Victorian Treasurer Tim Pallas has handed down a budget focussed on increasing taxes for “those with an ability to pay”. The introduction of a new COVID debt levy on businesses along with additional land taxes on property investors are intended to generate around $8.6 billion over four years, but are slated to continue for ten to address the $31.5 billion of COVID debt.
What is most evident is that this budget is a strong response to an over-abundance of debt in a high interest rate environment as well as an attempt to reduce future spending and potential debt increases.
‘Small business’ has a small win whilst bigger businesses lose
The payroll tax-free threshold will increase from $700,000 to $900,000 from 1 July 2024, with a further increase to $1 million from 1 July 2025. Large businesses with total annual Australian wages exceeding $10 million will be subject to a temporary COVID Debt Repayment Plan levy from 1 July 2023, to contribute towards paying down COVID-related debt.
These increases to the payroll tax-free threshold are expected to result in up to $14,550 of annual payroll tax savings each for approximately 26,000 small businesses.
Bigger businesses with a national payroll of more than $10 million will incur an additional 0.5 per cent payroll tax levy under the COVID debt levy, expected to apply until 30 June 2033. For larger businesses with a national payroll of $100 million or more, the rates increase by 1 per cent. This comes on top of the Mental Health and Wellbeing Surcharge that commenced 1 January 2022.
BDO Comment
The increase in the payroll tax-free threshold is a welcome saving for small business. The payroll tax regime has often been viewed by business owners as an impediment to growth as this business cost increases along with the business growth, preventing the creation of valuable Victorian jobs.
The COVID debt levy is a broad plan to share the repayment pain of paying down COVID debt across bigger Victorian businesses. The Victorian debt does need to be managed and may be seen as Victorian businesses’ contribution towards its repayment, many of whom may have received some form of Government COVID support when they needed it most. Given this levy is in addition to the Mental Health and Wellbeing Surcharge that is also payable by larger employers, we hope that these additional business costs do not lead to business owners making tough employee decisions in the near future.
Employers now subject to increased WorkCover premiums
Victorian employers will be subject to an increased premium on their WorkCover insurance policies, with a 42 per cent increase in premium costs to take effect from 1 July 2023.
Businesses will be subject to higher WorkCover premiums, with this increase seeking to bridge the gap between WorkSafe’s annual claims cost and the premiums collected. The 2022-23 average premium rate will increase from 1.272 per cent to 1.8 per cent for 2023-24. For employers engaging staff across various jurisdictions, Victorian premiums will be more in line with premium costs in all other States and Territories (excluding Queensland).
BDO Comment
After more than 20 years of relatively stagnant premiums, unfortunately, this premium increase is inevitable. WorkSafe’s current annual premium deficit is not sustainable in the long-term, especially given increased worker reliance on the scheme with WorkSafe’s claims liability tripling since 2010.
Businesses should be prepared for an increase in their employment cost by way of increased premiums. For employers with Victorian rateable remuneration of $10 million, the annual premium is expected to increase by $52,800 from 1 July 2023. We hope to see this measure lead to improvements in the scheme, with Victorian workers receiving the necessary financial and ancillary support needed in the event of an injury, to ensure their safe and efficient return to work.
Land taxes are on the rise
As part of the COVID debt levy, Victorian land tax will be increased significantly for the next ten years. Commencing 1 January 2024, this will be done using three levers:
- Reducing the threshold
- Adding a fixed charge
- Increasing the rate.
The tax-free threshold for general land tax rates will decrease from $300,000 to $50,000. An additional fixed charge will apply, starting at $500 for landholdings between $50,000 and $100,000 and rising to a $975 charge for landholdings above $100,000. Tax rates will temporarily increase by 0.1 per cent for both general and trust taxpayers, with holdings above $300,000 and $250,000 respectively.
BDO comment
These changes are estimated to raise $4.7 billion to repay COVID debt over four years. It will not affect the family home but seems likely to have a significant impact on the average property investor.
The ‘base’ land tax is forecast to increase from $5,289m in 2022-23 to $6,079m in 2023-24 (including the impact of doubling the foreign owner surcharge from 2% to 4%). There will also be an additional $1,149m COVID debt levy component. Year on year, it seems that the land tax component of the COVID debt levy will represent an increase of approximately 19 per cent on the base land tax. In simple terms, property investors can expect to pay substantially more land tax every year for the next ten years.
Duty on business property to transition to increased land tax
Victoria will transition to an annual property tax, replacing stamp duty on commercial and industrial property. Businesses looking to purchase property can manage their upfront duty costs but ultimately face higher ongoing costs of holding property in the form of an annual tax of 1 per cent of the unimproved land value, compared to a once-off duty of up to 6.5 per cent of the capital improved value.
Initially there is a choice to pay stamp duty upfront or over ten years (with interest) for the first sale of a property after 1 July 2024. An annual property tax will apply starting ten years after that first sale - or sooner if the property is resold. In the future, whether commercial property is subject to stamp duty on sale or is subject to an immediate property tax, may depend on whether it previously changed hands after 1 July 2024. The Budget papers say further details on how this will operate will be released by the end of 2023.
BDO comment
This measure will be welcomed by businesses given the deeply unpopular nature of stamp duty and its drag on efficient use of property in Victoria. In the short term though, the Victorian tax landscape will become even more complicated. The first sale of any property after 1 July 2024 will be subject to stamp duty and the buyer will face the decision to ‘buy now, pay later’ by paying off the duty over ten years instead of paying up front. Either way, the annual property tax will commence ten years after that first sale and, it appears, will apply instead of stamp duty following any subsequent sale of that property.
One of the big advantages of replacing stamp duty with a property tax may ultimately be an income tax benefit – an upfront capital expenditure could be replaced with an annual deduction when property tax replaces duty for subsequent sales. But there is no immediate duty relief in our State which, at 6.5 per cent, has the highest rate of duty in Australia. Further detail, including how this interacts with landholder duty, is expected in late 2023.
If you’d like to discuss the changes outlined in this article and what they might mean for you, please contact BDO’s team of specialists in Melbourne.