Recent Victorian Vacant Residential Land Tax (VRLT) changes will take effect in January 2025.
Despite that these new changes are established to encourage the use of vacant land and ease housing shortages in Victoria, these changes require careful estate planning for holiday home owners from a VRLT perspective.
Here’s an overview of the key updates to VRLT and how they can affect your estate planning, in particular, if you consider gifting your holiday home to one or more of your beneficiaries under your Will.
What is Vacant Residential Land Tax?
VRLT may apply to ‘residential land’ that is vacant for more than 6 months in the preceding calendar year (i.e. from 1 January 2024 to 31 December 2024).
Residential land can include:
- land with an existing home on it;
- land with a home which is being renovated or has been under construction;
- land with a home on it that has been uninhabitable for 2 years or more.
VRLT does not apply to land without a home on it (sometimes called unimproved land), commercial residential premises, residential care facilities, supported residential services, retirement villages etc.
VRLT rates & timing
VRLT is calculated on the capital improved value (CIV) of the taxable land which can be found on your council rates notice.
The rate for VRLT is changing from 1 January 2025 from an annual tax of 1% of the CIV to a progressive rate of VRLT (as below), which will apply to non-exempt land with a vacant residential property, anywhere in Victoria, irrespective of its CIV (meaning there is no tax-free threshold for VRLT).
| Number of years residential property is vacant | VRLT Rates % |
|---|---|
| 1 year | 1% of CIV |
| 2nd consecutive year | 2% of CIV |
| 3rd consecutive year | 3% of CIV |
Are there any exemptions?
Generally speaking, if your property is exempt from land tax, it is also exempt from VRLT. These include exemptions for:
Holiday homes:
- Exempt provided that it is used by the owner, close relatives or beneficiaries for at least 28 days a year; and
- Exempt if a company/trustee of a trust has continuously owned the holiday home since 28 November 2023 and one or more natural persons have used the holiday home for at least 28 days a year.
- Apartments/homes/units used for work purposes (provided that the workplace is in Victoria);
- Property transfers during the preceding calendar year; and
- New residential properties.
Deceased estates
From 1 January 2025, the holiday home exemption for deceased estates may continue to apply for 3 years after the owner, or sole shareholder of a corporation that owns the home, passes away.
This exemption for deceased estates will continue, provided that a relative of the owner or the sole shareholder of the landowning corporation:
- uses and occupies other land in Australia as their principal place of residence; and
- uses and occupies the holiday home for a period of at least 4 weeks (whether continuous or aggregate) in the calendar year.
Estate Planning Strategies for Holiday Home Owners
VRLT highlights the need for careful consideration of factors below, when you consider gifting your holiday home to a particular beneficiary under your Will.
Consider the personal circumstances for your desired beneficiary (Natural Person):
Natural person: where does this person usually reside? Does this person already have his/her own principal place of residence? How easy/difficult is it for a holiday home to be occupied by your desired beneficiary?
Consider the financial circumstances for your desired beneficiary:
Your holiday home could potentially result in even more adverse tax consequences for your beneficiary as a result of VRLT, land tax and CGT etc, creating financial distress for your beneficiary.
Consider holding your holiday homes in your Discretionary Trust:
In order for your holiday home held in a discretionary trust to qualify for VRLT exemptions, the following criteria must be met:
- Your holiday home is continuously owned by a trustee of a trust on and from 28 November 2023;
- Your holiday home must be occupied by a natural person or their relative for at least 28 weeks in the prior calendar year;
- Unless you would like such natural person(s) to reside in the holiday homes rent-free, you may consider having a lease agreement in place with a natural person, in order to mitigate the risk of the holiday home being unoccupied for more than 6 months in a calendar year and therefore subject to VRLT; and
- It is important that you carefully review the terms of the Trust Deed as well as the State Taxation Amendment Act 2024 (Victoria) (STA Act) to determine whether all the relevant criteria are satisfied.
Please contact iWills Legal if you would like assistance with reviewing your circumstances and Estate Planning from a VRLT perspective.
