By Charlotte Black – Partner
WHAT IS IT AND HOW DOES IT AFFECT ME?
The Victorian State Government has recently announced the introduction of the new Commercial and Industrial Property Tax or CIPT which will come into effect on 1 July 2024. The introduction of the CIPT is intended to abolish stamp duty on the purchase of commercial and industrial property.
But what does this tax mean and how will it impact transactions moving forward.
What is CIPT
Prior to 1 July 2024, where commercial or industrial property is transacted on, the purchasing party would be required to pay land transfer duty, which is more commonly known as Stamp Duty. Stamp Duty represents a significant upfront cost for a purchaser.
However, with the introduction of the Commercial and Industrial Property Tax, from 1 July 2024, commercial and industrial properties will move away from Stamp Duty and instead enter the CIPT scheme.
Commercial and Industrial Property Tax, once payable, will be an annual levy applied to a property at a rate of 1% of the site value (which is more commonly known as the unimproved value). It is important to note that CIPT is payable in addition to Land Tax.
When will CIPT apply
From 1 July 2024, Commercial and Industrial properties will move to a 10-year transition period. However, CIPT will not be payable immediately after 1 July 2024.
A property will enter the 10-year transition period which will commence upon an entry transaction occurring.
Entry transaction
An Entry Transaction for a Commercial or Industrial Property occurs when all of the following occur.
- A transaction occurs in relation to the property (such as a sale);
- The transaction is entered into pursuant to an agreement entered into on or after 1 July 2024;
- The transaction would ordinarily have attracted stamp duty;
- On the date the transaction, the property is a type of property which falls under the CIPT scheme.
What is payable on an Entry Transaction
Where an Entry Transaction occurs, the party who would ordinarily pay Stamp Duty (generally the purchaser) will have a choice whether to:
- Pay stamp duty as one lump sum payment; or
- Pay stamp duty plus interest over a 10-year period with a government facilitated loan.
This gives the purchasing party an option as to whether to pay stamp duty up front or spread the payment over the 10-year transition period. However it is important to note that if you spread out payment of the Stamp Duty over 10 years, you will have to pay interest on that.
Transactions during the 10-year transition period
After a property is transacted on after 1 July 2024, the property will enter its 10-year transition period.
It is only at the end of this 10-year transition period that CIPT will be payable in relation to a property.
EXAMPLE
John enters into a Contract to purchase a commercial property at 1 Smith Street. Settlement of his property occurs on 1 December 2024. This is the Entry Transaction for 1 Smith Street.
John can choose to either pay the Stamp Duty due on his purchase on 1 December 2024 or spread out that payment over 10 years. John chooses to pay his Stamp Duty up front.
The 10-year transition period for 1 Smith Street therefore commences on 1 December 2024 and will conclude on 1 December 2034.
On 1 April 2030, John sells 1 Smith Street to Michael. As 1 Smith Street is already part of the CIPT Scheme and as John paid Stamp Duty when the property entered the scheme, Michael is not required to pay any Stamp Duty nor CIPT.
On 1 December 2034, Michael is still the owner of 1 Smith Street and will therefore commence paying CIPT at a rate of 1% of the Site Value of the property.
Conclusion
The introduction of CIPT has created a great deal of uncertainty amongst owners and potential purchasers of commercial and industrial property.
If you have any questions or concerns about how CIPT may apply to your property or a property you are considering purchasing, please contact Mr Richard Mackenzie or Ms Charlotte Black on (03) 8621 1000 at our Melbourne office or (03) 9331 1144 at our Essendon office or via email at advisors@emlawyers.com.au at Eales & Mackenzie.
