The Baillieu Government has this afternoon handed down its first Victorian State Budget. The Pitcher Partners Tax Consulting team has reviewed the Budget and we highlight below the tax changes that have been announced by the Treasurer.

Summary
The first Budget handed down by the Baillieu Government contains no real surprises on the tax front.  The only significant announcement of interest to the business community is the proposal to change the stamp duty rules that apply to acquisitions of interests in ‘land rich’ entities.  The other main tax change is a reduction in the amount of stamp duty payable by first home buyers, young buyers of farm land and pensioners.  We discuss these changes in more detail below.

The slowing property market has hurt the state's finances with stamp duty revenues estimated to fall by $135 million or 3.5 per cent in coming financial year.

Budgeted revenue from all sources is expected to increase to $47.4 billion in 2011/12, reflecting an overall increase of 4.4%.  This includes a projected increase of just over $500 million in revenue from state taxes, including a $360 million or a 7.4% increase in payroll tax revenue.  Victoria’s share of the national GST revenue pool is predicted to decrease in 2011/12 due to changes in the Commonwealth funding model and a decrease in the total available GST pool.  As a result, the Government predicts that Victoria will lose $498 million in GST grants in the coming financial year.

Proposed changes to the ‘land rich’ duty rules from 1 July 2012
The Government has announced its intention to amend the Duties Act 2000 (Vic) to replace the current rules that impose duty on transactions relating to changes in the ownership of land rich private companies and unit trusts.  The changes will take effect from 1 July 2012.  Victoria will move to a land holder duty model from that date.

Stamp duty is imposed on a significant change of shareholding or unit holding in ‘land rich’ entities.  Under the current rules, entities are land rich if they hold land in Victoria with an unencumbered value of at least $1 million and their land holdings in Australia and elsewhere represent 60% or more of their total assets.  Duty is imposed where, over a 3 year period, a person acquires an interest of 50% or more in a land rich private company or 20% or more in a land rich private unit trust. 

Although there is no detail in the Budget on the proposed new land holder duty model, it is likely that the current requirement that land represents at least 60% of the total assets of the entity will be removed.  An entity will therefore be land rich if it holds land in Victoria that exceeds a certain (yet to be announced) value, irrespective of how significant its land holdings are as a percentage of its total assets.

Part of the rationale for the change is to bring Victoria into line with other states and territories.  A land holder duty has existed in New South Wales since July 2009.  In the New South Wales provisions, duty is imposed where a person acquires a significant interest (including 50% or more of a private company or a private unit trust) in a land holder that holds New South Wales land with an unencumbered value of $2 million or more.

Given that the Victorian Budget Papers estimate additional revenue of $50 million to $75 million a year from the move to the land holder duty model, it is possible that Victoria will retain its existing ‘land rich’ threshold of $1 million and impose duty where a person acquires an interest of 50% or more in a land rich private company or 20% or more in a land rich private unit trust.  These changes are likely to result in more transfers of shares and units becoming subject to duty.

From 1 July 2012, anyone contemplating taking a significant equity interest in an entity that holds land in Victoria will need to be even more careful to determine whether the entity they are acquiring an interest in is land rich.  Although the entity’s land holdings may represent an insignificant portion of its total assets, if the value of the entity’s land holdings in Victoria exceeds the threshold to be set by the Government, any significant acquisition in that entity could result in a liability for duty being incurred.

No changes to payroll tax or land tax
In relation to both payroll tax and land tax, no changes to the applicable rates or thresholds have been announced in the Budget.

Victoria continues to have the lowest threshold at which a business becomes liable for payroll tax.  As a result more and more small businesses are being drawn into the payroll tax net.  Once again the payroll tax threshold has been left at $550,000, representing the ninth year since it was last increased.  In addition the rate of payroll tax remains at 4.9%.

With the change of Government and the expected growth in the labour market, it was hoped that some fundamental reform of payroll tax might be considered particularly by raising the tax free threshold.  Regrettably this has not occurred and Victorian businesses will have to wait at least another year for any chance of positive reforms in this area.

In relation to land tax, overall revenue is expected to decline slightly in the coming financial year due to some timing issues in counting revenue and in what the State Treasury refers to as ‘the continued disaggregation of land holdings which incur a lower rate of tax’.  As with payroll tax, reforms in land tax would be welcomed particularly with the recent softening in property values.

New stamp duty concessions
The Government has announced that certain duty concessions will become available to first home buyers, pensioners and young farmers.

First home buyers
For people who qualify as first home buyers, there will be a 20% reduction in the amount of duty payable from 1 July this year if the property acquired is used as the principal place of residence.  The concession will increase gradually to a 50% reduction from 1 September 2014 as set out in the table below.

Table A: Duty concession for first home buyers

In addition to the duty concession, the Government has announced that the existing first home buyer grant and bonuses for new homes will be retained.  Eligible first home buyers will continue to receive a $7,000 grant when buying an established home valued up to $750,000 and a bonus of $13,000 for a new home valued up to $600,000.  If the new home is located in regional Victoria, an additional bonus of $6,500 will be payable.

Pensioners
Eligible pensioners currently enjoy a concession from duty if the property they acquire is valued between $330,000 and $440,000. Where the property is valued below $330,000 they receive a full exemption from stamp duty.

The Government is retaining the exemption for properties valued below $330,000 but will increase the concession threshold from $440,000 to $750,000. The Budget announcement also states that the concession will extend to the holders of a Commonwealth Seniors Health Card.

These changes will apply to contracts entered into on or after 1 July 2011.

First farm buyers under 35
From 1 July 2011, young farmers aged less than 35 will be eligible to receive a full exemption or a partial concession from duty when they purchase their first farm land property.  The full exemption applies to farm land property valued up to $300,000. Eligible farmers will be entitled to a partial concession if the farm land property is valued between $300,000 and $400,000.  No concession will be available for farm land that is valued in excess of $400,000.