What investors can expect to pay under Victoria’s new COVID-19 debt levy

Who the new tax targets

The state has zeroed in on landowners and large businesses to fund its new COVID-19 debt repayment plan.

From 1 January 2024, the tax-free threshold for general land tax rates will temporarily decrease from $300,000 to $50,000. The family home will remain exempt from land tax.

Those who pay land tax will attract a temporary additional fixed charge starting at $500 for landholdings between $50,000 and $100,000. There will be a $975 fixed charge for landholdings above $100,000 and the tax rates will temporarily increase by 0.1 per cent for both general and trust taxpayers with holdings above $300,000 and $250,000, respectively.

The government will invest the funds in its Victorian Future Fund (VFF), introduced in last year’s budget, with the aim of neutralising the state’s accrued COVID-19 debt over a period of 10 years.

While there are other measures introduced to help pay down the government’s COVID-19 debt, including a new tax on businesses with national payrolls above $10 million a year, the land tax changes alone are estimated to raise $4.7 billion over four years. The government’s current budget plans for these taxes to stay in effect through 30 June 2033.

The existing land tax exemptions will continue to apply, including exemptions on the primary place of residence, primary production land, land used by charities and residential care facilities.

In introducing the new tax, the government characterised it as a method of evening the playing field, targeting Victorians who prospered under pandemic conditions.

“We know some did better out of the pandemic than others, and it is only fair that those that did better contribute the most to the repayment effort,” the Andrews government stated.

What will average investors pay?

The Property Investment Professionals of Australia (PIPA) and the Property Investors Council of Australia (PICA) analysed the budget data to estimate that a Victorian investor with land holdings worth $1 million will soon pay about $2,000 in extra land tax per year. While that currently equates to about $20,000 over the next decade, the organisations noted that the tax will continue to increase along with land values throughout that time, so the ultimate cost to investors will likely be much higher.

In their eyes, the policy is akin to the Victorian government asking individuals and entities to pay for its own financial mismanagement.

PICA chair Ben Kingsley said: “This is what happens when you have so much debt as well as continued economic mismanagement and self-serving governance.

“It’s a classic case of which policy is going to cause the least amount of political damage, so they go after the aspiring and hardworking Australian, but aspiration in Victoria is officially dead under the Labor government.”

Renters to feel the heat

Meanwhile, the Real Estate Institute of Victoria (REIV) signalling concern that the tax would serve as a deterrent to investment, thereby worsening the rental crisis.

“This is a tax on families, not the big end of town,” Quentin Kilian, REIV’s CEO, said.

“The government is seeking to recoup the budget debt off short-term solutions that will hurt mum and dad property investors and Victorian renters, while exacerbating the structural housing supply issues facing the state,” he added.

Looking at data from the Australian Tax Office (ATO), the REIV reported that more than 70 per cent of Victorian property investors own only one rental property, with 43 per cent of that group earning under $100,000 per annum.

“This announcement will ultimately drive mum and dad investors out of the market as the cost of maintaining a rental property outweighs future-proofing family finances,” Mr Kilian said.

“The biggest impact will be felt by people with smaller holdings as the tax-free threshold drops from $300,000 to just $50,000, disproportionately impacting everyday Victorians investing to secure their future.”

And Mr Kilian noted that while the policy goes after large businesses with the payroll tax, the SME sector may also be hurt as the new land tax is not just payable on residential but also on commercial and industrial property.

Julie Toth, chief economist at online settlement platform PEXA, flagged that while the tax might dampen investment, thus tightening already slim vacancy rates in the state, it could also drive up the cost of rentals if landlords pass the cost on.

“The newly announced levy has the potential to add directly to rental inflation as landlords try to recoup increased costs, only adding to the state’s housing affordability crisis for residential property investors and renters,” she commented.

She said that renters could easily be slapped with an extra $1,000 a year in rental repayments every year for the next decade.

And she added that those suffering the most from the current housing affordability crisis got little relief from the latest budget.

“For low-income households… there were no funding increases to tackle the growing waiting lists for public and low-cost social housing. We hope to see this addressed in the future,” Ms Toth said.

Following in Queensland’s footsteps

The new land tax reminded many of a similar tax on investors floated in Queensland late last year, which the government ultimately walked back.

PIPA chair Nicola McDougall commented: “It does seem like the Victorian government has taken an illogical page out of the Queensland government’s ill-fated and investor-focused land tax playbook from last year, and we all know how that worked out for them”.

That policy, which would have increased the tax burden on Queenslanders with investment property holdings outside of the state, was similarly flagged as a potential major deterrent to investment within the state.

Elinor Kasapidis, senior tax policy manager at CPA Australia, said that she hoped the Victorian government would take another cue from Queensland and roll back this decision before the tax is introduced.

“The government is failing to read the room. Landlords and renters have done it tough with rising interest rates and increasing costs. An extra $1,000 or more in land tax on top will put even more pressure on those doing it tough,” she said.

“We are appalled by this decision. We encourage the government to reconsider.”