Michael advises on property development transactions and joint ventures, structuring of acquisitions, divestments and commercial transactions.  He has extensive experience advising residential and commercial property developers in connection with income tax, stamp duty, GST, land tax and GAIC, as they impact land procurement structures.  

He is a current committee member for UDIA and PCA.   

As unpalatable as a Windfall Gains Tax (WGT) might be for the development industry, the Victorian State Government has remained steadfast in its commitment to the new tax since first announcement on 20 May 2021.

Accepting the inevitability of the new tax, discussion in industry circles has started to shift towards what the new tax might look like when it is introduced. The WGT did not form part of the State Taxation and Mental Health Acts Amendment Bill 2021 enacted on 8 June 2021 to implement other 2021/22 State Budget measures. The Government subsequently confirmed that separate legislation will appear in September 2021 to shape the new WGT. Until then, amidst growing market uncertainty, it is timely to ask what might the WGT look like when it commences on 1 July 2022?

Some of the issues we think government will need to consider in the design and implementation of the new WGT are discussed below.

Land captured – details so far around what land the new WGT will apply to are scant. Government has confirmed that it will not apply to land already subject to growth areas infrastructure contribution (GAIC). Given that not all land in the urban growth boundary (UGB) is subject to GAIC, that should not however be taken as an indication that the WGT will not apply to land within the UGB. Land outside the UGB, in so-called ‘regional areas’, is very likely to be affected by the new tax. Similarly, land in and around greater Melbourne, including Melbourne’s CBD, is almost certain to be affected. In announcing (and rationalising) the new tax, government used the example of Fisherman’s Bend. Such an example provides a fairly good indication that the government has land within metropolitan Melbourne in its sights. Government has also failed to rule out regional areas in response to growing market speculation that the new tax will apply Victoria-wide.

Rezone event – the trigger for the new tax will be a rezone event. At this stage we don’t known what a ‘rezone event’ will be, but we do have some indication as to what it won’t be. A rezone event will be linked to the Victorian Planning Provisions and will apply to rezoning between zone types rather than between zone sub-categories. Rezonings to Public Land Zones will be specifically exempt, as will rezonings to and from the urban growth zone (UGZ) within the GAIC area. Given the complexities of Victoria’s Planning Provisions, we expect government will need to invest a considerable amount of time and effort in clearly defining what a rezone event is, and what exceptions might apply in special circumstances.

Calculation of windfall and tax rate – the Government has already said that the new tax will only apply to rezoning decisions that generate a ‘significant value uplift’ and significant means at least $100,000. For rezoning decisions that generate value uplift of between $100,000 and $499,999, 62.5% of the uplift will be paid as WGT. For rezoning decisions that generate value uplift of $500,000 or greater, 50% of the uplift will be lost to WGT. The ‘uplift’ (and therefore windfall) that will be taxed will be the difference between the value of the land before and after it is rezoned, as determined by the Valuer-General Victoria (VGV). It is not clear however what ‘value’ will be used - unencumbered market value, capital improved value or site value are all candidates. It is also unclear at what point in time the ‘before’ value will be assessed. The most likely assumption is that it will be the VGV’s valuation that is in force immediately before the rezoning event. Given how controversial land tax valuations have become in recent years, one imagines that value determination will feature as a key part of the new legislation, and the Government will be keen to limit the ability of landowners to contest VGV valuations as much as possible.

Who is liable – it is difficult to see how it could be anyone other than the landowner at the time of the rezoning decision that will be liable for the new tax. In press releases issued at the time of announcement the Government specifically referenced ‘speculators’ and ‘developers’ as the main beneficiaries of zoning windfalls. However what gets spun to the media and what ends up being included in functional legislation are often two different things. We would therefore be very surprised if government came up with a legislative model that didn’t tax all landowners, including farmers, and didn’t attach the tax liability to the land in a similar manner to GAIC.

When payable – recognising that value uplift created from a rezoning event may not be realised for several years after the rezoning decision that triggers the tax, the Government has foreshadowed a deferred payment regime similar to that which currently applies to GAIC. A landowner will therefore have the option to pay WGT at the time of the rezone decision, or defer paying the liability (probably via election) until the next dutiable transaction or subdivision of the land. Contemplation of such a deferred payment regime is no surprise. After all, banks don’t lend to pay tax. However, drawing inspiration from GAIC, a regime which the Government has never liked, is somewhat confounding and will no doubt introduce a layer of complexity into the payment and collection of WGT that GAIC is renowned for.

Underpinning the GAIC deferred payment model is the principle that tax payment is best aligned with revenue generation. If that principle is carried through to WGT, then we should see concepts such as Staged Payment Arrangements (SPA), Work in Kind Agreements (WIK), and interest payable on deferred tax in the new WGT legislation. Those concepts are already familiar to developers who transact land in Melbourne’s growth corridors, and are readily transferrable to WGT as it will apply to broadacre land.

It is less clear however how a deferred payment regime will apply in the built-form space. For a residential townhouse project for example, the subdivision event will generally occur once, at the back end of the project, when strata titles are registered in the weeks preceding settlement of pre-sold stock. It is difficult to see how government will wait until strata title registration before being paid any part of its WGT. An alternative (earlier) event is therefore likely to be looked for when dealing with built-form projects. When open space contributions are paid council releases the plan of subdivision into SPEAR in a similar manner to what occurs at Statement of Compliance (SoC) on a stage for a land project. There would therefore be some logic (and consistency) in pegging payment of the first 30% of WGT to payment of built-form open space contributions. Earlier events could be when the building permit is issued by the building surveyor or when construction commences. However, neither of those events have an objective council process to them.

To simplify the legislation and expedite revenue collection the Government may be tempted to not offer a staged payment model and just front-end 100% of the new tax. Staging is however fundamental to the revenue alignment principle mentioned earlier. Government would therefore have to come up with an entirely new payment structure which is as equally equitable and practical as staging if it wanted to move away from the GAIC staging model.

If a ‘dutiable transaction’ is a further payment trigger, then consistent with what we already have for GAIC, the following transactions will all trigger the payment of WGT (over and above settlement of an ordinary contract of sale):

• a declaration of trust over WGT land;

• the granting of a long-term lease over land with a premium;

• any change in beneficial ownership in land (wholly or in part); or

• a transfer of 50% or more, or 20% or more, of the shares/units in a company/unit trust that holds WGT-pregnant land.

Land under Contract – as was the case for GAIC, transitional rules will be needed to deal with land already under Contract either before the 1 July 2022 commencement date, or before the 20 May 2021 budget announcement date. In practice, prior to the 20 May 2021 announcement date, prices would have been struck for sites without any allowance for WGT. It can therefore only be fair that such sites are not subject to WGT despite a post-1 July 2022 rezoning decision. This fairness argument is less compelling for sites that go to contract after the announcement date.

However, when it is considered that until Sept 2021 (when the draft legislation is proposed to be released) landowners and developers will only have had the barest of details around what the WGT will look like and how it will operate, it would also not be unreasonable for land subject to contracts entered into between the announcement date and date of release of the draft legislation to also be exempted from WGT.

That then leaves contracts entered into between the date of release of the draft legislation and the 1 July 2022 commencement date. As a rule tax legislation should not apply retrospectively. However, even at a federal level where such rules tend to be adhered to more strictly, there are examples of transitional rules being linked to the date of release of draft legislation. Accordingly, don’t be surprised if WGT is enacted to apply to rezoning decisions made after 1 July 2022 in connection with land put under contract before that date.

Land under option – similar timing concepts as those which should apply to land under contract should apply to land under option. The pricing of land agreed to under an option prior to the announcement date will not reflect WGT. It can therefore hardly be fair to landowner or developer if WGT is retrospectively applied to such land. From the announcement date the principles become less clear. However, consistent with the treatment of land under contract, it would be fair and reasonable for land the subject of an option entered into before Sept 2021 to not be subject to WGT.

Land under Development Agreement (DA) – the treatment of DAs entered into before Sept 2021 should align with the treatment of contracts and options. As with a contract or option, the landowner and developer will have agreed to a pricing mechanism and payment model without reflecting WGT. It is therefore only fair and reasonable that land the subject of pre-September 2021 DAs is not subject to WGT.

Entry into a Development Agreement that triggers the Economic Entitlement Rules in Part 4B of Chapter 2 of the Duties Act 2000 is not a GAIC event. Application of an equivalent rule to WGT therefore also seems both logical and reasonable.

Landholder Rule interaction – given that the transfer of 50% or more of the shares in company, or 20% or more of the units in a unit trust, that holds GAIC-pregnant land triggers a GAIC event, it seems logical (and likely) that under the new WGT regime equivalent ‘relevant acquisitions’ (for the purposes of Part 2 of Chapter 3 of the Duties Act 2000) will trigger a requirement to pay a WGT liability crystallised in connection with an earlier rezoning decision.

Collection and Expenditure Nexus – despite the strong linkage drawn between the imposition of WGT and the funding of future public infrastructure, nothing has been said by government on whether WGT collected in a rezoned precinct will necessarily be spent on infrastructure constructed in that precinct. If GAIC is any guide, government will resist any such nexus. The closest GAIC comes to creating a nexus between GAIC collected and GAIC spent is a WIK Agreement. Despite the optimism when WIKs were retrofitted into the GAIC legislation in 2011, few in the market (and possibly government) would be brave enough to suggest that the WIK regime has been a roaring success. Accordingly, don’t be surprised if not only is there no nexus concept linking WGT collected with WGT spent, but also no concept of WIK Agreements as an alternative model under which a landowner or developer can pay WGT.

In closing

It will be extremely difficult over the next few months for Developers to enter into transactions in respect of property that is expected to be rezoned after 1 July 2022. It is therefore critical that government releases details on the structure and operation of the new WGT as soon as possible.

In order to be a good tax, the WGT needs to be equitable, efficient and administrable. As set out, some challenges lie ahead for the State Government in designing the new tax so those policy objectives are achieved. Basing the new tax on GAIC may work. However, let’s hope the Government engages in genuine industry consultation in the design and implementation of the new tax to help ensure WTG can be the best tax it can be.