Stamp duty changes for commercial property

WITH GARETH KENT, DIRECTOR PRESTON ROWE PATERSON

Rarely have we seen so much government meddling with the taxation and property systems.

With each change, it seems low-income earners or small businesses cop the backlash. I feel like every second article I’m writing is about a new property tax, it’s hard to keep up, and I am a professional in the industry.

Today I’m tasked with explaining the changes to stamp duty that will be impacting commercial and industrial properties from July 1, 2024 – yes, folks, that’s less than two weeks away!

In the May budget, the Victorian government announced the land transfer duty (stamp duty) on commercial and industrial property will be abolished and replaced with a commercial and industrial property tax.

For commercial and industrial property purchased after July 1, 2024, the owner will, upon settlement, pay the final stamp duty as either (a) an upfront lump sum or (b) 10 annual installments. Then in the 10th year, they will transition to a 1 per cent annual property tax, based upon the property’s site value.

Properties subject to this tax will be those classified as: commercial, industrial extractive industries, infrastructure and utilities, or “qualifying student accommodation’’. This could be the end of stamp duty, however if I recall, wasn’t GST supposed to replace stamp duty twenty years ago? Who is better off other than the tax office? Well that really depends on how long you hold the property unimproved land value. It is of note the same Victorian Government just reduced the thresholds for Land Tax Assessments from $300,000 to $50,000.

Let’s have a look at a case study for a comparison: you have just brought a nice industrial shed in Moolap as a long-term investment and you sign a contract for $1million. The land is 700sqm and has a site value of $650,000, and you are not an absentee owner (overseas investor). Your current land tax assessment should be $2,550 (based on the SRO online calculator).

If you had signed before July 1, 2024, and paid your stamp duty as part of your purchase loan (as most do) assuming principal and interest payments at current variable rate of 6.3 per cent over 25 years, you would have to pay $5,160 per year in additional loan repayments to cover the $65,000 stamp duty cost. Plus, your land tax of $2,550 – your total non-recoverable outgoings would be $6,775 per annum, and over a 25-year holding period you would be paying $129,118 in total.

Under the new regime, for the same property, signing your contract after July 1, 2024, the stamp duty of $65,000 is paid in 10 installments over the first 10 years – that’s $6,500 per annum – plus your land tax, you will have a non-recoverable outgoing $9,000 per annum so you are annually $2,225 out worse off over the first 10 years.

However, here is the real kicker. For the remaining 15 years (assuming a 25 year holding period) you will pay 1 per cent per annum of the site value. Now we know that commercial property prices increase on average 7 per cent annually, so in 10 years your site value is approximately $1.2 million, and your 1 per cent payments are now $12,000 annually, plus your land tax. Over the remaining 15 years, your total annual payments will equate to approximately $335,000, assuming the same 7 per cent annual growth.

So as an investor you are considerably worse off under the new regime. However, the real problem will be that when purchasing a property for investment, the buyer will build stamp duty into their initial purchase costs and seek to achieve a profit yield from the property. My fear is that this additional 1 per cent property tax will now be added to rental costs, passed on, and more small businesses will end up getting the short straw.

This is no different to the regime being placed on residential properties, for compliance and additional taxation. And what we have witnessed in the residential market over recent times is a serious decrease in investors, a shortfall of rental housing and the fastest increase in rental costs that we have ever seen.

If the taxation meddling continues in Victoria, in my view, these changes will again put further pressure on small businesses to move to another state, where fixed costs will be cheaper.