Land Tax and amendments to adjustments in property settlements

In a significant shift from traditional practices in real estate transactions, the recent amendment to Victoria’s tax legislation will transform how land tax liabilities are managed during property settlements. Traditionally, it was common for sellers to pass on their land tax liabilities to buyers as part of the settlement adjustments. However, starting 1 January 2024, this practice will see a drastic change in Victoria due to the enactment of the State Taxation and Other Acts Amendment Act 2023 (Vic).

The new law explicitly prohibits the inclusion of land tax adjustments in the financial settlements between sellers and buyers for the majority of land sales in Victoria. This change means that any contractual agreement made after the start of 2024 cannot legally include provisions for the buyer to cover land tax liabilities, rendering such terms ineffective and void. This legislative change necessitates a revision of existing standard contracts used for land sales in Victoria, affecting forms previously endorsed by the Law Institute of Victoria and those based on the general conditions outlined by the now-superseded Estate Agents (Contracts) Regulations 2008 (Vic).

The legislation was officially passed on 30 November 2023 and received royal assent on 12 December 2023. This leaves a narrow window for property developers and sellers to align their sales agreements with the new legal requirements. Failure to comply with these changes could result in hefty penalties for those attempting to shift land tax burdens onto buyers contrary to the new regulations.

The rationale behind this legislative update is to enhance consumer protection by ensuring greater clarity in the costs associated with land transactions. The government aims to eliminate the opacity surrounding land tax liabilities, advocating for these costs to be directly reflected in the property’s sale price upfront. This approach acknowledges the variability of land tax liabilities, which can differ based on the seller’s circumstances, such as whether the property is an investment or if the seller is considered a foreign or absentee owner.

The legislative amendments are broad, covering transactions up to a threshold sale price of AU$10 million, inclusive of both residential and commercial properties. Notably, the law introduces penalties for sellers who contravene this regulation, setting fines based on the severity of the offense.

There are specific exceptions to these rules, notably for contracts finalized on or before 31 December 2023, and for sales exceeding AU$10 million. Additionally, the law adjusts the threshold amount annually based on the consumer price index, ensuring the legislation remains relevant over time.

This legislative change underscores the importance of transparency in property transactions, aiming to provide buyers with clearer insights into their financial commitments. It represents a significant shift in how property settlements are conducted in Victoria, emphasizing consumer protection and the need for sellers to adapt swiftly to comply with the new legal landscape.