Land tax changes to put residential developers in more pain

November 2023
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Land tax changes to put residential developers in more pain

Land Tax Changes Victoria

The Victorian Treasurer unexpectedly announced further significant property tax updates in early October, after already having introduced various significant property tax changes less than five months prior as part of the 2023-24 Victorian Budget.

The changes slated to impact property owners as early as 1 January 2024 include major expansions to the Vacant Residential Land Tax (VRLT) rules.

The changes are in draft legislation subject to approval by the Victorian Parliament at the time of writing. 

What are the changes?

The major changes proposed are:

  1. The VRLT is to be payable (at the rate of 1% of the Capital Improved Value (CIV)) on any residential properties anywhere in Victoria that are vacant for more than six months in the previous calendar year. Previously only relevant to properties in inner and middle Melbourne, this is proposed to apply from 1 January 2025, affecting Victorian residential properties that were vacant for the requisite period in 2024.


  1. The VRLT is to also apply to unimproved or undeveloped properties that have been unimproved for five years or more in certain areas of metropolitan Melbourne, that are currently not subject to the VRLT. This is proposed to apply from 1 January 2026, affecting properties that have not been developed as required by the end of 2025.


VRLT background and issues 

The VRLT has been a problematic property tax for years; its saving grace being that it has only applied to residential properties in the inner and middle suburbs of Melbourne. The existing problems will become more widespread with the proposed expansions to the VRLT rules.

Introduced in Victoria back in 2017 as the first of its kind at the state level for residential properties (no surprises there, as the state of Victoria is often a trailblazer when it comes to property taxes), the VRLT was designed to address the number of properties left empty across inner and middle Melbourne suburbs.

The government’s stated aim is to encourage “owners who unreasonably leave these properties vacant” to make them available for either purchase or rent hence reducing “the pressure on house prices and rents and add to the government’s overall housing affordability strategy”.

Accordingly, the VRLT has to date targeted only areas of Melbourne where issues of housing affordability are considered most pressing.

The crude supply/demand rationale for the tax is questionable, as in its five year tenure we have not seen any statistical evidence of the tax achieving its purported aims.

In introducing the proposed expansions to the VRLT rules, it was recognised that the issue of housing affordability remains acute across the whole of Victoria with the expectation that expanding the VRLT to the entire state will ease pressure on rents and prices.

Current evidence makes this unlikely.

When the VRLT was first introduced in 2017, the government recognised that “there are legitimate reasons why some properties have been left unoccupied and sought valuable input from industry stakeholders on the nature and extent of the exemption that will be required” and designed exemptions for holiday homes, city properties used regularly for work purposes, and residences undergoing renovations or rebuilds.

However, there was a lack of proper industry consultation, leaving many persisting problems that are expected to compound with the proposed VRLT expansions.   

Existing problems for residential developers

A key problem relates to residential projects that suffer delays in construction, or that have completed but the developers suffer issues with selling all residential stock. In those scenarios, a developer could face prolonged holding costs (such as ordinary land tax) and the VRLT at 1% of the CIV of the relevant properties.

It is mind-boggling that developers, who are instrumental contributors to the supply of housing (and help advance the government’s housing policy), can get stuck with a bill for the VRLT despite all efforts to complete developments and sell properties in a timely manner.

This appears to be an unintended consequence when you look at the background policy statements referred to above, and is no doubt unfair for the developers as well as the eventual purchasers of the properties given the VRLT would generally factor into the prices for the properties.  

While the above scenarios can affect several developers across multiple land tax years, there is next to no relief for such issues in the relevant VRLT legislation. This leaves many developers with limited potential solutions to deal with the issue. 

Existing problems for holiday homes

Another key problem is one that involves holiday homes. Many holiday homeowners hold their respective holiday homes in discretionary trusts. However, the holiday house exemption only applies where, among other things, the owner of the holiday home also has a principal place of residence in Australia.

This means that, essentially, the owner of the holiday house needs to be an individual, and holiday homes owned by trusts, such as discretionary/family trusts and companies, are not eligible for the exemption.

While there may be solutions involving the transfer of the ownership of the holiday home to an individual, often a transfer of ownership involves significant tax complications and therefore is not always feasible. 

New problems

Apart from the existing problems, the proposed changes to the VRLT rules carry new problems.

Firstly, the expanded rules are proposed to take affect from the 2025 land tax year which, according to drafters of the new rules, provides “adequate time” for landowners to deal with the changes.
However, the application of the rules in the 2025 land tax year looks back to the use of the property starting from 1 January 2024 – about two months away.
As properties count as vacant if not occupied for more than six months in a year, properties at risk of the VRLT effectively need to be occupied starting no later than July 2024.

So in reality, many landowners have approximately six to seven months to get their head around yet another set of new tax rules (assuming Parliament passes the rules by the end of 2023), ensure that any properties undergoing construction or renovation are completed within the relevant timeframe, ensure that properties are fit for occupation and ensure that the properties will actually be occupied for the relevant periods.

Adequate time?

I think many would disagree.

Secondly, when it comes to the application of the rules to unimproved or undeveloped properties, the proposed rules, as currently drafted, provide the Commissioner of State Revenue with a range of discretionary powers to decide if properties should be subject to the VRLT.
This could give rise to a lot of uncertainty and lead to potentially harsh outcomes for landowners.
While taxpayers may sometimes benefit from the exercise of the Commissioner’s discretion in their favour, leaving broad discretionary powers with the Commissioner is unwise.
With various circumstances (such as planning delays) often outside a landowner’s control, this could leave room for subjectivity and disputes regarding when and how the discretionary powers should be exercised.

Be aware and act now

Unfortunately, with these VRLT changes Victoria is expected to maintain its reputation for the highest property taxes, and time will tell if the changes ultimately hinder, instead of help, the housing issues.

Developers and holiday homeowners need to be aware of the proposed changes, consider the potential impact on their specific circumstances and explore mitigating strategies where required.
The rules are complex and the quantum of VRLT could be significant (as it is a percentage of the CIV) - so property owners should tread carefully. 

Photo by Dylan Lu on Unsplash

Author: Irina Tan is a Partner with Pitcher Partners in their Melbourne office.

Irina Tan
Pitcher Partners

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