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23 Dec 2020

Providing a better development contributions system in NSW: Productivity Commission Report released

By Nick Thomas, Wagih Doueihi and Victoria Hu

The Productivity Report found that the current system is unnecessarily complex and is not fully enabling local and State government to provide the infrastructure required to support development.

The NSW Productivity Commission has proposed a significant shake-up of the development contributions system, with the public release of its Final Report into the Review of the Infrastructure Contributions System in NSW this month.

The Report makes 29 recommendations covering the local and state infrastructure contributions system, which aim to deliver a more efficient and transparent system that is easier to understand and more consistent in its application. There's a variety of proposals, including charges to link contributions to land value uplift, standardised costing for infrastructure which is intended to reduce local contributions, locking in the deferral of contribution payment dates to the occupation certificate stage, and more limited scope for using planning agreements.

The Government has said it will respond "early in 2021". Property developers and other stakeholders should consider the recommendations over the summer break, so they are ready to engage with Government on next steps early in the new year.

Current state of play

Property developers are required under NSW planning laws to make contributions towards local and State public infrastructure which is needed to service their developments. They can be required in a few different ways:

  • Almost all developments must contribute land and/or money to local infrastructure, in accordance with the terms of a contributions plan, which is usually made by the relevant local council. The contribution is determined by reference to a series of calculations in the plan ("section 7.11 contributions") or a fixed percentage levy based on the forecast cost of the development proposal ("section 7.12 contributions").
  • Some developments, usually larger scale or in designated areas, must also make contributions towards State or regional infrastructure either:
    • as a special infrastructure contribution (SIC) pursuant to a rate set in a Ministerial determination for a designated "special contributions area" (eg. Sydney's north-west and south-west growth areas); or
    • to comply with a requirement in a planning instrument to make "satisfactory arrangements" for a contribution to infrastructure before development consent can be granted – these usually apply to urban release areas.
  • Voluntary planning agreements (VPAs) between the developer, the landowner and the relevant planning authority can be used in addition to or instead of the forms of contribution described above, to provide flexibility in the form, amount and timing of contributions.

The development of greenfield and urban renewal sites can be delayed because essential enabling infrastructure is not available at the same time as development is ready to proceed. Reasons for this include (among others) delays in the identification of infrastructure needs at the rezoning stage, delays in the finalisation of contribution arrangements and inadequate available funding.

The Report found that:

  • the current system is unnecessarily complex and is not fully enabling local and State government to provide the infrastructure required to support development;
  • it is unclear what infrastructure charges apply to a development and how they are calculated;
  • local government rate pegging and the restrictive "essential works list" are impacting councils' ability to meet service needs and residents' expectations;
  • infrastructure charges are not known until late in the development consent process, often after the land is rezoned, preventing developers from accurately pricing in the impacts;
  • high and rising land values (particularly in Sydney) pose a risk to government by inflating the cost of property acquisition;
  • there are concerns that the current system results in some property owners enjoying windfall gains from public investment and up-zonings at the cost of the wider community; and
  • there is a need for greater transparency and accountability of how and where contributions are spent.

Infrastructure contribution plans should be developed upfront as part of the zoning process

Contribution plans should be developed concurrently and exhibited with planning proposals to optimise infrastructure costs. This will allow infrastructure planning to be part of the broader strategic planning process and will send clear cost-based signals to property developers.

While this recommendation is sensible, it will be important to ensure that implementing it would not hold back the rezoning process.

A direct land contribution when rezoning should be introduced for landowners to fund public infrastructure

A major issue identified by local councils is the time lag between collection of contributions and land acquisitions which those contributions are intended to support, which can create funding shortfalls, and a major risk for timely infrastructure delivery. The Report proposes a "direct land contribution" which requires all landowners to contribute to "a common share of land" required for public purposes either by direct dedication or by monetary contribution.

The obligation will be enforced through a statutory charge which would be created at rezoning but it will not be payable until land is sold or developed, whichever occurs first.

It is not clear how this recommendation would work in practice. For example, it is not clear how the amount of contribution required of a landowner could be calculated equitably, to reflect the density of development which their landholding will generate at this early stage in the development lifecycle.

Allow councils’ general income to increase with population by reforming rate pegging

While the NSW local government rate peg takes into account increases in prices, it does not allow for increases in the volume of services. The Office of Local Government is progressing changes to the calculation of rate pegs which will allow councils' general discretionary income to grow with population, so that general population costs can be removed from infrastructure contributions.

The Report has also called for IPART to establish benchmark costs based on efficient delivery, and review the essential works list to ensure that only development-contingent items are funded by infrastructure contributions.

Payment of contributions should be permanently deferred to the occupation certificate stage

As a COVID-19 response, payment of contributions has been temporarily deferred to the occupation certificate stage to encourage more development projects to commence. The Report has recommended that this deferral be permanent.

Subdivision certificates are generally regarded as a more secure hold point for the collection of contributions than occupation certificates because, usually, only a council can issue them. Planning authorities who traditionally relied on a prohibition on the issue of a subdivision certificate as a form of security in their VPAs will need to revisit their security arrangements to ensure that they remain adequate.

Increase the maximum rate for section 7.12 fixed development consent levies

The Report has identified that section 7.12 levies are less cost reflective than section 7.11 contributions and are best suited to areas with low infrastructure need or where a 7.11 contributions plan would be too costly.

The maximum 7.12 levy for non-residential development should be maintained at the equivalent of 1%. Additionally, a 7.12 levy should be on a per dwelling basis for residential development, and per square metre of floor area basis for non-residential. These levies should be equivalent to 3% of capital cost for residential development and 1% for non-residential. On this basis, the proposed maximum rates are:

  • $10,000 per dwelling for houses (detached, semi-detached, townhouses)
  • $8,000 per dwelling for other residential accommodation
  • $35 per square metre for commercial uses
  • $25 per square metre for retail uses
  • $13 per square metre for industrial uses.

Section 7.11 contribution plans should use benchmark costs

The Report has recommended that IPART develop and maintain standardised benchmark costs for local infrastructure that reflect the efficient cost of provision.

The Report has also recommended that infrastructure not on the essential works list should be funded by other means such as council rates, fees and charges. There are some issues with this recommendation that will need to be worked through, including to ensure that the application of the essential works list is equitable between councils.

Introduce contribution plans in regional areas – Greater Sydney, Hunter, Central Coast, Illawarra and Shoalhaven – to fund growth infrastructure

State contributions plans should be introduced to Greater Sydney, Hunter, Central Coast, and Illawarra-Shoalhaven. This is a much broader catchment for State and regional infrastructure contributions than current arrangements.

The introduction of regional infrastructure contributions in these areas is expected to raise approximately $630 million in revenue in 2024.

VPAs should not be used for monetary value capture on height and floor space increases

The Report recommends curtailing the use of State and local VPAs in connection with infill development involving height and floor space increases. Instead, it recommends that VPAs should only recover development-contingent costs of "out of sequence" development proposals not identified in strategic plans or for the direct delivery of land or works with a relationship to the proposed development. These reforms, together with adoption of the draft revised VPAs policy framework released in April 2020, could limit significantly the use of VPAs. 

Implementation of contributions digital tool within the NSW Planning Portal

The NSW 2020-21 Budget has committed $14.8 million to implementing a centralised digital tool within the NSW Planning Portal which will give the industry quick and easy estimates of contributions liabilities. 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.