Proposed Changes to Vacant Residential Land Tax

Update: December 2023 – The changes to the vacant residential land tax (VRLT) laws have now passed into law, with the new bill receiving Royal Assent on 12 November 2023. Read more in our article here.

The Victorian government has this week announced significant changes to the vacant residential land tax (VRLT), which could have major impact on owners of holiday homes.

To avoid incurring an unexpected land tax liability, anyone owning a holiday home in Victoria will need to give careful consideration to the new rules and plan accordingly.  

What is VRLT?

VRLT is an annual tax collected by the State Revenue Office. It is separate and additional to standard land tax.

VRLT is calculated as 1% of the capital improved value of the property – this means a property with a capital improved value of $1.5m would incur a VRLT bill of $15,000 annually.

It is important to note that this is different to standard land tax, which is calculated on ‘site value’ (unimproved value).

Current operation of VRLT

Currently, only properties in the inner and middle suburbs of Melbourne are caught by the VRLT net. 

Properties in those areas are liable for VRLT in any calendar year where the property ticks all of these boxes:

  • residential in nature (ie. currently able to be used solely or primarily for residential purposes, or land on which a residence is being renovated, or where a former residence has been demolished and a new residence is being constructed);
  • vacant for more than six months in the preceding calendar year (the period of six months does not need to be continuous); and
  • does not satisfy one of the legislated grounds of exemption.

The exemptions from VRLT include the following scenarios:

  • Holiday homes – The property was used as a holiday home and occupied by the owner for at least four weeks of the preceding calendar year. To be entitled to this exemption, the owner must have principal place of residence (PPR) elsewhere in Australia. The holiday home exemption can only be applied to one property.
  • Business use – The property was used by the owner to attend the owner’s place of business or employment for at least 140 days of the preceding calendar year.
  • Change of ownership – The property changed ownership in the preceding calendar year.
  • Renovations – Properties in the process of undergoing construction of a home or significant renovations will not be considered vacant for up to two years from a building permit being issued.

Importantly, residential properties owned by companies, organisations and trusts are generally not eligible for the first two exemptions.

Proposed changes to the VRLT

The Government is proposing to extend the current VRLT rules to the whole of Victoria with effect from 1 January 2025.

Further amendments will also be made to expand the type of land which will be subject to VRLT.

  • The definition of ‘residential land’ is proposed to widen to include vacant land which has been unimproved for more than five years.
  • It will also include land in metropolitan Melbourne which is not solely or primarily used for non-residential use.

Some additional VRLT exemptions have been proposed, including:

  • Land that is contiguous to the owner’s PPR such as a swimming pool or tennis court; and
  • Land that cannot be used or developed for residential purposes.

These further amendments and additional exemptions are scheduled to come into force on 1 January 2026.

What should you do?

If the proposed changes are passed by the Parliament, there are a lot of people who could potentially receive a hefty and unexpected VRLT bill in 2025.

To reduce the chances of being one of those people, follow these tips:

  • Anyone who owns more than one residential property in Victoria should consider taking steps ensure that their properties are not considered ‘vacant’ for more than six months in a year. Options available include:
    • Leasing the property out formally to a tenant (whether short-term or long-term).
    • Permit someone else to reside at the property as their PPR (a common scenario is allowing a relative to reside at a property – importantly, though, this cannot be on a casual basis, and the permitted person must be treating the property as their PPR).
    • Ensuring that the registered owner stays at the property as a holiday home for at least 4 weeks each year.
  • If you (or your client) own land in a company, trust or other organisation’s name and use it as a holiday home or for business use, it is essential to seek advice as to whether any exemption will be available. This will also be relevant to properties intended to be held in a testamentary trust following a person’s death. If not, then one option could be to restructure the ownership of the property – for example, by distributing the property out of the trust to a beneficiary who uses the property as a holiday home. Such transfers can have potentially significant duty and CGT implications however, and so tax issues will need to be carefully considered before proceeding, along with the impact on any existing estate planning arrangements.

How we can help

The team at Moores is across the complex issues raised by the VRLT changes, and would be glad to help you or your clients to navigate the new rules.

We can assist with:

  • Advising on the impact of the changes on a specific person’s landholdings
  • Exploring options to ensure that a property is not vacant and caught by the VRLT regime
  • Exploring potential restructuring options, including tax and estate planning and administration implications

Contact us

Please contact us for more detailed and tailored help

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Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.