Commercial and Industrial Property Tax - What you need to know!

What is the CIPT?

The CIPT is a new annual tax which will apply to commercial and industrial property in addition to land tax.  It will ultimately replace stamp duty.

The CIPT will not apply to residential, primary production, community services, sport, heritage or cultural purpose properties.

 How does a property become subject to CIPT?

CIPT will apply to commercial and industrial properties that enter into the CIPT system by being transacted with on or after 1 July 2024.  A transaction for this purpose is a transaction that:

• would ordinarily be subject to stamp duty; and
• involves 50% or more of the property.

This can include both a usual sale of property, and also acquisitions of interests in land-holding entities. In usual circumstances, contracts executed on or after 1 July 2024 will fall into the new system.

Arrangements and agreements made prior to 1 July 2024 and which lead to a Contract on or after 1 July 2024 could be considered by the State Revenue Office (‘SRO’) as exempt from entry into the CIPT system. However, this transition arrangement is not defined in detail and will be subject to further guidance and discretion from the SRO.

Are there any exemptions to the CIPT commencing?

A CIPT qualifying transaction will not include transactions that:

• would have been exempt from stamp duty;
• qualify for the corporate restructure duty concession;
• relate to dutiable economic entitlements; or
• relate to dutiable leases (other than long term leases).

How much is the CIPT?

CIPT will be charged at a rate of 1% of the site value of the property (being the same value that land tax is based on). Note that build-to-rent land can access a concessional rate of 0.5% subject to requirements.

CIPT is a flat rate and will apply to all land owned by a taxpayer on 31 December of the year prior to the tax year.

Will land tax still apply to CIPT property?

Yes, CIPT is in addition to land tax. As such, properties in the new system will pay both land tax and CIPT commencing in the year that the CIPT is first assessed on the Property.

When will the CIPT be payable?

When a property enters into the CIPT system, one final amount of stamp duty will be assessed and paid and the CIPT will be payable 10 years after the transaction that brought the property into the CIPT.  The CIPT will be assessed on a calendar year basis in the same manner as land tax.

Accordingly, for properties that are transacted with between 1 July 2024 and 31 December 2024, the CIPT will be first payable in calendar year 2035 (being Year 11 after the date the property was brought into the CIPT system).

How will the phase-in of the CIPT operate?

When a commercial and industrial property is first transacted with after 1 July 2024, it will be assessed for the last amount of stamp duty that will apply to that property.  The stamp duty will be assessed on the same basis as any transaction prior to 1 July 2024 with any applicable concessions continuing to apply.

The transferee/purchaser shall then either pay the stamp duty at settlement in the usual way or, if eligible, obtain a government transition loan to pay the stamp duty over a 10 year period by annual instalments (further detailed below).

If you pay the stamp duty in the usual way, then for the next 10 years you will pay land tax but otherwise will beholding the property on the same basis as anyone who purchased prior to 1 July2024.  If you are eligible for and obtain the government transition loan, then you will pay your annual stamp duty instalments (plus interest) in addition to land tax for the next 10 years.

Once the 10 years have passed, and from Year 11 after the property was transacted into the system, the CIPT will be payable on the property in addition to the land tax, which continues to apply.

What to consider in dealing with property leading into and after the introduction of the CIPT?

In simple terms, the phase-in process will mean that after 1 July 2024 most commercial or industrial property will primarily fall into two categories (noting that there are exemptions):

a)   CIPT Property – Being land which has been transacted with after 1 July 2024 and therefore is in the CIPT system; and

b)   Pre-CIPT Property – Being other commercial and industrial land which has not yet been transacted with in the new system.

For CIPT Property – A purchaser can acquire the property without stamp duty applying, on the basis that the CIPT will apply from the next calendar year 10 years after the transaction that brought the property into the CIPT system.  Accordingly, in the phase-in, the second and subsequent purchaser/s of the CIPT Property will have the benefit of not paying stamp duty or CIPT until 10 years are up.

For Pre-CIPT Property – Any purchaser acquiring the land will need to pay stamp duty, either up front or, if eligible, via accessing the government transition loan (see below).  This will then start the clock on the 10 year time period before the application of the CIPT.

What is the government transition loan?

This is an optional government loan to enable the last stamp duty payable on CIPT Property to be paid over a 10 year period.  The loan will be subject to interest and principal and interest will be payable by annual instalments over the 10 year period.  The loan will be secured as a first charge over the property.

If you sell or another compulsory repayment event occurs, then the balance of the loan has to be repaid (accordingly the loan does not carry forward from the first purchaser who was entitled to access the transition loan).

To be eligible, an applicant will need to be an Australian business or Australian citizen or permanent resident; be purchasing a property valued to a maximum of $30 million; have the purchase complete as a standard transaction; and have finance pre-approved by an approved lender.

Break fees will apply if the loan is repaid early (including in any sale).

Do Consolidations or Subdivisions of Property have any impact?

Consolidation can bring property into the CIPT system, if property that is Pre-CIPT Property is consolidated with CIPT Property and the CIPT property is 50% or more of the consolidated property.

In a subdivision involving CIPT Property, the subdivided lots will be CIPT Property with the applicable dates that operated on the parent property.

What if there is a change of use of the property?

If property is CIPT Property and has been involved in a stamp duty free transaction and then there is a change of use so that it ceases to have a qualifying commercial and industrial use, then the SRO will assess stamp duty on the land at the time the use changes with the dutiable date being the date of the last stamp duty free transaction.  The SRO will apply a 10% discount for each year that has passed since the stamp duty free transaction that is being reassessed.  There is an obligation to notify the SRO of a change of use within 30 days.

What will change in the sale process?

The Vendor’s Statement in a sale should identify whether the property is CIPT Property and, if so, when the property entered into the CIPT system.  Property clearance certificates will be able to be obtained to confirm the CIPT payable on a property.

CIPT will not be adjustable at settlement.  This is in line with the position on land tax from 1 January 2024 for land that is below the high value threshold.

Will there be an effect on Leases?

If you are an investor/Landlord, you can claim the CIPT for reimbursement by non-retail commercial Tenants in the same manner as land tax - provided this is allowed for in your Lease. You will not be able to recover the CIPT from residential or retail Tenants (as is the case with land tax).

What resources are available for the CIPT?

State Revenue Office: https://www.sro.vic.gov.au/commercial-and-industrial-property-tax

State Revenue Office Information Sheet: At the bottom of the page linked above.

Treasury and Finance Reform Information: https://www.dtf.vic.gov.au/funds-programs-and-policies/commercial-and-industrial-property-tax-reform

**Note that the above summary addresses the general operation of the CIPT and not any specific individual circumstance. There are specific applications, exemptions and nuances in the CIPT legislation which have not been addressed. You should obtain advice on your individual circumstances prior to making any decisions with respect to the CIPT.

How Sharrock Pitman Legal can help?

The introduction of the CIPT brings about a significant change to the property landscape in Victoria for owners and prospective investors. Contact our Accredited Specialist Property Law team for advice on your situation on 1300 205 506 or sp@sharrockpitman.com.au.

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‍The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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