The recently announced Victorian State Budget includes new taxes for property investors and significant cuts to the public sector. These measures aim to repay the $31.5 billion borrowed by the Victorian Government during the Covid-19 pandemic. However, these changes may have consequences for individuals, particularly in the real estate market and rental sector.

Property Tax Changes and Rental Implications

Starting from January 2024, property investors will face additional land tax charges based on the value of their landholdings.

Landholdings exceeding $300,000 will incur a fee of $975 plus 0.1% of the total land value. Landholdings valued between $50,000 and $100,000 will be subject to a fee of $500, and those valued between $100,000 and $300,000 will face a fee of $975.

Exemption for Family Homes

The changes in land taxes will not apply to family homes; however, holiday homes held as second properties will be subject to the new tax. According to the Victorian Treasurer, Tim Pallas, approximately 860,000 landowners will be affected by the widened land taxes, resulting in an average additional tax burden of $1,300 annually.

Mr Pallas presented his ninth and most challenging budget in early May, outlining a "Covid debt repayment plan" aimed at bringing the state's borrowings, projected to reach $171.4 billion by 2026/27, under control. He emphasised that the debt levies were temporary, targeted, and responsible, specifically designed to impact those with the ability to pay.

Mr Pallas noted the significant increase in big business profits over the past three years and the rise in land values for rental providers, coupled with a 25% increase in rents over the past five years.

To mitigate the impact on businesses, the Budget proposes the abolition of stamp duty for commercial and industrial properties in favour of an annual property tax, along with the gradual phasing out of business insurance duties over the next decade.

Implications for Renters

However, the unintended consequence of the land tax changes may be increased costs for Victorian property owners who invest in rental properties, ultimately affecting renters. The Real Estate Institute of Victoria (REIV) immediately criticised the tax increases, arguing that they would exacerbate the existing rental crisis faced by Victorians.

REIV Chief Executive Quentin Kilian stated that the government's decision represents a step backward and fails to address the shortage of affordable rental housing, further impacting Victorian renters. He highlighted that the budget debt is being recouped through short-term solutions that harm both property investors and renters while worsening the structural housing supply issues in the state.

Implications for Small Property Investors

Australian Tax Office data reveals that over 70% of Victorian property investors own only one rental property, with 43% of that group earning less than $100,000 per year. Mr. Kilian argues that these investors will be particularly affected by the tax changes, as the tax-free threshold drops from $300,000 to just $50,000. This disproportionate impact on every day Victorians who invest to secure their future may lead to fewer incentives for investors, exacerbating the supply-demand imbalance and driving rental prices even higher.

The budget was presented alongside new data from analyst group PropTrack, which indicated a record low of 16.55% of rental properties listed for less than $400 a week in Melbourne in April, a 30% decrease compared to the same period last year. Vacancy rates remain at near-record lows.

Potential Reduction in Rental Stock

Cameron Kusher, PropTrack's Executive Manager of Economic Research, believes that the debt levy policies have the potential to further reduce rental stock when the market requires more properties. He notes that many investors have already exited the market during the Covid-19 pandemic, and these tax changes may encourage more to do the same.

Cath Evans, Victorian Executive Director of the Property Council, also criticised the new taxes. She argues that the Covid Debt Levy will burden the Victorian economy until its conclusion in 2033. Ms Evans emphasises that most of the state's rental stock is owned by small property investors who lease their properties to Victorian renters. Even investors with properties with a land value component as low as $100,000 will receive a $975 land tax bill starting next year.

Commercial Stamp Duty Reforms

Despite the negative implications for property investors and renters, the budget contains a mix of measures that offer some benefits to companies and investors. One such measure is the commercial stamp duty reforms, which received strong support from the Property Council. The phased elimination of stamp duty fees for commercial and industrial property transactions is seen as a positive initiative that could stimulate economic activity and investment in Victoria.

Ms Evans from the Property Council commends this move, stating that stamp duty is a destructive tax that discourages positive economic outcomes for the state. The Property Council has consistently advocated for its elimination from all transactions in Victoria, including residential properties.

Reduction in Public Service Jobs

As part of the budget measures, the Andrews Government plans to reduce the public service workforce by 3,000 to 4,000 employees and scale back the utilisation of labour-hire and consultancy firms.

The budget papers indicate that interest payments on state debt are projected to reach $5.6 billion in the current financial year, equivalent to $15 million per day, up from the $5.17 billion forecasted six months ago. By 2026/27, these interest payments are expected to grow to almost $8 billion.

Analysts have identified several assumptions underpinning the budget, including the belief that inflation peaked at 7% in the 2022/23 financial year and will gradually decrease to 4.25% this year, with a further decline to 2.75% projected for 2024/25. The budget also assumes a population growth rate of 3.5% in 2023/24, while the unemployment rate is expected to rise to 4.25%.

The Victorian State Budget introduces significant changes that aim to address the state's financial challenges, but the impact on individuals, particularly property investors and renters, remains a topic of discussion.