Residential property law in Victoria: 2017 year in review and what to expect in 2018

Over recent years, Victorian property law has been subjected to change like never before, leaving an indelible mark on the residential market. Below, we explore some of the key changes and shifts, including the transition to a 100% digital future, policy reform and developing case law.

2017 – The year in review

2017 saw a raft of changes impact the way property transactions are carried out in Victoria:

Stamp duty changes – the availability of the off the plan (OTP) concession was tightened and is now only available to those purchasing an OTP property to live in as their principal place of residence where the dutiable value is up to $550,000. This has placed pressure on both the investor market (which has tightened) and the ‘down-sizer’ market.

The changes to the OTP concessions were made, in part, to assist first home owners by introducing a stamp duty exemption for this segment of the market. The exemption applies to first home buyers purchasing a new home with a dutiable value up to $600,000, while new homes with a dutiable value between $600,001 and $750,000 are taxed at a concessional rate. The first-home owner grant also increased from $10,000 to $20,000 for new homes in regional Victoria valued up to $750,000. These changes have contributed to the first home owner market remaining strong.

Practically, these changes have made it far more difficult for developer’s sales consultants to provide accurate stamp duty representations to purchasers.

Foreign resident capital gains withholding – for contracts entered into on or after 1 July 2017, the withholding threshold was decreased from $2,000,000 to $750,000 and the withholding tax rate increased from 10% to 12.5%. This has significantly increased the number of vendors required to apply for withholding certificates, but the practice of attaching these certificates to the contract of sale has quickly developed.

Duties Online form – from 1 July 2017, the SRO digitised stamp duty assessments and removed many paper-based land transfer duty forms. Apart from a few teething issues, this has helped streamline a previously cumbersome part of the settlement process and will accelerate the uptake of e-signing.

Client Authorisation Forms (CAFs) – from 1 January 2018 all Victorian Land Titles Office documents (paper and electronic) must be executed by a lawyer or conveyancer on their client’s behalf. The lawyer must have a CAF and have completed a Verification of Identity prior to signing the form. 

Retail leasing landscape and the Cold Storage decision – relevant to mixed use developments, the string of decisions which culminated in the High Court’s refusal to grant special leave confirmed that the ‘ultimate consumer’ test is the primary test for determining whether the supply of goods or services are retail in nature for the purpose of the Retail Leases Act 2003 (Vic) (RLA). The decision highlights to landlords that leases which at face value may not appear to be retail in nature may in fact be subject to the RLA.

2018 – What to expect

In short, changes, changes and more changes! This year is again set to deliver significant reform to the property industry in Victoria:

Adoption of e-conveyancing – there are a number of important dates on the horizon for e-conveyacing:

• From 1 March 2018, standalone transfers must be lodged on PEXA. This means a property transaction not involving an outgoing or incoming mortgagee must be transacted on PEXA. We expect this to capture a significant volume of property transactions, particularly in the latter part of the development when any mortgage would likely have been discharged.
• From 1 October 2018, all available types and combinations of transactions must be lodged on PEXA.
• From 1 August 2019, all transactions must be lodged electronically (with what is currently a long list of exceptions).

The shift to e-conveyancing brings with it a range of issues for law firms including trust accounting, governance, resourcing and procedural changes. Those firms which are not already across these issues will face serious difficulties establishing the necessary systems before the looming deadlines.

Additionally, the shift to e-conveyancing is playing out in an environment where:

• the sole online platform (PEXA) is for sale, which may result in private ownership; and
• other players (such as the ASX / InfoTrack partnership) are contemplating building a rival e-conveyancing platform.

The State Government is also pressing ahead with the proposed sale of the core registration and information services provided by the land titles registry.

GST withholding – in an effort to eliminate the prevalence of developers who sell residential properties, collect the relevant GST and subsequently initiate insolvency before the GST is remitted to the ATO (‘phoenix entities’), the Federal Government has proposed a GST withholding scheme.

Reminiscent of the current Capital Gains Tax (CGT) withholding regime, the proposal will require, from 1 July 2018, vendors selling residential properties (including potential residential land) to notify the purchaser prior to settlement whether GST is to be withheld or not. If so, the purchaser can elect to either remit the GST to the ATO on or before settlement, or request that a cheque be drawn from the settlement proceeds to then be remitted onto the ATO.

Under the current proposal, there will be a 2-year transition period for contracts entered into before 1 July 2018 which settle before 1 July 2020.

The withholding rates will vary for full taxable sales (1/11th of the contract price) and margin scheme sales (a fixed 7% of the contract price regardless of the actual margin). The cashflow of developers will likely be impacted under this scheme, as money which would have typically been remitted as part of the developer’s monthly or quarterly BAS return process will now become payable on or before settlement. 

Ghost tax – from 1 January 2018, a vacant property residential tax (otherwise known as a ghost tax) will be levied on residential properties which are vacant for more than 6 months in a calendar year. The tax is self-reporting meaning owners of vacant residential properties (including developers) are required to notify the SRO of any vacant properties they own.

The ghost tax will only apply to properties located in defined council areas (focusing primarily on metropolitan Melbourne) and will be levied at 1% of the capital improved value of the land. The ghost tax has the potential to impact residential developers who have difficulty selling all of the lots in a development in the year following completion of construction.

Owners Corporation (OC) reform – Victoria is currently reviewing the regulatory regime for owners corporations which is likely to result in the adoption of aspects of the reform that occurred in NSW (such as there being a restriction on the developer for a project being appointed as strata manager for an owners corporation). The changes may also create new business opportunities particularly if the NSW position is adopted which entitles 75% of lot owners to ‘force’ the sale of the remaining 25% (the current legislation requires 100% to vote in favour of any sales of this nature).

Short stay restrictions – Airbnb and similar platforms will continue to be a contentious issue throughout 2018. The courts are continuing to grapple with the rights of a statutory organisation like an Owners Corporation imposing restrictions on the use of privately owned apartments. A recent decision of the Privy Council[1] builds upon a 2017 decision of the WA Supreme Court[2] which upheld a restriction of leasing for less than 3 months within a 12 month period. While this is inconsistent with the current views of the Victorian Supreme Court[3], we expect the issue to be on the agenda in 2018 and may even form part of the OC reform referred to above.

Public Land Contributions (ICPs) – We have a new public land contribution regime in Victoria with the recent enactment of the Planning and Environment Amendment (Public Land Contributions) Act 2018 (Vic), which will commence on 1 September 2018 unless proclaimed earlier. The legislation will replace the existing infrastructure contributions provisions of the Planning and Environment Act 1987 (Vic) with a regime that includes a land equalisation mechanism, intended to spread the cost of securing public land equally across the infrastructure contributions plan area.

Ipso Facto Insolvency Reforms – From 1 July 2018, a party to a contract entered into after 1 July 2018 will not be able to rely on a right to terminate that contract which is triggered by, or arises as a result of, the appointment of a voluntary administrator or receiver or the proposal of a scheme of arrangement. Such termination rights are typically included in off the plan contracts of sale.

Other termination rights which may exist are not disrupted and parties will continue to be able to terminate on other grounds such as for non-payment of the balance of the purchase price.

This stay on enforcement of so called ipso facto clauses will apply to any contract, agreement or arrangement entered into after 1 July 2018 which contains an ipso facto termination clause (other than any contract, agreement or arrangement which has been expressly excluded under the relevant regulations or by ministerial declaration). It will not however apply to any contract, agreement or arrangement entered into prior to 1 July 2018 or to any variations or amendments which occur after 1 July 2018 to contracts entered into prior to 1 July 2018.