An overview of Victoria’s new Windfall Gains Tax

The Windfall Gains Tax (Tax) has been introduced by the Victorian Government to capture some of the uplift in value that results from land being rezoned.

In an earlier insight, we explained the Tax as it had been proposed by the Windfall Gains Tax and State Taxation and Other Acts Further Amendment Bill 2021 (Bill). With the Bill subsequently enacted, and the new Tax commencing from 1 July 2023, it is timely to revisit the Tax, how it will operate and consider implications for landowners and the development industry.

Why was the Tax introduced?

To recap, the policy drivers behind the Tax are that it is ‘unfair’ for windfall gains arising from land rezoning to accrue solely to the landowner. This issue gained prominence following reports[1] that the Fisherman’s Bend precinct rezonings led to an average 368% windfall gain per square metre, at a total estimated value of $4.43 billion.

Accordingly, it is said to be efficient and equitable for a share of those private economic benefits to be captured as a revenue stream for public benefit.

When is the Tax imposed and who is liable?

The Tax will be imposed on the owner of land at the time that the land is rezoned, where that occurs on or after 1 July 2023.

Where a person owns multiple parcels that are rezoned, or where various parcels are owned by commonly controlled entities, the Tax liability will be assessed on an aggregated basis (and in the latter scenario, each group member is jointly and severally liable to pay the Tax for the group).

When is land ‘rezoned’?

Land is ‘rezoned’ through an amendment to the planning scheme. Amendments are prepared by ‘planning authorities’ such as the local Council (although they can be initiated and progressed following a request from a private developer), and require the approval of the Minister for Planning.

A rezoning can change the nature of what the land can be used for, and therefore can materially impact its ‘development potential’.

Are there any exemptions?

There are various excluded or exempt rezonings, and relief for certain landowners, that may be available.  For example, the Tax will not be imposed with respect to:

1. rezoned property that is used primarily for residential purposes (up to two hectares);
   
   
2.  land rezoned to or from the Urban Growth Zone (being land that is subject to the Growth Areas Infrastructure Contribution or ‘GAIC’); or
   
   
3. land rezoned to certain rural zones, including the Green Wedge Zone, Rural Conservation Zone, Farming Zone and Rural Activity Zone.

Further, an exemption may be available to landowners who remain bound by an uncompleted contract of sale that was executed before 15 May 2021 (which is the date the Tax was announced), where the terms have not since been varied, or in respect of rezonings that were underway and sufficiently progressed (by reference to particular thresholds) before the Tax was announced.

Charities (including universities) are also given special relief, as they are entitled to apply for a waiver from payment of the Tax where the Commissioner is satisfied that the land will be used and occupied exclusively for charitable purposes for at least 15 years after the rezoning or, in the case of a university, that revenue from the rezoned land will be used to further the university's charitable purposes.

How much Tax is payable?

Where a liability arises, the Tax is calculated by reference to the difference in the capital improved value (CIV) before and after the land is rezoned. The CIV is determined by the Valuer-General Victoria and is currently used, for example, in assessing council rates.

For the purposes of the Tax, the Valuer-General will use the CIV as at 1 January before the property was rezoned (CIV1). It will also undertake a supplementary valuation of the property, based on the new rezoning, as if it had been rezoned at 1 January of the same year (CIV2). The difference between CIV1 and CIV2 reflects the uplift in value arising from the rezoning.

The Tax applies to uplifts over $100,000, and is imposed at the following rates:

1. 62.5% for an uplift in value between $100,000 and $500,000; or
   
   
2. 50% for the total uplift in value over $500,000.

By way of example, if the total uplift in value is $140,000, the Tax will be applied to the uplift in value of $40,000 (at a tax rate of 62.5%). However, if the total uplift in value is $600,000, the Tax will be calculated based on the uplift in value of the full $600,000 (at a lower tax rate of 50%).

Capacity to offset the uplift in order to reduce liability is limited, given:

1. the legislation confirms that any negative taxable value uplifts (i.e. decreases in land value resulting from the rezoning) are to be ignored; and
   
   
2. while the legislation permits prescribed deductions, none are provided for or proposed at this stage.

Objections to CIV

There is scope to object to the CIV of land as assessed by the Valuer-General.  In particular, subject to time restrictions (usually two months), a landowner can apply for a review of the CIV1 or CIV2 of their land, by lodging an objection with:

1. their local Council (where the CIV is specified in a rates notice); or
   
   
2. the Commissioner of State Revenue (Commissioner) (where the CIV is specified in a notice of assessment).

In practice, objections have traditionally been pursued to reduce the CIV of land. However, the Tax is likely to motivate some landowners to object to their pre-rezoning CIV, on the basis that it is too low and should be increased. If successful, such an objection would mean that when the property is formally rezoned, there is a smaller uplift and less Tax payable.

An objection to increase the CIV may well  align with observations from valuers’ that a proposed amendment is an existing relevant consideration in determining CIV, and that any change in the pre- and post-rezoning CIV likely reflects the uncertainty associated with whether the amendment will be approved and on what terms. Practically, this appears to reduce the significance of this Tax in all but exceptional circumstances (such as where a rezoning is approved without any forewarning).

Timing for payment of the Tax

Shortly after a property is rezoned, a landowner will receive an assessment notice. The notice will give the landowner the option of:

1. paying the Tax in full;
   
   
2. paying part of the Tax and deferring payment of part of the Tax for up to 30 years; or
   
   
3. deferring payment in full for up to 30 years, or until a dutiable transaction or relevant acquisition (as defined for stamp duty purposes) occurs. If the Tax is deferred in full (or part), the debt plus accrued interest becomes payable within 30 days of the earliest of these occurrences. There is no scope to defer again.

If a landowner does not pay the Tax when due, the Commissioner has the power to register a charge on title to the property, which limits the landowner’s ability to transfer (i.e. Sell) the property unless the Tax is paid and the charge is removed.

Key implications for stakeholders

The Tax will affect a range of stakeholders including landowners, property developers and of course the broader community.

For landowners, the Tax obviously impacts the value of an uplift that can be realised by a landowner following a rezoning. The Tax also changes the risk associated with continued ownership post rezoning. This is because, whilst a landowner that does not wish to sell may defer payment of part or all of the Tax, interest will accrue and a downturn in the property market might mean that the owner does not realise the financial uplift on which the Tax was calculated. This vulnerability escalates over time as the maximum deferral period is 30 years. The result is that the Tax creates a financial pressure that may encourage land to be sold sooner than its owner(s) want or intend.

The Tax will also be a significant new liability for public bodies such as statutory authorities and municipal councils that own land. Traditionally, surplus land owned by these bodies is rezoned prior to a public sales process, in order to achieve the highest price consistent with government policy requirements. However, liability for the Tax will change the financial metrics and practically, may prompt reconsideration of the strategy and timing for disposal of unused public land.

From a developer’s perspective, the Tax is likely to:

1. influence sale price (both pre- and post-development) and need to be factored into determining project feasibility and bankability, particularly given that developers can be expected to pass on any additional costs associated with the Tax either upstream to the incumbent landowner (through a lower purchase price) or downstream to future purchasers. Such costs include not only the quantum of Tax and any interest payable, but also indirect costs such as those incurred securing finance, if financial institutions impose stricter conditions (or worse, refuse to lend), where a significant Tax liability is anticipated;
   
   
2. impact the timing of transactions, particularly as the decision to rezone land is not something that developers can fully control, and a landowner’s right to defer liability can only be exercised once; and
   
   
3. incentivise developers to consider whether alternatives to rezoning may be available, such as site specific controls incorporated into the planning scheme, which do not trigger liability for the Tax.

Finally, Tax proceeds will contribute to the Government’s consolidated revenue. Unlike other forms of development contribution, there is no mandate on the Government to spend the proceeds of the Tax on services benefitting the local area from which it was collected.

_{[1] "The Rezoning ‘Honeypot’: Evidence from Fishermans Bend", Prosper Australia}