Victorian State Budget 2023-24: Key Items for clients to consider
Treasurer Tim Pallas handed down the Victorian State Budget 2023-24 on the afternoon of 23 May 2023.
It contains several proposed changes to Victoria’s tax regime, the most significant of which for business relate to payroll tax, land tax, work cover scheme and stamp duty reform for commercial and industrial properties.
This Budget sees Victorian businesses shouldering the burden of debt recovery, with the introduction of a 10-year Debt Levy targeting any business with an annual Australian payroll above $10m. Business will also fund the paying down of state debt through higher payroll tax bills for around 4,000 SMEs and large businesses alongside higher land tax bills for around 380,000 landowners.
Payroll tax
The following payroll tax changes have been announced:
- As part of its COVID Debt Repayment Plan, from 1 July 2023, a levy on payroll will apply to businesses with annual Australia-wide taxable wages above $10m
- From 1 July 2024, the payroll tax-free threshold will increase from $700 000 to $900 000, and subsequently increase to $1m from 1 July 2025
- From 1 July 2024, the payroll tax exemption for high-fee non-government schools will be removed
The Debt Levy, operating through the payroll tax regime, is scheduled to begin on 1 July 2023 and businesses with national payrolls above $10m a year will be subject to an additional 0.5% levy on top of the existing payroll tax rate, with a further 0.5% for businesses with a payroll over $100m.
However, there is some tax relief for micro businesses with wages below $1m, who will not be subject to payroll tax due to an increase in the tax-free threshold. This change is estimated to remove payroll tax from 4,200 businesses and reduce taxes for a further 22,000.
Increase in the Payroll Tax Threshold
To ease the payroll tax on smaller businesses, the tax-free threshold will increase from $700,000 to $900,000 from 1 July 2024. The threshold will be increased further to $1m from 1 July 2025.
This is a welcome change for eligible businesses but it will only benefit businesses with relatively small payrolls. The Victorian Government estimates that around 6,000 businesses, who otherwise would have paid payroll tax, will no longer be subject to the tax when the threshold reaches $1m. Furthermore, it is expected that more than 26,000 small businesses will benefit from the increase of the tax-free threshold to $1m.
This change will provide a payroll tax saving of up to $9,700 for the financial year ending 30 June 2025 and a saving of up to $14,550 for eligible businesses for the financial year ending 30 June 2026 and onwards. These estimates are calculated on the expected savings for those businesses that are not based in regional Victoria.
Phase out of Tax-free Threshold
The Government will also ‘phase out’ the tax-free threshold for businesses with taxable Australia-wide wages over $3m. The threshold will be reduced proportionally such that businesses with taxable wages over $5m will no longer be entitled to any tax-free threshold.
This measure will result in an additional payroll tax liability for affected businesses. For a business with taxable wages above $5m, the introduction of the phase out threshold will result in an additional payroll tax liability of $43,650 for the year ending 30 June 2025 (and $48,500 for the year ending 30 June 2026). These estimates are calculated on the assumption that the businesses are not based in regional Victoria.
Land tax
Property investors with landholdings valued above $300,000, as well as trust taxpayers with property holdings above $250,000, will be hit with a temporary land tax rate increase of $975 plus 0.1% of the value of their landholdings above $300,000 (in the case of non-trust taxpayers) or $250,000 (in the case of trust taxpayers).
The relevant land tax measures announced today are as follows:
- The tax-free threshold for general land tax rates will be cut from $300,000 to $50,000 (therefore subjecting more properties and property owners to land tax)
- A temporary fixed charge of $500 will be levied on general taxpayers with total landholdings between $50,000 and $100,000*
- A temporary fixed charge of $975 will be levied on general taxpayers with total landholdings between $100,000 and $300,000*
- For general (non-trust) taxpayers with total landholdings above $300,000 and trust taxpayers with total landholdings above $250,000, land tax rates will increase by $975 plus 0.1% of the taxable value of their landholdings
The above changes will commence from 1 January 2024 (i.e., the 2024 land tax year) and will apply until 30 June 2033.
Existing land tax exemptions, including for principal places of residence, primary production land and land used by charities, should continue to apply provided the property and the owner continue to satisfy the relevant eligibility requirements.
The above information will be subject to the detail set out in the relevant amending legislation (which has not yet been made public at the time of writing) and is subject to change once the final details are available.
Increase of Absentee Owner Surcharge Rates
From 1 January 2024, the Victorian Absentee Owner Surcharge (“AOS”) (i.e., foreign land tax surcharge) rate will increase from 2% to 4%. Whilst this change has been presented as a measure to harmonise the rate with New South Wales, it is worth noting that New South Wales currently has the highest foreign land tax surcharge rate.
Work Cover scheme
Last week, the Victorian Government announced that it would be modernising the WorkCover Scheme. In doing so, they have advised that the average premium rate would increase from 1.27% to 1.8% of remuneration in order to cover the cost of claims. This compares with average premiums of 1.23% in Queensland and 1.48% in New South Wales.
The increase in average premiums represents a cost increase of 42%. This coupled with other increases in costs announced in the 2023-24 Victorian State Budget puts considerable pressure on businesses operating in Victoria.
The other key reforms relevant to modernising the WorkCover Scheme include:
- Establishing Return to Work Victoria to provide more support for workers to return to employment; and
- Adjusting the eligibility for mental injury claims and introducing a whole person impairment threshold of 20% for claims that receive weekly benefits for more than two and half years
Stamp duty reform for commercial and industrial properties
The 2023-24 State Budget saw the Treasurer announce a significant reform to Victoria’s duty regime, with duty on commercial and industrial properties to be replaced over time with an annual property tax.
The finer details of the new regime are unlikely to be known for some months as we understand the Government intends to consult with industry before introducing the relevant legislation into Parliament. However, based on the Government’s media release we understand the change will involve:
- From 1 July 2024, commercial and industrial properties will transition to the new system as they are sold, with annual property tax equal to 1% of the land’s unimproved value to be payable from 10 years after the sale transaction;
- The first purchaser of eligible property after 1 July 2024 will be able to choose whether to pay the final duty liability as an upfront lump sum, or as fixed instalments over 10 years together with an interest charge; and
- Once the property enters the new system after 10 years, no further duty will be payable when the property is sold and the annual property tax will then apply moving forward
The new regime will not apply to the current owner of any commercial or industrial property purchased before 1 July 2024.
Tax planning opportunities may present for clients after the finer details of the new regime are understood.