COVID hangover: VIC budget 2023/24 tax measures

By Jim Koutsokostas and Bradley White

The Victorian Budget 2023/24 includes the new COVID Debt Repayment Plan, designed to claw back some of the deficit blow out from the pandemic. That means tax news.

The reaction to the announcement has been mostly unenthusiastic. On the whole, the measures are likely to further fuel the burden felt as a result of inflation. Prices for goods and services may need to increase, or resources shaved, so affected businesses can defray the cost of the new surcharges. This Budget appears to be less about building economic resilience and more about boosting revenue. And notably, these new taxes are likely to barely make a dent in the existing deficit to rebalance the State’s ledger.

Below is a round-up of the tax changes to keep in mind for the coming year. We’ve already covered the most significant change: the phase-out of duty for commercial and industrial properties in a more detailed standalone article.

COVID surcharges

COVID-19 debt temporary payroll tax surcharge

Victorian businesses with an annual national payroll of more than $10 million will see a temporary payroll tax surcharge of 0.5% applied from 1 July 2023 for the next 10 years. Businesses with national payrolls above $100 million will face 0.5% on top of that, increasing their effective payroll tax rate from 4.85% to 5.85%. The surcharge will apply until 30 June 2033. The levy is projected to raise $3.874 billion in revenue over four years. It appears this surcharge will be in addition to the mental health and wellbeing surcharge that was announced by the Government in 2021, which commenced on 1 January 2022.

Businesses are already facing significant cost pressures on labour, energy and other overheads. This increase to payroll tax will see conducting business in Victoria become more expensive compared to other states. And don’t let the $10 million payroll threshold distract you. Due to the broad payroll tax grouping provisions, small businesses may still find themselves in the crosshairs.

COVID-19 debt temporary land tax surcharge

A new COVID-19 debt temporary land tax surcharge will also apply in addition to existing land tax from the 2024 land tax year for the next 10 years. Exempt properties – including the principal place of residence – will be exempt from the surcharge.

Surcharge for general land tax properties

• For taxable landholdings between $50,000 and $100,000 – a $500 flat surcharge will apply.
• For taxable landholdings between $100,000 and $300,000 – a $975 flat surcharge will apply.
• For taxable landholdings over $300,000:
  • a $975 flat surcharge; plus
  • a land tax rate of 0.10% in addition to general land tax rates.

Surcharge for trust surcharge land tax properties

• For taxable landholdings between $50,000 and $100,000 – a $500 flat surcharge will apply.
• For taxable landholdings between $100,000 and $250,000 – a $975 flat surcharge will apply.
• For taxable landholdings over $250,000:
  • a $975 flat surcharge; plus
  • a land tax rate of 0.10% in addition to trust surcharge land tax rates.

This COVID-related levy will impact investment properties and holiday homes most. The Government estimates that about 380,000 properties will now be subject to land tax that were not previously, and an additional estimated land tax bill of $1,300 a year for homeowners affected.

Treasurer Tim Pallas justified the temporary surcharge by noting that land values have increased by 84% in the past decade. This justification is somewhat confusing given increases in land value naturally result in high land tax amounts being levied. With the effective removal of the contiguous land exemption in 2018 and the sustained impact of this surcharge, landowners may be reassessing their landholdings, their landholding structures and the availability of any potential exemptions.

Further land tax changes

Absentee owner surcharge rate increase

The absentee owner surcharge rate will increase from 2% to 4% from the 2024 land tax year for eligible properties. The minimum threshold for non-trust absentee owners will decrease from $300,000 to $50,000. The threshold for land held by an absentee trust remains unchanged.

Foreign investors will bear the brunt of this hike, which aligns Victoria with the higher rate imposed by New South Wales.

The absentee owner surcharge can be a significant cost, particularly given recent increases in capital improved values of homes in areas that have traditionally been holiday destinations (readers with properties on the Mornington Peninsula may be able to relate). Rising land tax and now absentee owner surcharge rates make owning an investment property (or holiday home) an increasingly expensive endeavour.

Before purchasing a property, it is worthwhile obtaining advice as to the potential taxes involved, and the exemptions that may apply.

Land tax exemptions

PPR exemption expansion

From the 2024 land tax year, the land tax exemption for principal places of residence under construction or renovation will be expanded to provide the Commissioner of State Revenue with discretion to extend the period by two years – if the builder goes into liquidation.

Given the issues facing the construction industry with delays in supply and resourcing – and the collapse of a number of property developers and builders – this change is welcome.

Trust for Nature

A new land tax exemption will be introduced from the 2024 land tax year for land protected by a conservation covenant with Trust for Nature.

Immediate family members

From the 2024 land tax year, a new land tax exemption will apply where an individual that is eligible to be a beneficiary of a special disability trust uses and occupies land owned by their immediate family member as their principal place of residence. This exemption includes circumstances where a special disability trust has not actually been established, but if it were, the individual would satisfy the criteria to be a beneficiary.

This is a welcome addition that ensures individuals, holding or purchasing property on behalf of family members suffering from some form of disability or other condition, are not unfairly subjected to an additional land tax burden.

Payroll tax changes

Payroll tax-free threshold increase

From 1 July 2024, the payroll tax-free threshold will be increased:

• commencing 1 July 2024 – from $700,000 to $900,000; and
• commencing 1 July 2025 – from $900,000 to $1,000,000.

This measure will hopefully provide some relief to the burden experienced by an estimated 4,200 micro-businesses and a further 22,000 small-medium enterprises.

The deduction associated with the tax-free threshold will begin phasing out for every dollar of wages above $3 million. This means businesses with wages above $5 million will not receive any benefit associated with the payroll tax-free threshold.

These changes will be welcomed by businesses with taxable wages up to $3 million.

However, due to the phasing out of the tax-free threshold after this point, any business with taxable wages in excess of $3 million will be worse off. Making it more expensive to employ individuals during these tumultuous economic times may put unnecessary and additional strain on struggling employers, especially those with low margins. This approach also means that the stakes are raised for those business structures already in the State Revenue Office’s cross hairs, such as general practitioner clinics.

Payroll tax exemption for high-fee non-government schools

The payroll tax exemption for high-fee non-government schools will be removed from 1 July 2024.

Approximately 110 schools across Victoria are expected to be affected by the measure (or the top 15% by fee level), with an estimated $134.8 million generated when it takes effect in 2024-25.

The Minister for Education will determine which non-government schools will continue to be exempt from payroll tax. This will bring affected non-government schools in line with government schools (which are not exempt).

Transfer duty changes

Special disability trust concession

From 1 July 2023, the deduction threshold for the transfer duty special disability trust concession will increase from $500,000 to $1.5 million for principal place of residence transfers.

Also from 1 July 2023, a new transfer duty concession will apply for the transfer of a home valued up to $1.5 million by an immediate family member to an individual eligible to be a beneficiary of a special disability trust.

Pensioner exemption and concession thresholds increase

The transfer duty pensioner exemption and concession thresholds will be aligned with the thresholds for first home buyers, at $600,000 and $750,000 respectively. Eligibility will be assessed on the total value of the purchase. This will apply for contracts entered into from 1 July 2023.

Other taxes

Business insurance duty abolished

Business insurance duty will be abolished over a 10-year period from 1 July 2024. The rate of duty, currently at 10%, will be reduced by 1% each year.

The Government estimates businesses will save approximately $3,200 on professional indemnity insurance, or $2,400 on fire and other special risk insurance over the decade.

Wagering and betting tax rate increase

The wagering and betting tax rate will increase from 10% to 15% of net wagering revenue from 1 July 2024.

This measure will bring Victoria in line with all other States, except Queensland.

Bottom line

Broadly speaking, this Budget appears to be squarely targeted at revenue raising and refilling the State’s coffers after significant outlays resulting from the COVID-19 pandemic.

However, since the pandemic, we have already seen the introduction of a new tax that is set to do a pretty good job at revenue raising – the Windfall Gains Tax (WGT). For those who may have missed it, this tax comes into effect on 1 July 2023 and can result in up to 50% of the windfall gain made on rezonings of land being subject to tax. Although this tax can be deferred, it is difficult to argue that it will not play a significant role in offsetting the State’s COVID-19 spending. This is particularly the case given that industry experts consider the revenue that the State has estimated the WGT will raise is grossly underestimated.

With the introduction of WGT on the horizon, some may question the necessity of the surcharges discussed above. Perhaps the WGT will take too long to raise enough revenue to offset spending during the pandemic. Perhaps the WGT is truly the Government wanting its share on Government-actioned increases in land value – on wind fall gains.

Further, the new surcharges are not the only revenue-raising feature in the Budget. The payroll tax-free threshold is being phased out for businesses with taxable wages over $3 million and the absentee owner surcharge is doubling. New costs to be borne by businesses are likely to be passed onto consumers, and increases in land tax are likely to be passed onto renters. Some would say that this undercuts one of the purposes of the Budget – assisting those struggling with the rising cost of living.

Indeed, there doesn’t appear to be much in the State Budget’s tax measures that assists with housing affordability. Long overdue is an adjustment to the thresholds for the first home buyers concession which currently applies to purchases between $600,000 and $750,000. Compare this with New South Wales, where no duty is payable on homes purchased by first home buyers valued at up to $800,000, with a concessional rate applying to homes up to $1 million.

The Victorian Government is in an unenviable position. The need to address the impact of COVID-19 spending on Treasury’s bottom line is a real one. But at what cost to Victorians?

Let’s hope the Budget tax measures do not push businesses and Victorians over the brink.

This article was written with the assistance of Tracey Hoffman, Law Graduate.