Vacant residential land tax — Extension of holiday home exemption

On 14 May 2024, the Victorian Government introduced the State Taxation Amendment Bill 2024 (Bill) into Parliament. The Bill (if passed) amends the Land Tax Act 2005 to expand the exemption from the vacant residential land tax (VRLT) for holiday homes.

Currently, this exemption applies to homes which are owned by natural persons, who must use and occupy other land in Australia as their principal place of residence (PPR). With effect from 1 January 2025, the broadened exemption will also apply to holiday homes that are owned by a company or trustee, subject to satisfying several requirements.

VRLT overview

The VRLT applies to residential properties that have been vacant for more than six months in the preceding calendar year. The VRLT is set at 1% of the capital improved value of taxable land, and is in addition to land tax. The VRLT currently applies only to residential land in inner and middle Melbourne, however from 1 January 2025, the VRLT will apply to residential land across all of Victoria.

A property is considered vacant if, for more than six months in the preceding calendar year, the following people have not lived at the property:

• the owner, or the owner’s permitted occupant, as their PPR; or
• a person under a lease or short-term letting arrangement made in good faith.

Currently, a home that is unoccupied for more than six months of the preceding calendar year may be exempt from VRLT if it was used as a holiday home and occupied by the owner for at least four weeks of that year, and the owner had their PPR in Australia.

Holiday homes held in discretionary trusts and companies are currently ineligible for this exemption.

The Bill proposes to extend the holiday home exemption to properties held in trusts, companies and unit trust schemes with effect from 1 January 2025. Accordingly, as it is common to hold properties in family trusts for asset protection purposes, trustees may be able to access this exemption, subject to satisfying several conditions.

Requirements for extended holiday home exemption

Discretionary trusts

The trustee of a discretionary trust will be eligible to access the exemption for a holiday home held in the trust where the following requirements are satisfied:

• the owner of the property (i.e. the trustee) has owned the property continuously since 28 November 2023, or became the owner of the land at a later date under a contract of purchase entered into on or before 28 November 2023 (relevant date);
• since the relevant date, any change in the ‘specified beneficiary’ of the trust has been limited to a change to add or remove a person who is a relative of another specified beneficiary;
• the PPR requirement is satisfied, being that a specified beneficiary of the trust who is a natural person, or a relative of that person, in the year preceding the tax year, used and occupied other land in Australia as a PPR (i.e. other than the holiday home);
• in the year preceding the tax year, the property has been used and occupied as a holiday home for a period of at least four weeks (whether continuous or aggregate) by a specified person, being the natural person referred to in point 3 above, or their relative; and
• the Commissioner of State Revenue (Commissioner) is satisfied that the land was used and occupied as a holiday home in the year preceding the relevant land tax year.

It is critical to note that this exemption will only apply if the Commissioner is satisfied that the property was genuinely used as a holiday home. In considering this matter, the Commissioner will take into account the following factors:

• the location of the land;
• the distance between the land and the PPR of the beneficiary or specified beneficiary; and
• the nature and frequency of the use of the land.

Contiguous land

Under the current provisions, an owner entitled to the holiday home exemption in a particular year is excluded from claiming the same exemption on any other land in that year (i.e. the exemption can be claimed only on one property).

However, the Bill provides an exception to the above, for residential land that has been unimproved for five years or more that is contiguous to land exempt under the holiday home exemption. Such unimproved land will also be eligible for exemption if the land:

• is contiguous with the holiday home land, or separated from the holiday home only by a road or railway, or other similar area across or around which movement is reasonably possible;
• enhances the holiday home land; and
• is used solely for the private benefit and enjoyment of the person who uses and occupies the holiday home land.

For example, such land that may qualify for exemption would include land used as a tennis court, swimming pool or a garden.

Comment

The extension of the holiday home exemption to trusts and companies is welcome, and will provide relief to many families who own a holiday home in vehicles such as family trusts. However, the exemption is not automatic, and there are several conditions that must be closely examined.

For example, in assessing entitlement to the exemption, care must be taken to not change the specified beneficiary of the trust, since it has held the land. If such a variation to the trust deed has already been made after that date, it would seem that entitlement to the exemption may potentially be lost.

To claim the holiday home exemption, it will be critical to document the use and occupancy of the holiday home, e.g. via a logbook, ensuring that the property is used as a holiday house for at least four weeks in each year. We also recommend that owners retain utilities invoices, e.g. water usage and electricity, and receipts from purchases in the surrounding vicinity (such as grocery shopping, restaurants, local entertainment). All records should be retained for at least five years, being the period in which the SRO can generally amend land tax assessments.

How can Rigby Cooke Lawyers help?

If you would like to discuss the extension of the VRLT to holiday homes, please contact our Tax and Property teams.