Victoria's Vacant Residential Land Tax (VRLT) is set to apply to all vacant residential land throughout Victoria from 1 January 2025. This tax, which was originally introduced in 2017, aims to address housing affordability issues. However, it also impacts holiday homes unless certain exemptions apply.

What is VRLT?

VRLT was initially introduced to combat housing affordability concerns caused by overseas purchasers buying homes in Melbourne's inner and middle suburbs. Starting from 1 January 2025, VRLT will apply to all vacant residential land in Victoria.

The VRLT is an annual tax based on 1% of the capital improved value (CIV) of vacant residential land in the first year, in addition to any general land tax. For example, a vacant home valued at $1 million will incur $10,000 VRLT in the first year, on top of any other land taxes.

The Holiday Home Exemption

An exemption from VRLT may apply if the residential land is used and occupied as a holiday home for at least 4 weeks of the preceding year. However, several criteria must be met for the holiday home exemption (HH Exemption) to apply. The owner or a relative must use and occupy the land as a holiday home, and the owner must have another property in Australia as their principal place of residence (PPR). The term "relative" is narrowly defined under the Land Tax Act 2005 (Vic) and includes the owner's spouse, siblings, and children.

The Commissioner must be satisfied that the land is genuinely used as a holiday home, considering factors such as the property's location, the distance from the owner's PPR, and the nature and frequency of its use. If these criteria are met, the holiday home should not be subject to VRLT.

Misconceptions

Not all holiday homes are owned personally. Many are held in family trusts or companies for asset protection or other reasons. However, the HH Exemption only applies to personally owned holiday homes, not those held in trusts or companies.

Exemptions for Trusts and Companies

For holiday homes owned by trusts or companies, VRLT can be avoided if the property is used and occupied by a natural person for more than 6 months of the year (6+ Month Test). This often requires leasing the property on a long-term basis to ensure sufficient use and occupation. Leases must be at arm's length to satisfy the Commissioner that they are genuine and not intended to avoid VRLT.

Tax Implications of Arm's Length Leases

An arm's length lease involves regular rental payments and adherence to landlord and tenant laws. If rent is charged at market rates, related expenses become tax-deductible. However, rental income is also assessable, and tax must be paid on it. Careful tax planning is essential to comply with legislation and maximise deductions.

Limited Exemptions for Trusts

The HH Exemption may apply to a vested beneficiary of a trust, though this is uncommon. Most holiday homes are held in discretionary or family trusts, where no specific beneficiary has a vested interest. Vesting a property in a beneficiary requires careful analysis of income tax and duty implications, as CGT and duty typically apply on such transfers.

Increasing VRLT Rates

If a property remains vacant for more than a year, the VRLT rate increases annually. For example, a property valued at $1 million will incur $10,000 VRLT in the first year, $20,000 in the second year, and $30,000 in the third year, assuming the value remains unchanged.

Case Example: Jack and Jill Smith

Jack and Jill Smith own a holiday home in regional Victoria via their family trust, with their PPR in Melbourne. As the home is owned by a trust, the HH Exemption does not apply. If they cannot meet the 6+ Month Test, VRLT of $10,000 will apply in the first year, doubling to $20,000 in the second year and tripling to $30,000 in the third year if the property remains vacant.

Legislative Changes and SMSFs

The Victorian Government has indicated a possible extension of the HH Exemption to trusts and companies, but until this change occurs, obtaining professional advice is prudent. SMSFs, as trusts, cannot qualify for the HH Exemption and must satisfy the 6+ Month Test to avoid VRLT. SMSF trustees must also comply with the prohibition on leasing residential land to related parties.

The introduction of VRLT from 1 January 2025 poses significant challenges for holiday home owners. Understanding the criteria for exemptions and exploring options such as arm's length leases are crucial to managing the financial impact of this tax. Legislative changes may offer some relief in the future, but until then, careful planning and professional advice are essential.

General Advice Warning:
Any general advice on this page does not take account of your personal objectives, financial situation and needs, and because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. Information contained on this page was correct at the time of posting.

Impacts of the New VRLT on Holiday Homes