New analysis says Victorian tenants could potentially pay more under the recent property tax changes in this year’s State Government Budget.  

Last week, the Victorian Government expanded and revised property taxes in its latest Budget in a move that has been widely criticised by property groups.  

The tax changes included decreasing the tax-free threshold for general land tax rates from $300,000 to $50,000 and slapping many taxpaying-landholders with a temporary ‘COVID-debt’ fixed charge levy.

“These tax reforms will not only impact owners but potentially tenants as market rentals could be affected in addition to capital values, depending on how outgoings are recovered in pre-existing leases,” Preston Rowe Paterson CEO Greg Sugars said. 

For commercial office, industrial and some retail leases subject to a net lease, the tenant pays a net rental plus outgoings including statutory outgoings.  

According to analysis from Preston Rowe Paterson, if the new taxes fall within the existing lease definition of outgoings, the tenant may be forced to pay more, potentially pushing lease rentals above market rents. 

On the other hand, if a lease is a gross lease where outgoings are paid for by the landlord from the rental tenants’ pay, the resultant net rental will be less and when capitalised the properties market value will be less. 

For many investors, both commercial and residential, where they had previously been below the $300,000 land tax threshold, they were now faced with the impost of land tax as the threshold had reduced to $50,000.  

“A huge number of residential strata titled properties, which previously were exempt from land tax will now fall under the new threshold and become subject to the tax for the first time,” Sugars said.  

“Land tax is a cost to development as a holding cost, not only whist waiting to achieve development approvals after a site has been acquired, but also during construction until the project has been sold. Therefore, development site land values will be impacted. We already know development approvals are at their lowest in four years and that, combined with rising interest rates, the supply of development land will continue to be an issue in a market where we need more land supply to meet population growth.”  

Sugars said most landowners, including investors and developers, borrowed to purchase properties from various types of debt providers, including bank and non-bank lenders. He said most lenders would be anxious to test the likely impact on market values.  

The tax changes come at a time when the residential rental crisis was already testing Victorian residential tenants, Sugars said.  

“We already have record low vacancies, increasing residential rental prices, in the order of 11.5% year-on-year in Melbourne and 4% year on year in regional Victoria,” he said. 

“Add to this the expected population growth due to increased immigration over the coming years, lower housing starts and lower dwelling approvals, and we cannot see the crisis abating for quite some time. We have no doubt that Landlords will move to pass the increased Land and Property Tax burden onto tenants in the residential space as is already happening in Queensland following that state’s announced land tax changes.”  

Preston Rowe Paterson’s Victorian valuers were already advancing plans to take into account the impact of the changes in their market rental and capital valuations.  

Under the tax changes, a temporary ‘COVID-debt’ fixed charge levy of $500 will apply for taxpayers with landholdings between $50,000 and $100,000, and a temporary fixed charge levy of $975 for taxpayers with landholdings between $100,000 and $300,000.   

For general taxpayers with property landholdings of more than $300,000 (and trust taxpayers with property holdings above $250,000) land tax rates will temporarily increase by $975 plus 0.1% of the value of their landholdings of more than $300,000. 

The Victorian Government also announced plans to reform stamp duty laws, replacing stamp duty for commercial and industrial properties with a flat tax from mid-next year.