Windfall Gains Tax takes effect from 1 July 2023

WINDFALL GAINS TAX TAKES EFFECT FROM 1 JULY 2023

From 1 July 2023, where the value of land increases by more than $100,000 as a result of a rezoning, the new Windfall Gains Tax (WGT) will kick in.

The introduction of the WGT stems from legacy events where the rezoning of land has resulted in a ‘windfall gain’ that hasn’t been captured and invested for the benefit of the community. One of the examples often cited is the rezonings approved by the former Minister for Planning in Fisherman’s Bend in 2012.

The WGT is forecast to collect $40 million in FY2023-24, $59 million in FY2024-25 and $84 million in FY2025-26. In the context of the Growth Areas Infrastructure Contribution (GAIC) which is expected to derive $328 million in FY2023-24, $336 million in FY2024-25 and $344 million in FY2025-26[1], the expected gains from the WGT sound relatively modest.

What’s more, while the WGT has been on the horizon for some time, it remains to be seen whether the changes in land values will deliver the uplifts in taxation revenue anticipated.

What is a rezoning?

A rezoning is “an amendment of a planning scheme that causes land to be in a different zone from the zone that it was in immediately before the amendment”[2].  Zone means “a zone under a planning scheme”.[3]

A rezoning can sometimes be anticipated, particularly an amendment that’s initiated by a landowner/developer or prepared by a local council following extensive consultation. Landowners considering pursuing a planning scheme amendment or purchasing land which may be subject to an amendment will need to carefully consider the implications of a WGT event.

Not all rezonings will result in a WGT. The following are considered Excluded Rezonings[4] and will not give rise to a WGT event:

• a rezoning between schedules in the same zone

For example, a rezoning from a General Residential Zone Schedule 1 to General Residential Zone Schedule 2.

• a rezoning that causes land to be brought within the contribution area within the meaning of section 201RC of the Planning and Environment Act 1987

This aspect of the Planning and Environment Act 1987 deals with the Growth Areas Infrastructure Contribution (GAIC). GAIC was established to help provide infrastructure in Melbourne’s expanding fringe suburbs.

It is a one off-contribution, payable on certain events, usually associated with urban property developments, such as buying, subdividing, and applying for a building permit on large blocks of land.

• the first rezoning after 1 July 2023 of land that was in the contribution area within the meaning of section 201RC of the Planning and Environment Act 1987 immediately before that date.
• a rezoning that causes land that was not in a public land zone to be in a public land zone.

This scenario would not generally affect private landowners. Public Land Zones are primarily used for government authorities.

• a rezoning that causes land that was in a public land zone to be in a different public land zone.

For example, a rezoning from a Public Use Zone 1 to Public Use Zone 2.

• a rezoning that causes land to be in a zone declared under subsection (2)(a) to be an excluded zone.

This provides the ability for Treasurer, by notice published in the Government Gazette, may declare a zone to be an “excluded rezoning”.

• a rezoning of land that, immediately before the rezoning, was in a zone declared under subsection (2)(b).

It is worth noting that a number of the Excluded Rezonings carve out land to which GAIC applies, thereby avoiding a double-dipping or exclude land used for public purposes.

What is payable on account of WGT?

WGT is calculated by reference to the difference in the capital improved value (CIV) of the land with and without the rezoning, both as at 1 January preceding the rezoning.  

Source: Department of Treasury and Finance Factsheet - Windfall Gains Tax

The Valuer General Victoria will be responsible for determining the value of land before and after a rezoning.

In terms of the WGT liabilities, for a rezoning of land that results in a value uplift:

• of more than $100,000 but less than $500,000 the tax will apply to marginal rate of 62.5% on the uplift above $100,000.
• of $500,000 or more a tax rate of 50% will apply to the total uplift.[5]

In determining the value uplift of land, all land owned by the person or groups of companies and/or trusts and subject to that rezoning will be taken into account.

Exemptions 

The Windfall Gains Tax and State Taxation and Other Acts Further Amendment Act 2021 (vic) provides a number of exemptions:

• residential land up to 2 hectares;[6]
• rezonings which seek to correct obvious or technical errors in planning provisions or the planning scheme;[7]
• land which is subject to a contract of sale or option before 15 May 2021 and where settlement has not occurred before the windfall gains tax event;[8]
• rezonings underway before 15 May 2021:[9]this requires registration of the amendment tracking system before 15 May 2021; or
  1. before 15 May 2021 the owner of the land—
     • approached the Council to request the rezoning; and
     • paid for, was liable to pay for, or had otherwise performed or procured relevant work in relation to the rezoning; or
     • the total value of relevant work and relevant costs was not less than the threshold amount[10].
• charities and university land (in certain circumstances only);[11]
• land rezoned to a rural zone.[12]

Who is responsible for the WGT and when does it need to be paid? 

The Landowner will be liable to pay the WGT[13].  The liability can be deferred, either partially or in full, until the next dutiable event (or relevant acquisition in a landholding company or trust) occurs or thirty years after the rezoning event, whichever occurs first. An example of a duitable event would be a transfer of land.

Interest will accrue over the deferral period at the 10-year Victorian Treasury bond rate. Once deferral ceases, full payment must be made within thirty days[14].

Source: Department of Treasury and Finance Factsheet - Windfall Gains Tax

What next?

The WGT is in its infancy. Landowners will no doubt seek to minimise their exposure to WGT liabilities, and this will ultimately require consideration of the “value uplift”, a valuation question. Planning Scheme Amendments are generally foreshadowed and processed over long time periods.  It is unclear how changes in the market over the processing time of the amendment will be factored into the calculation and the value increases that can and can’t be attributed to a rezoning.

For landowners, being alive to planning reforms and seeking advice from a planning or property professional in the early stages of a property transaction or redevelopment proposal will assist in foreshadowing a potential WGT event, and managing the potential liabilities.