It is longstanding conveyancing practice for the vendor’s land tax liability to be included in the usual settlement adjustments between a vendor and purchaser.

This practice will be banned for most sales of land in Victoria from 1 January 2024 under the State Taxation and Other Acts Amendment Act 2023 (Vic) (Act).

Remarkably, it will also be unlawful for a contract of sale entered into after 1 January 2024 in Victoria to provide for the adjustment of land tax (even though the Act renders such provisions void). This means that all existing standard form contracts for the sale of land in Victoria (including the current Law Institute of Victoria standard form and contracts based upon general conditions prescribed by the former Estate Agents (Contracts) Regulations 2008 (Vic)) will require amendment.

While the Victorian government announced its intention to ban the adjustment of land tax earlier this year, it was until recently silent as to the operation of any proposed transitional provisions. The Act passed parliament on 30 November 2023 and received royal assent on 12 December 2023, leaving very little time for developers and other vendors to bring their contracts of sale into compliance. Significant penalties will apply to vendors who seek to recover land tax from purchasers in breach of the changes.

In addition to the prohibition of land tax adjustments, there are similar amendments that prohibit vendors from recovering windfall gains tax.    

BACKGROUND

The Victorian government is proposing to prohibit the recovery of land tax as a consumer protection measure, targeting a perceived lack of “transparency”. The view is that a land tax liability that is known prior to entry into a contract of sale of land should be directly reflected in the sale price at the time that contract of sale is entered into.

Part of the justification for the change is that land tax liability is not uniform and can vary depending upon the particular circumstances of the vendor. For example, a vendor who owns a residential property as an investment will pay land tax, but a purchaser who buys the same property as their principal place of residence will not. Further, certain vendors may be liable for additional land tax based upon the extent of properties that they own, if they hold the property as a trustee or if they are a foreign or “absentee” owner.

While this consumer protection justification appears reasonable in a general residential conveyancing context, the amendments are not limited in this way and will apply equally to relatively high-value contracts (up to AU$10 million) including commercial properties.

SCOPE OF CHANGES

From 1 January 2024: 

• Contract terms requiring purchasers to pay land tax are void: A term of a contract of sale of land, for a sale price of less than the “threshold amount” (AU$10 million), is of no effect to the extent that the term purports to require the purchaser to pay an amount for or toward tax for which the vendor is or may become liable in respect of the land under the Land Tax Act 2005 (Vic) (LTA).
• Offence to require purchasers to pay land tax: It is an offence for a vendor to enter into a contract of sale, for a sale price of less than the “threshold amount”, which requires the purchaser to pay any amount for or toward land tax for which the vendor is or may become liable in respect of the land under the LTA. The penalty for this offence is 60 penalty units for an individual or 300 penalty units for a company, currently AU$11,538.60 and AU$57,693 respectively. 

While these amendments clearly prohibit the adjustment of land tax at settlement, the amendments have been drafted in very broad terms and potentially have other implications. For example, it is arguable that the changes would prevent a vendor from recovering additional land tax that arises as a result of a purchaser’s default. This is of particular significance if a purchaser’s default results in settlement being pushed from one calendar year to the next. In this case, the vendor will incur a land tax liability for an entire year, which it may be unable to pass through to the purchaser. 

EXCEPTIONS 

The prohibition on the recovery of land tax does not apply in the following circumstances: 

• Contracts entered into on or before 31 December 2023: The prohibition extends to contracts entered into after 1 January 2024 as a result of the exercise of an option entered into prior to 31 December 2023, which is nonsensical. The Act has included specific provisions dealing with options in respect of windfall gains tax liabilities, but not in respect of land tax.    
• Sales of land with a sale price of AU$10 million or more: The changes do not apply to contracts of sale with a sale price of AU$100,000 or more. 

  For each subsequent calendar year thereafter, this “threshold amount” is increased (or decreased) by reference to consumer price index (all groups). The Director of Consumer Affairs will publish the threshold amount on its website. 

OTHER CHANGES

The Act also targets the recovery by vendors of windfall gains tax. This is a relatively new tax arising under the Windfall Gains Tax Act 2021 (Vic) from 1 July 2023 applying to all land in Victoria that is rezoned and where the rezoning results in a value uplift to the land of more than AU100,000. The taxable value uplift is the difference in the capital improved value of land before and after the rezoning takes effect. The Valuer-General Victoria is responsible for determining the value of the land before and after a rezoning.

The Act states that from 1 January 2024, a term of a contract of sale of land, as well as of an option to enter into a contract of sale of land, will be of no effect to the extent that the term purports to require the purchaser to pay an amount for or toward tax payable under an existing windfall gains tax liability in respect of the land. 

It is also worth noting that the prohibition only applies to an “existing” windfall gains tax liability where a notice of assessment has been issued to the vendor. Accordingly, the Act does not prevent the recovery of windfall gains tax from purchasers if land is rezoned after entry into the contract of sale.

IMPLICATIONS

The prohibition on the recovery of land tax is a sweeping change that overturns a longstanding and widely accepted conveyancing practice.  

Vendors must act quickly to amend any existing contracts of sale that are proposed to be entered into after 1 January 2024.

Vendors will now need to absorb any land tax liability for the calendar year in which settlement occurs and make an appropriate allowance in the sale price. Determining the amount of such allowance will not be straightforward, including where a sale is subject to a lengthy settlement period.