Victoria’s changing tax environment

On 1 July next month Victoria’s new CIPT Tax will come into effect commencing the decade-long abolishment of stamp duty on commercial and industrial property replacing it with an annual site value tax of one per cent (starting in year eleven). The new tax is basically a new land tax and will leave Victoria with a dual tax system until all properties are transacted at least once after the commencement date.

These reforms have received a mixed reception from industry due to their complexity and unpredictable market, valuation, and leasing impacts. And naturally, the industry will be stuck with a higher tax bill (what government introduces new taxes to collect less revenue?). This change combined with a myriad of other property taxes, including last years COVID debt levy, are all making Victoria harder and more complicated to do business.

Over the course of my career, I have never encountered the level of concern about the future as currently expressed by commercial property owners today. Together, these challenges pose the most formidable challenge to non-institutional commercial and residential property markets since the early 1990s recession.

Slow growth makes survival a priority

Speaking of recession, the March Quarter GDP growth figures (0.1%) were as anaemic as they come pointing to flat growth at best and a future downturn at worst. Much of this is due to high interest rates, stubborn inflation pressures, and several post COVID aftereffects. These conditions are impacting everyone across the economy, especially in our sector.

While investment property is often perceived as the domain of the elite, this view is far from accurate. Over the past 20 years, I’ve come to know a diverse range of commercial property landlords. The disparity between a private investor owning a retail strip shop and one owning a supermarket or shopping centre as an example, is stark. Many owners of commercial properties have vast differences in net worth and access to working capital.

At either end of the scale, Victorian landlords are hurting. Decreased rents due to the broader economic performance and rising outgoings are badly straining returns for owners. This makes the above-mentioned tax reforms even harder to swallow given the sacrifices the sector made during the COVID pandemic (e.g. when landlords were prevented from collecting rents from businesses unable to operate - at their own expense). In recent days I have experienced one property owner in Melbourne’s inner suburbs found her annual land tax bill exceeded the fair rental income from her long-term tenant. How one is expected to survive such a burden and then overcome rising taxes and increased complexity is beyond me – and is a pressure too many landlords are currently feeling.

What is around the corner?

With Victoria’s vibrancy weakening compared to our peers – largely due to our rising debt and tax profile - serious questions are being asked about our long-term competitiveness. No one can ever truly know the future, but NSW’s June 18 State Budget will be a good indicator as to where we will stand in terms of property taxation. Victoria’s new Commercial and Industrial stamp duty reforms were in part a response to earlier property tax reforms initiative by NSW. It will be interesting to see if the one-upmanship continues and how we Victorians fare at the end of it.

All these pressures beg the question….

While there are some positive reports around such as Melbourne’s declining vacancy rate and rising foot traffic numbers, a serious question posed by many landlords needs to be asked. Is owning commercial property in Victorian becoming untenable? Or perhaps more gently phrased, is commercial property in Victoria becoming a less attractive investment?
I think not as the long-term fundamentals for Melbourne are still very good. However, investors and landlords need to be scrupulous in their decision-making. There is considerable public and private turbulence out there now – and the margin for error remains small.

The challenge going forward

Victoria is in a difficult spot. A slowing economy, soft market activity and rising taxes are all headwinds the property sector does not need. If things go badly, we risk a glut of vacant commercial properties on the market, with potential buyers becoming scarce, leading to significant value erosion. Such a scenario could ultimately impact capital gains tax revenues more profoundly than the increased land tax currently burdening owners at a time when they can least afford it.

Until next time, Mark Wizel