For State tax purposes, an increase in land value arising from a favourable rezoning decision in respect of Victorian land would typically only carry an adverse side effect of a heftier land tax bill. This side effect could then be minimised by savvy investors who would dispose of the land for a sizeable profit. However, this is no longer the case.
On 15 May 2021, the Victorian Government announced a new windfall gains tax (WGT) for uplifts in land value resulting from amendments to planning schemes under the Planning and Environment Act 1987 (Vic). The Windfall Gains Tax and State Taxation and Other Acts Further Amendment Bill 2021 (Vic) was made available to the public on 13 October 2021, and put meat on the bones of this new tax.
The purpose of this article is to cover some of the more material aspects of the draft legislation in respect of the WGT – noting that the final form of the WGT regime is subject to change as part of any amendments made to the draft legislation prior to enacting.
In the interim, it would be prudent for any person to seek specific stamp duty advice to the extent that they consider they may be potentially impacted by the WGT regime.
Application of the proposed Windfall Gains Tax Act 2021
The Victorian Government says that the rationale behind the introduction of this tax is to recoup windfall profits that arise simply from a rezoning of land and to then direct the profits to the community, for use in building roads, hospitals and schools. Rezoning may be developer led or could even be government led. Importantly, it is not intended that WGT be payable in respect of land which becomes the subject of the Growth Areas Infrastructure Contribution (GAIC).
Under the new legislation, from 1 July 2023, a land owner will become liable to pay WGT on the “taxable value uplift” of land when a “WGT event” occurs.
In broad terms, a “WGT event” occurs when a rezoning (other than an "excluded rezoning") under the Planning and Environment Act 1987 (Vic) takes effect in respect of Victorian land. Rezoning of contribution areas subject to the GAIC and rezoning between schedules in the same zone are “excluded rezonings” that do not trigger a “WGT event”. The “taxable value uplift” of land that is subject to a "WGT event" is broadly the difference between the capital improved value of the land (as contained in a valuation made by the Valuer-General) immediately before and after the WGT event, minus any deductions as prescribed by the regulations. The regulations have not been published as at the date of this article, although it is hoped that deductions prescribed by the regulations will include costs incurred by land owners or developers in achieving the value uplift.
The rate of WGT will generally depend on the taxable value uplift. There is a tax-free threshold for taxable value uplifts under $100,000, while taxable value uplifts of more than $100,000 but less than $500,000 will be subject to WGT at the rate of 62.5% for the part of the taxable value uplift that that exceeds $100,000 (resulting in an effective WGT rate of less than 50%). For taxable value uplifts of $500,000 or more, WGT is applied at a flat rate of 50% of the taxable value uplift.
Importantly, WGT is assessed on all land owned by a taxpayer whose value is uplifted by the same WGT event on an aggregated basis (disregarding any land whose value may be reduced as a result of the "WGT event"). Consequently, the taxpayer will not be able to utilise the $100,000 tax-free threshold in respect of each separate title. Additionally, land owned by members of a group (that is, related corporations, similar to the concept under the Land Tax Act 2005 (Vic)) will also be assessed on an aggregated basis. The applicable WGT is then apportioned to each title in the proportion that the taxable value uplift of that land bears to the aggregated taxable value uplift.
In most circumstances, any unpaid WGT (including any interest and penalty tax) will be a first charge on the land on which the WGT is payable. This charge has priority over all other encumbrances to which the land is subject and this can negatively impact the raising of finance from financiers.
Deferral of payment
In recognition of the reality that many landowners may not have the funds to pay a tax which amounts to 50% of the increase in land value and where the tax liability arises simply upon a rezoning decision, the legislation gives the landowner the ability to defer payment of the WGT in certain circumstances. The WGT can be deferred until the next dutiable transaction of the land or after 30 years, whichever occurs first. However, the deferral is subject to interest, calculated daily at the 10-year-bond rate.
Nevertheless, if any non-deferred WGT is not paid by the due date, the whole of the WGT becomes immediately payable as if a deferral election had never been made.
Residential land exemption
A full exemption is provided for up to 2 hectares (ha) of "residential land", regardless of whether it is a principal place of residence if the residential land is the only residential land owned by the taxpayer that is rezoned by the "WGT event".
Broadly, "residential land" comprises land that:
- has a building affixed to it that is designed primarily for residential purposes and which may lawfully be used as a place of residence; or
- a residence is being constructed or renovated on and before the construction, the land was either:
- capable of being used as a place of residence; or
- there was a residence that was uninhabitable on the land.
If a residence is being constructed or renovated on the land, the Commissioner requires that a building permit has been issued for the construction or renovation. It is expected that upon completion of the construction or renovation, the land will be capable of being lawfully used as a place of residence.
What is not "residential land"?
Consistent with the treatment of certain classes of residential land across the tax legislation, commercial residential premises, residential care facilities, and which may lawfully be used as a place of residence and retirement villages are excluded from the definition of "residential land" under the WGT provisions. Therefore, rezonings pertaining to the building of a hotel or motel (being commercial residential premises) could trigger WGT. A rezoning for the purposes of constructing a retirement village or aged-care facility, could also trigger WGT. Carve-outs are given for land within commercial residential premises, residential care facilities, supported residential services and retirement villages which have a separate title and hold a separate residence on that title and are owned separately (for example, a unit in a retirement village which is separately titled and owned by a resident).
Primary production land is also excluded from the definition of "residential land". However, any primary production land that contains a home will remain exempted up to 2ha. Specifically, only 2 ha of any title with the residence on it is treated as residential land, and any adjoining land with a different title used for primary production is not residential land.
Certain other exemptions
Some of the other exemptions include:
- Rezoning Errors: Where an event that triggers WGT is due to a technical rezoning error, then an exemption will be available.
- Negative Uplifts: If a "WGT event" results has a negative impact of land value and there is no WGT payable in relation to that "WGT event".
The proposed legislation also provides for transitional arrangements for certain contracts, option arrangements and proponent led-rezonings that were underway before the previous WGT announcement on 15 May 2021. Specifically, under the draft legislation, there will be additional transitional exemptions for:
- pre-existing contracts of sale for land subject to a WGT event that were entered into before 15 May 2021 but will not be completed before 1 July 2023;
- pre-existing options to enter into a contract of sale for land subject to a WGT event granted before 15 May 2021 but will not be exercised, or will be exercised but not completed, before 1 July 2023 (note that this exemption will only be available if the terms of the contract of sale were settled at the time the option was granted);
- land that is rezoned by a WGT event where the planning scheme amendment was prepared by a Council, the request for amendment was created and registered in the Amendment Tracking System by the Council before 15 May 2021, the owner of the land approached the Council to request the rezoning and paid for (or was liable to pay for) the costs associated with the rezoning before 15 May 2021, and the total costs exceeded the lesser of 1% of the capital improved value of the land immediately before the WGT event or $100,000; and
- land that is rezoned by a WGT event where the planning scheme amendment was prepared by or at the request of the Planning Minister, the Planning Minister agreed to prepare the amendment before 15 May 2021, the owner of the land approached the Planning Minister to request the rezoning and paid for (or was liable to pay for) the costs associated with the rezoning before 15 May 2021, and the total costs exceeded the lesser of 1% of the capital improved value of the land immediately before the WGT event or $100,000.
Interaction with other taxes
Further thought will need to be given to the interaction between any other taxes such as capital gains tax (CGT) (which is a federal tax) and WGT and the impact (if any) that WGT may have on any CGT that may be payable on any disposal of the relevant land.
Given the potential for substantial costs associated with any WGT liability, builders, land owners and developers seeking to take advantage of increased property values arising from rezonings should consider the application of WGT and seek advice on the eligibility for any available exemptions.