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Land tax is a legal loophole favouring vendors that purchasers must be aware of.

FAQ: Why does the purchaser need to pay the vendor's land tax bill?

There are many legal loopholes that favour vendors; land tax is one of them.

Update: due to recent changes to Victorian law, land tax apportionment at settlement now only applies to contracts signed before 1 January 2024, or for properties sold for more than $10,000,000 if the contract is signed after 1 January 2024.

In Victoria, if the vendor has a current land tax bill, this becomes an apportioned outgoing on settlement day. That means that purchaser needs to pay their share of the vendor's land tax bill, pro rata for the calendar year settlement occurs in, as a lump sum added onto the total amount the purchaser pays on settlement day. If the property is not claimed by the vendor as their Principal Place of Residence, then it is likely to attract a land tax liability owing to the State Revenue Office.

It doesn't matter if the purchaser is moving into the property and won't ever receive a land tax bill in the future; it's a one-off amount paid on settlement day, which is factored into the Statement of Adjustments (the itemised document summarising what the purchaser needs to pay the vendor on settlement day).

The amount payable will depend on the terms of contract. The standard general conditions of Victorian contracts state that the apportionment of land tax is calculated on a single land ownership basis, so it doesn't matter how many properties the vendor owns. However, some contracts will contain a special condition that requires the apportionment of land tax to be calculated on a proportional, aggregate, total or multiple land holding basis. This could significantly increase the amount payable by the purchaser. A land tax certificate, or a copy of the vendor's current land tax bill, should always be included in the contract, so a prospective purchaser can determine how much land tax, if any, they will need to pay if they purchase the property.

This issue is one of those nasty surprises that first home buyers and unwitting purchasers may receive, unless they have obtained a legal review of the contract before signing it. That means they are aware of the extra amount of land tax payable at settlement, and can factor it into their budget when purchasing the property. It also means that if the property is offered as a private sale, they can try to negotiate a no land tax special condition, or at least seek to remove the greedy proportional special condition. Obtaining legal advice before signing the contract could potentially save a purchaser thousands of dollars in a land tax apportionment.

Because land tax runs on a calendar year (January to December), the later in the calendar year settlement occurs, the less the apportionment is for a purchaser. This can be factored into when a purchaser agrees to settle.

And any land tax the vendor owes to the State Revenue Office should be paid off on settlement day. This is usually a requirement of any incoming mortgagee/bank lending money to the purchaser. Some contracts (especially drafted by larger law firms) will give the vendor an option to pay land tax when it's actually due, or by the end of the year and not at settlement. This should always be removed from the contract if possible, as it could jeapordise the purchaser's finance approval.

Note: the above is general information and should not be considered as legal advice.

Photo via Freepik.

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