner for business or employment purposes for at least 140 days in the preceding calendar year.
- Change of ownership – Properties that changed ownership in the previous calendar year.
- Renovations – Properties undergoing significant renovations or home construction are not considered vacant for up to two years from the issuance of a building permit.
Notably, residential properties owned by companies, organizations, and trusts generally do not qualify for the first two exemptions.
Proposed Changes to VRLT
The government is proposing a comprehensive expansion of the current VRLT rules to cover the entire state of Victoria, effective from January 1, 2025. Additionally, there will be amendments to broaden the scope of land subject to VRLT. The proposed changes include:
- Expanding the definition of ‘residential land’ to encompass vacant land that has remained unimproved for over five years.
- Incorporating land in metropolitan Melbourne not primarily used for non-residential purposes.
The proposed amendments will introduce additional VRLT exemptions, effective from January 1, 2026, such as:
- Land contiguous to the owner’s PPR, like a swimming pool or tennis court.
- Land unsuitable for residential purposes or development.
What Should You Do?
If these proposed changes become law, numerous property owners could face unexpected VRLT bills in 2025. To reduce the risk of being affected, consider the following steps:
- Owners of multiple residential properties in Victoria should take measures to prevent their properties from being vacant for more than six months in a year. Options include leasing the property to a tenant (short-term or long-term), permitting someone else to use the property as their PPR (on a non-casual basis), or spending at least four weeks annually at the property as a holiday home.
- Seek advice if you own land in a company, trust, or organization’s name and use it as a holiday home or for business purposes. This also applies to properties intended to be held in a testamentary trust following a person’s passing. Explore options for property ownership restructuring while considering tax implications and the impact on existing estate planning arrangements.
How We Can Assist
The team at McDonald Legal is well-versed in the complexities of the VRLT changes and is ready to assist you or your clients in navigating the new regulations. We offer guidance on:
- Assessing the impact of these changes on specific landholdings.
- Exploring strategies to avoid property vacancy and VRLT liability.
- Investigating potential restructuring options, including tax and estate planning implications.