What Victoria’s new vacant property tax means to you: Juwai's Gavin Norris

GUEST OBSERVER

You may have heard that Victoria announced a new tax this month that will cost landlords $20 million a year, and that's just in the beginning.

Many observers believe that investors will be squeezed over time by increasing tax rates that raise the state government's take.

How does this new tax affect you as a property investor? Let's look at it closely.

First, here are the details of the tax:

• It will be charged every calendar year from January 1, 2018, together with your land tax.

• It will be imposed on houses and apartments in the inner and middle suburbs of Melbourne that lie vacant for more than six months per year.

• It will cost you 1 percent of your property’s capital improved value. For example, if the capital improved value is $500,000, you will have to pay $5,000 in tax every year.

• There are exemptions: holiday homes (if your principal place of residence is in Australia), a city unit for work purposes, properties in deceased estates and homes subject to legitimate temporary absences (e.g. medical care, overseas appointments).

• You can avoid this tax by selling, moving into or renting out your vacant Melbourne property.

Is Victoria a safe place to invest?

The biggest question raised by this new tax, which is just the latest strand of red tape strewn across Melbourne’s CBD in recent years, is whether the state is any longer a safe place for property investors to put their money.

Property investment is almost always a years-long commitment to a location. Time can expose you to many unforeseen risks, so the smart investor tries to avoid at least those that seem obvious.

And it does seem obvious that Victoria's leaders will impose more taxes on property investors in the years to come. The Australian Financial Review reckons that the latest move is "just the start of a push by the state to collect more revenue from property owners."

True, most of these fees and taxes have targeted foreign investors, but this latest levy makes no distinction between offshore and local absentee owners. 

Who’s Next?

Pickpockets operating on a crowded street never limit themselves to just one wallet, but pick as many as they can. Just so, governments pursuing new revenue never limit themselves to taxing —as in the case of foreign buyers— just the smallest share of those within their reach. Not when there is a far richer wallet to be picked. Australian property investors: that wallet belongs to you.

What's most puzzling about this behaviour is that property investors have contributed much to Victoria. You have added hundreds of millions of dollars and tens of thousands of jobs to the local economy. By purchasing units off the plan, you have made possible the construction of development projects that otherwise would have remained nothing more than architectural drawings. All this building has provided tens of thousands of new homes for Victorian residents.

Worst of all is the government's shallow claim that housing affordability is its real goal. Victoria’s recent development boom was made possible, in large part, by property investors. The most powerful thing the state government could do for first home buyers would be to encourage the very property investors who make new construction possible.

The new residences that investors create give homes to renters and provide opportunities for new buyers to grasp the property ladder and climb onto the first rung. 

Unfortunately, the state is taking exactly the opposite tack.

Real estate agents can profit

While investors may be dismayed, real estate agents can profit from the new vacant property tax. It represents a golden ticket for real estate agents who, due to their deep local knowledge, may be aware of which residences are vacant. I'm sure smart agents are already calling and emailing owners of vacant property to help them to sell or lease up the homes for them.

Perhaps most puzzling of all is that Victorian Treasurer Tim Pallas says the State plans to use utility usage to determine which homes are left empty. At Bunnings right now you can buy timers that give you precise control of both water and electrical usage in your property. Is the State so naive as to impose a tax that anyone can foil by installing a couple of $20 electronics? Installing a timer on one faucet and another on a single outlet seems likely to ensure an owner’s utility usage falls within the minimum range.

Gavin Norris is head of Australia for Juwai.com, the No. 1 Chinese international property portal and can be contacted here.