MELBOURNE, AUSTRALIA
The added cost of doing business in Victoria
Rapidly rising taxes in Victoria are hitting industrial tenants hard.
For the 2024 land tax year, the state government increased the absentee owner surcharge (also known as the ‘foreign owner surcharge’) from two to four per cent from the 2024 land tax year onwards.
The surcharge exists to discourage underutilised property and applies to absentee individuals, corporations, or trusts, that own property in Victoria but reside or operate primarily outside of Australia.
Introduced in 2016, the initial surcharge began at 0.5 per cent, increased to 1.5 per cent for the 2017-2019 land tax years, and to two per cent for the 2020-2023 land tax years. As of 2024, this has now increased to four per cent.
With Victoria facing exponential debt in 2024 of over AUD $135 billion in the face of post-pandemic spending, the state government is using land tax changes as one way to recover debt.
However, the impact across residential and commercial land holdings is becoming evident and disproportionately impacts industrial land.
Office buildings require significantly less land than industrial, and the cost is spread over multiple tenants over multiple floors. But a single tenant usually occupies industrial property, which requires significant land holdings.
The outgoings provision - a new loophole
The state government introduced the surcharge in 2016, but rising land values, land tax, and surcharge rates mean the impact on cost is now far higher. Although the tax targets foreign owners, Victorian businesses that lease premises where landlords are subject to the tax are the ones absorbing these surcharges.
The Retail Lease Act restricts absentee landlords from passing on the land tax to retail tenants. But most tenants within industrial fall outside of this act, meaning landlords can recover land tax from tenants through the outgoings provision of a lease.
As such, we are seeing the surcharge become a key factor for tenants during renewal of lease or new lease discussions. During a recent review of outgoings for a TMX customer, the land tax surcharge equated to an additional expense of AUD $350,000 per annum and when combined with the land tax equates to $500,000. To put this into perspective, the annual rent for the customer is AUD $1,000,000.
The land tax and the surcharge add an additional 50 percent to the tenant’s cost. And that is before the balance of outgoings such as council rates and compliance or utility services such as power.
How tenants are paying the price
Land value rates have increased steadily across the past decade and therefore baseline land tax has also climbed. If we take Melbourne’s west, for example, we have seen land values for sites sub-three hectares increase from AUD $250/sqm in 2018 to around $800/sqm in 2024.
This represents a 220 per cent increase in land value over a six-year period.
A foreign landlord passing on land tax in 2018 would have seen a tenant charged AUD $55,975 for land tax on a one-hectare parcel of land. That same parcel of land, with the increase in land value over the past six years together with the foreign ownership surcharge, would now have land tax passed on of AUD $484,000.
For clients with larger property portfolios and multiple sites leased from foreign owners, the compounding additional total cost across their portfolio is in the millions.
The foreign status of an owner is now forming a consideration for occupiers when entering new leases, with the lease structure negotiated to ensure a landlord’s ownership structure does not disadvantage a tenant.
For example, if an asset owner sells the property to an absentee owner, the tenant may become susceptible to paying the surcharge. But the question also arises – what are the tenant’s other options? Fit-for-purpose industrial land and premises are hard to find.
The targets of the tax
Property is Australia’s biggest employer, contributing $234bn+ to direct GDP. Who the state government considers a foreign owner may come as a surprise. Foreign owners are often large, institutional landlords who have a parent company or an owned fund sitting outside of Australia. They are large employers within Australia and contribute significantly to the economy, through job generation within the construction and property sectors.
For tenants and occupiers, outgoings previously were a low cost and a consistent rate from one site to the next. But we are now seeing the disparity between sites at such significant levels that costs such as land tax is being scrutinised and factored into an occupier’s feasibility when considering sites. The difference could be as much as AUD $3M or $4M, over a ten-year period.
Additionally, while negotiating new or renewal leases, the ambiguity over which party will or should absorb the costs of the surcharge is creating additional uncertainty for landlords, tenants, and managing agents alike. Carve outs and clarification on pass-through costs are now starting to become a critical negotiation point.
If this is the added cost of doing business in Victoria, what are the consequences?
Is the state disincentivising businesses from investing in Victorian property? Clear legislation on this surcharge is crucial. Industrial property is a crucial part of any company’s supply chain – meaning it is the consumer who will pay the ultimate price.
This piece was written by Stefanie Frawley and originally published in MHD Supply Chain on September 17, 2024.