Legislation for Victoria’s new ‘Windfall Gains Tax’ (WGT) is due to be introduced to Parliament later this year. It is proposed to be a tax on the uplift in land value flowing from the rezoning of that land that will operate separately to and in parallel with the existing development and infrastructure contribution charges under the Victoria Planning Provisions and the Planning and Environment Act 1987 (Vic) (PE Act).
The WGT is promoted as a way for developers to “contribute their fair share” to infrastructure such as public transport, roads, hospitals and schools. However, it will be different to existing development and infrastructure contributions which, in the case of any monetary component, are largely levied at a specific rate per hectare, rather than by reference to the metric of property value uplift. The funds from the WGT will form part of the Victorian Government’s consolidated revenue and, as far as we know, may be spent as the State sees fit.
As we await the tax’s final form, it is time for developers to start thinking about what the WGT might look like, and how it will impact their development portfolios.
The WGT is proposed to be levied on certain land rezoned after 1 July 2022. At this stage it is understood:
- the WGT will be linked to the Victoria Planning Provisions and will apply to the rezoning of land from one zone type to another, rather than between zone sub-categories. For example, a change from a Residential Zone to an Industrial Zone would trigger the WGT, but not a change from the General Residential Zone to the Mixed Use Zone as they both fall within the Residential Zone grouping;
- the tax will apply to all landowners and will operate in a tiered fashion starting with uplifts of $100,000 in land value. Where the land rezoning generates an uplift of $500,000 or more, 50% of the uplift will be payable as the WGT;
- the 'windfall gain’ will be assessed by the Valuer General on the value of land before and after it is rezoned. Whether the value will be based on unencumbered market value or capital improved value pre and post rezoning is not yet clear, nor is it clear at what point in time the original value will be assessed;
- while we do not know what the Bill for the introduction of the WGT will look like, it is possible the tax will be introduced as an amendment to the PE Act where it will sit alongside the Growth Areas Infrastructure Contribution (GAIC);
- land already subject to the GAIC will be exempt from the WGT, as well as properties that are rezoned to a Public Land Zone;
- like the GAIC, payments for the WGT may occur at the time of the rezoning decision that triggers the WGT, or be deferred until the next dutiable transaction or subdivision of the land. For this reason, it is possible that concepts such as the Staged Payment Arrangements and interest payable on deferred tax may be introduced as part of the reform;
- unlike the GAIC, which is a one off-contribution payable on certain events associated with property development in the growth areas, such as buying, subdividing, or applying for a building permit, which generates a specific need for infrastructure in the relevant growth area, the WGT is a one-off payment tied to the rezoning of land with the funds collected able to be deployed anywhere in Victoria; and
- likewise, the WGT differs from the development or infrastructure contributions system which imposes a development or community infrastructure levy to fund projects involving the construction of infrastructure or community buildings or facilities. Again, these contributions are generally linked to infrastructure or community upgrades in the area where the development, which generated the need and liability to pay the contribution, will occur.
What the tax may look like
If the WGT is enacted, Victoria will be joining the Australian Capital Territory (ACT) in taxing development on land beyond the typical development or infrastructure contribution charges.
The ACT has had a form of ‘betterment’ tax in place since 1971. That regime has been implemented via a Lease Variation Charge (LVC) since 2011.
The LVC is designed to ensure the community shares the windfall gains developers make when the government varies a 99-year Crown lease (being the primary tenure of land in the ACT) to allow for new development such as new uses or expanded gross floor area limits. The LVC is a 75% charge on the increase in land value (with a 25% remission available in some circumstances, including for affordable housing developments).
For variations to a Crown lease, the taxable value is based on the difference the land would sell for immediately before and after the variation, presuming the land were offered on reasonable terms and conditions that a genuine seller would require.
Like the proposed WGT, the LVT forms part of the ACT’s consolidated revenue, which the government may choose to spend on facilities such as schools, roads and hospitals.
The introduction of another tax to Victoria’s property development regime has the potential to further complicate an already heavily regulated and costly rezoning process, particularly at a time when industry is still adjusting to the new public land contribution regime introduced relatively recently in 2018 under the Planning and Environment Amendment (Public Land Contributions) Act 2018 (Vic).
The devil of how the WGT will operate will be in the detail when the Bill is released over the coming months so developers can start to better understand how equitable, organised and easy to administer it will be. Like any tax tied to property development, already hotly rising property prices will invariably increase further as developers seek to pass on those costs to purchasers.
Good or bad, similar betterment taxes may be on the horizon across Australia in the years to come, particularly as state governments look to bankroll major property development projects as the nation recovers from COVID-19.