Whilst homes in Victoria that are occupied as a principal place of residence are exempt from Land Tax, building works or disputes that result in homes being unoccupied for extended periods of time can have the unexpected result of a Land Tax liability.
These assessments can be particularly frustrating if there have been significant delays, resulting in multiple years of land tax being imposed on land that can neither be occupied nor rented.
Is the builder liable for the Land Tax, if they have caused the delay?
Assuming that the owner is ineligible to seek a refund from the State Revenue Office (see next section), and that Land Tax would not otherwise have been imposed (i.e. if not for a delay caused solely by the builder), it is possible that owner could make a claim against a builder for this loss.
However, most standard form construction contracts limit a builder's liability, in the event of a delay, to a fixed weekly rate for liquidated damages. It is important, therefore, when negotiating a liquidated damages rate in a building contract, to ensure that the rate is high enough to compensate a home owner for a potential land tax liability that might arise out of the construction taking longer than anticipated.
In appropriate cases, owners can apply for a refund of up to four years of land tax if they subsequently occupy the property as their principal place of residence continuously for at least 6 months.
A refund will be granted if the relevant requirements under section 61 of the Land Tax Act 2005 (Vic) are satisfied:
- The owner has paid the land tax assessments; and
- The owner has actually occupied the property continuously as their principal place of residence for 6 months following the completion of the construction or renovation.
A refund for the first two years will only require evidence in relation to the two above factors. Importantly, the owner must initially pay the assessments on time during the construction or renovation period, even if there was a delay in construction that was not the fault of the owner.
However, when applying for a refund for the third and fourth years, the taxpayer may need to provide additional evidence proving that there was an 'acceptable delay' in relation to the start or finish of construction that was due to reasons beyond the control of the owner.
In preparing the refund application, it is important to consider and gather evidence in relation to a range of factors, including:
- How long was the delay and the reasons for it occurring?
- Can you reside at the property continuously for 6 months before submitting the refund application?
- Is the land owned under a trust? If so, who are the legal beneficiaries under the trust?
- Did you benefit from a principal place of residence exemption for any other land occupied during the construction or renovation period?
- Did you derive any income from the land during the construction or renovation period?
Can I apply for a PPR exemption during construction?
Unfortunately, the Victorian legislation only allows owners to apply for refunds following a period of 6 months of subsequent occupation. A pre-emptive application for an exemption during the period of construction is not available in Victoria, unlike in some other states such as NSW and South Australia. Also, refusing to pay and objecting to the assessments issued during this period is generally not advisable, as significant interest may accrue on the outstanding amounts.
Vacant Residential Land Tax
Additionally, owners may also be charged with the newly introduced Vacant Residential Land Tax. This is particularly relevant during construction involving the demolition or significant renovation of an existing home within inner or middle Melbourne.
The SRO can deem land as 'vacant' and 'residential' at law during this period, even if the land was not habitable during the relevant year(s) of construction. The Vacant Residential Land Tax of 1% of the capital improved value will apply on top of regular land tax, and has a separate application process regarding exemptions.
When applying for an exemption from the Vacant Residential Land Tax, a range of factors need to be considered, including:
- Was there a pre-existing home or unit on the land before construction?
- Was the home habitable before the renovation or construction commenced?
- Will the land be used for commercial or any other non-residential purposes post construction?
- Has the tax been imposed during the first two years of construction or renovation?
Additionally, the onus is on owners to notify the SRO when they can no longer reside at their home due to ongoing construction or renovations (typically an absence that is in excess of 6 months prior to the assessment date of 31 December). Otherwise, owners may be liable for penalty tax if they do not notify the SRO of the construction and change in their living arrangements. To avoid this, it is important that home owners notify the SRO as soon as a property is no longer occupied as a principal place of residence.
- Before signing a building contract, think about how much Land Tax will be payable while the property is unoccupied, and whether the weekly rate for liquidated damages is high enough to cover land tax as well as other expenses you will incur if the project is delayed.
- Notify the SRO as soon as you cease to occupy a property previously claimed as your principal place of residence
- If you are out of the property for more than 6 months in any calendar year, expect to receive a Land Tax assessment
- Pay the assessment
- Keep records of how long the build is meant to be taking, and the reasons for any delays
- Apply for a refund once you've been back in the property for more than 6 months.
- Always apply for a refund if you're claiming back less than 2 years' worth of Land Tax.
At Pointon Partners, we are experienced in providing personalized building and tax advice, assisting with the preparation of the relevant exemption and refund applications, as well as negotiating and settling disputes with the State Revenue Office.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.