Hidden tax costs for foreign investors in residential property in Victoria

There have been 3 recent Federal and state taxes / fees that impact overseas investors involved in the Australian residential property market. We are observing many foreign property investors are unaware of these changes. They are related to:

  • Vacant Residential Land Tax (Victorian State Revenue Office tax)
  • Absentee Owner Surcharge (Victorian State Revenue Office tax)
  • Vacancy Fee (Federal Australian Government Fee).

Vacant Residential Land Tax

This is a tax on residential properties in certain areas of Melbourne (generally in areas of Melbourne that are considered medium to high density) that are unoccupied for more than 6 months in a year and was effective from 1 January 2018.

The tax is calculated based on 1% of the capital improved value of the property.  However, if the property was acquired in the prior year you do not have to pay the vacant residential land tax in the following land tax assessment year. For example, if an investment property is acquired in November 2017, it is exempt from the vacant residential land tax for the 2018 year land tax assessment.

If the property is not leased out and occupied for at least 6 months between 1 January to 31 December, the vacant residential land tax will apply and voluntary notification to the SRO of liability is required by 15 January the following year.

Absentee Owner Surcharge

The absentee owner surcharge is levied at the rate of 1.5% of the value of the land component of the property and applies if a foreign owner owns land as at 31 December 2017. However, the absentee owner surcharge is calculated on the value of the “land” component of the apartment only and not the full capital improved value. There is however a carve out if the land holdings is below $250,000 in value (in aggregate for all property holdings in Victoria).

Again, this absentee owner surcharge is on a voluntary disclosure bases to the SRO and therefore being aware of this is critical to mitigate the risk if reviewed by the SRO. The penalty for failing to pay is an automatic 25% plus interest penalties.

Vacancy Fee

The Australian Government has introduced a vacancy fee for residential property owned in Australia that is not occupied for at least 6 months in a 12 month term (either by the owner or by way of lease).

A vacancy fee return must be lodged within 30 days after the vacancy year. The vacancy year is the 12 month period after the foreign person settled the property.

The fee will be equal to the fee payable for FIRB approval to acquire the property. Therefore the fee starts at $5,500 for properties valued less than $1 million.