Major changes expected for NSW infrastructure contributions in 2022

Twelve months on from the release of the NSW Productivity Commission’s landmark Review of Infrastructure Contributions (Review), the NSW Government has released the latest components of its infrastructure contributions system reform package for public comment.

Previous announcements left questions over how certain contributions would be calculated, where they would apply and what other implications the more detailed regulatory changes would pose.

The latest suite of documents provides much of this missing detail, including:

• formulas and guidance for the calculation of the new land value contributions;
  
  
• a complete overhaul of the method for determining section 7.12 levies; and
  
  
• clarity on how and where ‘Regional Infrastructure Contributions’ (RICs) will apply.

As with all broad scale reform, there is understandable anxiety in the development industry about how the Bill and supporting instruments will affect land sales, the viability of developments and housing affordability. Whether these concerns are realised may not be apparent until the new contributions system is introduced. At this stage, at least, the reforms appear to propose a more transparent and consistent system for determining and collecting local and regional contributions.

Background to reform package

In March this year, following minor administrative reforms to the infrastructure contributions system, the NSW Government committed to implementing all 29 of the recommendations of the Review.

In June, the then Treasurer and now NSW Premier, Dominic Perrottet introduced the Environmental Planning and Assessment Amendment (Infrastructure Contributions) Bill 2021 (Bill) alongside the State Budget, seeking the Parliament’s endorsement of the Government’s infrastructure contributions reform agenda.

The Bill sought to make a wide range of changes to the infrastructure contributions system to give effect to the recommendations of the Review through amendments to the Environmental Planning and Assessment Act 1979 (NSW) (EPA Act).

While the Bill would establish the framework for the new contributions system, the Upper House of the NSW Parliament expressed concerns about the level of detail that would be left to the Minister for Planning and Public Spaces (Minister) to determine through regulations, and the Bill was referred to a parliamentary committee, delaying its passage.

In response, the NSW Government has now released a further tranche of new draft guidelines, practice notes, Ministerial directions and a draft amendment to the Environment Planning and Assessment Regulation 2000 (NSW). While the latest material is still missing certain discrete items to be determined following further consultation, it provides a much clearer picture of how the new contributions system will operate.

What’s new in the latest update?

All up, there are 13 separate documents in the latest reform package, predominately concerning local infrastructure contributions and RICs.

1) Local Infrastructure Contributions

Local infrastructure contributions are collected by councils pursuant to approved contributions plans, and presently fall under one of two categories: section 7.11 contributions or section 7.12 levies, named for the relevant sections of the EPA Act.

The Bill has introduced new terminology for these contributions, naming them ‘Local Infrastructure Conditions’ and ‘Local Levy Conditions’ respectively, reflecting their status as charges payable as a condition of a development consent or complying development certificate. The Bill also proposes a new contribution known as a Land Value Contribution (LVC), which would introduce a direct value capture mechanism into the NSW infrastructure contributions system for the first time.

The proposed Environmental Planning and Assessment Amendment (Infrastructure Contributions) Regulation 2021 (Amending Regulation) is the principal instrument which sheds light on the changes to local infrastructure contributions.

Notably, proposed clause 25J prevents a condition under either section 7.11 or 7.12 being imposed on:

• public housing;
  
  
• affordable or seniors housing (undertaken by or on behalf of a social housing provider);
  
  
• state development for the purpose of schools, health services facilities, emergency services facilities or public administration buildings; or
  
  
• development on land the subject of a ‘Lease Area’ under the State Environmental Planning Policy (Three Ports) 2013.

Section 7.11 Local Infrastructure Conditions and Land Value Contributions

The most notable change to section 7.11 proposed by the Bill is the introduction of LVCs. LVCs are intended to be used in greenfield urban release areas as an optional alternative to collecting section 7.11 contributions for land acquisitions.  

An LVC will apply to land in an ‘LVC Area’, which will be set out in a contributions plan and mapped in the relevant local environmental plan. An LVC is restricted to future rezonings and will not be applied to land already rezoned for intensive uses.

While the system for imposing and recouping an LVC is dealt with under the Bill, the method of calculation and other essential elements of the charge have been clarified in the Amending Regulation. Importantly, for land specified in an LVC Area:

• according to the principle that not more than 20 per cent of land should be required for local infrastructure, the maximum LVC which may be imposed is 20 per cent of the value of that land; and
  
  
• the relevant value is not market value but the value of the land for rating purposes as determined by the NSW Valuer General, not including the value of any structures on the land.

The LVC is intended to be used as an alternative approach to estimating land acquisition costs at the time a section 7.11 contribution plan is prepared, which often struggles to reflect changes to land values over time.

Each LVC proposed will require public consultation, as a proposal to introduce an LVC via a contributions plan must be exhibited concurrently with the planning proposal to rezone the relevant land.

Although an LVC will come into effect when land is rezoned, it will only be payable upon sale or subdivision/development of land in an LVC Area.

Section 7.12 Local Levy Conditions

Presently, levies collected under section 7.12 are tied to the cost of the development, with a maximum rate of up to 1 per cent of this cost. Councils can also apply to the Department of Planning, Industry and Environment (DPIE) to seek to increase the rate to a maximum of 3 per cent.

The Amending Regulation proposes to overhaul the way in which section 7.12 levies will apply, scrapping the flat percentage levy in favour of a fixed dollar amount which will vary according to development type and location and will be indexed and adjusted each quarter.

The table below shows the rates that will apply on commencement of the reforms across several key development types:

_{* Where the development is an alteration to an existing development, the maximum rate will be 50 per cent of the maximum rate for a new development or addition to existing development.}

2) Regional Infrastructure Contributions (RICs)

The RIC framework proposed by the Bill seeks to replace the cumbersome Special Infrastructure Contribution (SIC) system currently in place in certain areas across NSW.

While the fundamental components and operation of the RIC have already been set out in the Bill and its supporting material, the latest tranche of information provides some greater clarity on exactly where RICs will apply and what the indicative rates will look like on commencement.

Significantly, the Government has now confirmed that RICs will apply to broader parts of the State than the previous SIC system, with a single RIC to apply to all of Greater Sydney, and RICs for each of the State’s main regional metropolitan areas of the Central Coast, Lower Hunter and Illawarra-Shoalhaven.

While a RIC may consist of several smaller component charges, not every RIC region will be subject to all components. On commencement of the RIC framework, a RIC will consist of a base contribution amount of either $/dwelling or $/m² of new gross floor area (GFA), depending on development type.

Base contribution rates are generally consistent across Greater Sydney and the Central Coast, Lower Hunter and Illawarra-Shoalhaven RIC regions:

 *From 1 July 2022 to 30 June 2023 a 50 per cent discount to this rate will apply; and from 1 July 2023 until 30 June 2024 a reduced discount of 25 per cent will apply.

In addition to the base contribution, a RIC may feature either or both of the following component charges:

• a Transport Project Component (TPC), which will apply to new developments within a defined ‘service catchment’ of major transport projects and operate as a cost recovery mechanism for major transport infrastructure; and
  
  
• a Strategic Biodiversity Component (SBC), which will replace the current site-specific offsetting under the NSW Biodiversity Offsets Scheme for development subject to biodiversity certification.

The TPC is intended as a variable charge, and indicative rates have yet to be provided.  It is expected that the TPC will only apply where a major infrastructure upgrade is contemplated, with rates determined on a project-specific basis

It is not clear whether the SBC will be consistent across all areas to which it applies; rates will be determined as part of the strategic biodiversity certification process for land.   Proposed SBC rates for the Cumberland Plain Conservation Plan area, subject to biodiversity certification, are as follows:

 *From 1 July 2022 to 30 June 2023 a 50 per cent discount to this rate will apply; and from 1 July 2023 until 30 June 2024 a reduced discount of 25 per cent will apply.

More detail on the TPC and SBC are expected after the RIC is introduced, indicating that the initial RIC may not include either component.

RICs will not apply to development in rural zones or to social and affordable housing developments, and DPIE has announced that it will work with stakeholders in areas currently subject to a SIC levy to determine the arrangements for transitioning to the new RIC framework.

There is no change to the proposed timeframe for introducing a water charge RIC component and it is still anticipated that Sydney Water and Hunter Water will work with Government to introduce this charge for development completed after 1 July 2026.

What’s next?

These latest draft instruments and supporting material from the NSW Government provide more of the fine detail to support the overarching contribution system reform proposed by the Bill.  

The Bill itself remains before the Upper House of the NSW Parliament, which has sat for the final time in 2021. Should the Bill pass in early 2022 as expected, the NSW Government’s Infrastructure Contributions Roadmap’s goal of achieving all legislative and regulatory reform by the end of Q2 2022 can still be met.