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Additional Taxes to be Imposed on Victorian Properties
Vacant Residential Land Tax
The “Vacant Residential Land Tax” (“VRLT”) was implemented by the Victorian government in an attempt to address a lack of housing supply, by imposing an additional tax (on top of regular land tax) on properties that remain vacant for more than 6 months of the preceding calendar year.
Currently, the VRLT only applies to vacant properties in certain metropolitan areas. However, the Victorian Treasurer recently announced an expansion to the VRLT, consisting of two changes:
- The VRLT will be expanded to residential properties across the whole State from 1 January 2025 (based on the use of the property from 1 January – 31 December 2024).
- From 1 January 2026, vacant land in Melbourne that remains undeveloped for more than 5 years will be subject to the additional tax.
A Bill outlining these changes has now been introduced to Parliament.
The additional tax is charged at 1% of the capital improved value (“CIV”) of taxable land. The CIV of a property is the value of the land, buildings and any other capital improvements made to the property and displayed on the council rates notice for the property.
Therefore, on a property with a CIV of $1.5 million, the VRLT liability would be $15,000.
The Treasurer announced that they expect this to affect up to 700 vacant properties and 3,000 undeveloped properties. Holiday homes will continue to be exempt under the following circumstances:
- The property must be a genuine holiday home that is utilised by the owner for at least 4 weeks (either continuous or aggregate) within a calendar year;
- The property can’t be owned by a company or held within a trust; and
- The owner can only claim the exemption on one holiday home.
Additional Property Tax Considerations:
- A levy of 7.5% on all short-stay rentals has been announced, including through platforms such as Airbnb and Stayz. It is expected that this will come into effect from 2025.
- As discussed in our Victorian State Budget Newsletter in May, the Victorian government is introducing a Covid-19 Debt Recovery Levy, which will see additional land tax liabilities on properties with a value above $50,000. This should apply from 1 January 2024.
- From 1 January 2024, it will be an offence for a vendor to enter into a contract of sale of land that apportions any of the land tax liability and/or existing Windfall Gains Tax liability to the purchaser, which is a significant shift from current common practice. This is currently intended to cover both residential and commercial properties.
These proposed changes are yet to pass through Parliament, meaning that their final form may vary. However, if you own property in Victoria and want to know whether these changes will affect you, we encourage you to contact your SiP Director.
Small Business Energy Incentive
Small businesses may be eligible to claim a bonus 20% deduction on the cost of eligible assets (or improvements to existing assets) purchased throughout FY24 which support electrification or improved energy efficiency. The incentive aims to encourage businesses to move towards more energy efficient operations.
The bonus deduction applies to expenditure of up to $100,000, meaning that a bonus deduction of $20,000 will be available to eligible businesses (which, based on a 25% tax rate, equates to a tax saving of $5,000). To be eligible for this incentive, the following criteria must be met:
- Small business with an aggregated turnover of less than $50 million.
- The expenditure must be for eligible depreciating assets or eligible deductible improvements.
- Eligible depreciating assets include:
- Assets that use electricity instead of fossil fuels (where a reasonably comparable fossil fuel option is available in the market), such as electric heating and cooling systems.
- Assets that facilitate energy storage, efficiency, or demand management.
- If replacing an existing asset, a more energy efficient replacement asset (must be powered by electricity).
- Eligible improvements include:
- Upgrading part of an asset that enables use of electricity rather than fossil fuels (or improved energy efficiency if already utilising electricity).
- Improvements that allow for energy use to be monitored.
- The expense must be incurred, or the new asset first used or installed, between 1 July 2023 and 30 June 2024.
Certain expenditure is specifically excluded from the bonus deduction, such as:
- Expenditure on assets that utilise fossil fuels (even if it improves energy efficiency).
- Assets which have a sole or predominant purpose of generating electricity (e.g. solar panels).
- Motor vehicles (including hybrid and electric vehicles) and expenditure on motor vehicles.
As this incentive has not yet been legislated, certain details of the incentive may still change.
If you intend to upgrade to more energy efficient assets and would like to understand whether this incentive may be beneficial to your business, feel free to reach out to our team.
Updated Guidance on Payroll Tax for Medical Centres
In recent months, there has been a shift from State revenue authorities in how the Payroll Tax rules are being applied to existing service or facilities agreements between medical centres and practitioners.
In our February 2023 Tax Update, we discussed the release of updated guidance from the Queensland Revenue Office and the key features of such arrangements now in the Payroll Tax spotlight. And as was expected at the time, Victoria, NSW and South Australia have followed Queensland’s lead.
Broadly, the updated interpretation relates to agreements whereby:
- Medical centres engage practitioners to provide patients with medical services on behalf of the medical centre.
- The medical centre provides the necessary facilities to the practitioner, such as the consulting rooms.
- The medical centre is responsible for managing patient records, billing patients and booking appointments.
- The patient’s medical fees are paid to the medical centre, with a percentage then being paid across to the practitioner.
While these arrangements have previously fallen outside of the Payroll Tax scope, recent court cases, such as the Thomas and Naaz case, have prompted several State governments to change how they view such arrangements, resulting in many medical practices suddenly being hit with large payroll tax bills.
As per the new Victorian ruling, “if the contract provides, either expressly or by implication, that a practitioner is engaged to supply work-related services to the medical centre by serving patients for or on behalf of the medical centre, the contract is a relevant contract” and therefore Payroll Tax should apply ().
However, in a recent turn of events, the Queensland government subsequently eased their approach, releasing an updated ruling in September. The update provides that under normal business arrangements, patient fees (made up of the Medicare benefit and any out-of-pocket expenses) paid by a patient directly to a practitioner for their services will not be subject to Payroll Tax. In other words, if patient fees are paid directly to a bank account of the GP/Specialist, rather than to the practice first, then Payroll Tax should not apply in Queensland.
Additionally, the NSW government has agreed to pause compliance programs for 12 months in relation to Payroll Tax for general practices, while the South Australian government announced an amnesty program for general practices, which should relieve them of their Payroll Tax liabilities until 30 June 2024.
Unfortunately, at this stage there are no signs of Victoria adopting similar concessions.
These updates are going to adversely impact medical centre operators, as existing arrangements are likely to now be subject to Payroll Tax. Ultimately, this is likely to lead to higher fees being charged to patients, as medical centres seek to recoup their Payroll Tax liability. As such, medical centre operators and practitioners should review their current arrangements and reach out to us to assess the impact on their practice.
AAT Determines That a UPE is Not a Loan for the Purposes of Division 7A
Division 7A operates to avoid company profits being accessed by shareholders (or their associates) tax free. Where a company makes a loan to a shareholder (or their associate), it must be either repaid or placed onto commercial loan terms within a prescribed period to avoid triggering a deemed dividend.
Historically, it has been the view of the ATO that a UPE from a discretionary trust to a corporate beneficiary constitutes financial accommodation which is considered a loan for Division 7A purposes. This is because:
- Where a beneficiary is aware there is an unpaid amount they can demand from the trustee, the beneficiary is effectively loaning the amount of the UPE to the trust.
- Within a family group, where there is a UPE from a trust to a private company beneficiary, the trust would likely be considered an associate of the private company, even if the trust is not directly a shareholder of the private company.
As such, where these structures are present, there is significant tax planning required to ensure that any UPEs to corporate beneficiaries are converted onto complying Division 7A loan terms.
However, the decision by the AAT in the recent Bendel case contended that the balance of an outstanding or unpaid entitlement to a corporate beneficiary of a trust, whether held on a separate trust or otherwise, was not a loan to the trust and therefore not financial accommodation.
This is a significant change from how the ATO has been treating these arrangements. However, taxpayers should be aware that this treatment should only apply to the extent that the trust has not loaned funds to other related entities given the application of Subdivision EA. Broadly, Subdivision EA applies where a trustee makes a loan to a shareholder of a private company during a year, but the trust then has a UPE owing to that private company beneficiary at the lodgement date of the trust tax return for that year.
In the diagram above, by not calling on the UPE, the company has effectively provided financial accommodation to the individual shareholder, which under Subdivision EA would trigger a deemed dividend. While this decision is promising and would be considered a win for family groups with these sorts of structures, it should be emphasised that the ATO may appeal the AAT’s decision to the Federal Court.
Further, AAT decisions are not binding on the ATO and as such the ATO will likely continue with their current interpretation of the law. Therefore, it may be a while before this issue is settled.
Summary of Additional Tax Changes in FY2024
In addition to the issues discussed above, a raft of other tax changes can be expected in FY24. We’ve summarised a couple of the key changes to be aware of.
Instant Asset Write-Off
The Temporary Full Expensing measure – which allowed businesses to claim an instant deduction for the full amount of assets purchased – came to an end as of 30 June 2023.
For the 2024 financial year, a new set of Instant Asset Write Off rules has been announced, allowing small businesses with an aggregated turnover less than $10 million to immediately deduct the full cost of eligible assets purchased where:
o The cost of the asset was less than $20,000, and
o The asset was first used or installed ready for use between 1 July 2023 and 30 June 2024.
Increase to Super Guarantee Rate for Employers
As of 1 July 2023, the Super Guarantee (“SG”) rate of super required to be paid by employers to their employees has increased from 10.5% to 11%.
Increase to Superannuation Transfer Balance Cap
The general transfer balance cap (i.e. the amount of superannuation that can be transferred into retirement phase) has increased to $1.9 million from 1 July 2023, up from $1.7 million.
Additionally, if your total superannuation balance (TSB) across all superfunds is in excess of $1.9 million from 1 July 2023, you are no longer eligible to make any further non-concessional contributions. In the event that you do exceed the $1.9 million cap, there are likely to be various tax consequences and actions required by the member.
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The above tax summary is intended to be general in nature. Should you believe that any of the above matters may be relevant to you or your Group’s particular circumstances, please discuss the specific details with your Slomoi Immerman Partners advisor.