By Russell Cocks, Solicitor

First published in the Law Institute Journal

State Revenue Office has announced changes to the benefits available to purchasers of real estate to take effect from 1 July 2017.

Imposition of duty on transfer of land in Victoria is a significant source of revenue for the State government. It is also a significant source of angst for taxpayers and people involved in the real estate industry. Changes to the duty regime are often seen as levers for economic development and as such those changes are usually designed to achieve a politically beneficial outcome for the government.

The issue of housing affordability, particularly for first home buyers, is a hot button political issue and the duty changes are targeted at that demographic. The changes apply to contracts of sale after 1 July 2017, which may mean that the months of May and June will be ‘slow’ in this marketplace, followed by substantial uplift from July onwards.

Traditionally a first home buyer needs a minimum of the 10% deposit. Given that duty on a purchase of $500,000 is in the range of 5% the government impost is half of that hard fought for deposit. Granting an exemption or concession in relation to duty should therefore provide a substantial impetus for sales. The contrary argument is that it will simply bring more people into the market and effectively increase the price of housing by the amount of the benefit. This dispute between supply/demand will no doubt continue to occupy the attention of economists but we lawyers will move on to the practical consequences of the changes.

FIRST HOME BUYERS – both new and established homes

Full exemption for purchase price up to $600,000.

Reducing concession between $600,000 and $750,000 (no concession at $750,000).

Requirements:

1. Purchaser and partner must qualify as ‘first home buyers’; and
2. Purchaser must be an Australian citizen or permanent resident; and
3. Purchaser must use property as Principal Place of Residence for a continuous period of 12 months commencing within 12 months of possession.

Importantly in the new home market, the ‘dutiable amount’ is calculated after taking into account deductions relating to the cost of construction post-contract.

One segment of the new home market is based on the first home buyer purchasing the land and then entering into a separate building contract for construction. In this case the dutiable value is based on the land contract and will normally come within the full exemption available up to $600,000. However another method has the first home buyer enter into a land and building contract for the total value of the land and construction. This may have a contract price above the $600,000 threshold but the exemption is available if the value of the land as at the date of the contract is below $600,000. Adopting the Fixed Percentage Method of allocating value in such cases will mean that the full exemption will be available so long as an amount equal to 55% of the contract price is below $600.000, allowing for total contract prices of well over $1m.

This takes us into the realms of:

OFF THE PLAN SALES

Substantial duty concessions have always been available in Victoria in relation to off the plan sales. The availability of this concession is to be limited after 1 July 2017 to properties to be used by the purchaser as their principal place of residence.

The concession is available where the dutiable value of the property is less than $550,000. Importantly, the calculation of dutiable value allows for deduction from the contract price of an amount that represents the value of construction to be undertaken after the date of the contract and prior to settlement. The Fixed Percentage Method of calculation of post-contract construction cost allocates cost as follows:

Single dwelling

• Construction cost 45%
• Land component 55%

Multi-lot

• Construction cost 60%
• Land component 40%

High rise

• Construction cost 75%
• Land component 25%

If a purchaser signs a contract before any construction commences the dutiable value will be below the $550,000 threshold provided that the contact price is less than:

• Single dwelling $1,000,000
• Multi lot $1,375,000
• High rise $2,200,000

and duty will be calculated at the concession rate available to purchasers who intend to occupy the property as their principal place of residence.

The concession that was previously available for investment properties and commercial developments will cease as at 30 June 2017 and the concession will only apply to owner-occupied properties.