Legal Insights

Changes to the ACT lease variation charge

By Pria O'Sullivan

• 19 September 2018 • 5 min read
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As the Canberra landscape changes, property owners and developers are increasingly looking to undertake infill projects or regenerate existing properties.

These projects usually cannot proceed without a variation to the Crown lease, either to add in new uses or to expand the permissible gross floor area limits. The lease variation charge (LVC) is assessed and becomes payable when a property owner obtains development approval to vary the Crown lease.

The property industry has been lobbying the Territory Government since 2011 to amend the existing LVC process, and LVC continues to be cited as an impediment to undertaking both commercial and residential developments in the Australian Capital Territory.

Changes LVC process came into force in May this year via the passing of the Planning and Development (Lease Variation Charge Deferred Payment Scheme) Amendment Act 2018 (Amending Act). They are the latest changes seeking to stimulate development, since the economic stimulus remission on the LVC was introduced in 2014.

Questions remain as to whether these changes will encourage further investment in Canberra or provide the conditions needed to kick start developments that have not progressed to date as a result of the assessed LVC amounts.

What does the amendment do?

The amendments to the Planning and Development Act 2007 (PDA) do not alter the calculation of LVC or provide any new remissions on the payment of LVC. Rather, the Amending Act implements a deferred payment scheme for eligible development approvals and extends the operation of existing LVC remissions. The Amending Act also makes minor modifications and improvements to the administration of the LVC regime.

When the Amending Act was introduced, Chief Minister Andrew Barr endorsed the proposed changes, stating that "The LVC is designed to make sure the community shares in the windfall gains developers make when government varies a lease to allow for new development”.[1] However, one of the continuing obstacles property owners and developers encounter is the assessment of LVC is not offset by the cost of associated works that developers are often required to fund as a condition of its development approval, or by the costs of demolition to redevelop sites.

The LVC deferred payment scheme

Under the deferred payment scheme, Crown lessees that meet certain requirements will have the option to defer payment of the LVC until a later date in the development cycle so as to more closely align payment with the cash-flows received through a project. This means eligible Crown lessees are not required to pay the LVC before a Crown lease is varied, as was previously the case.

The scheme prescribes that the choice to defer payment of the LVC will only apply to projects with an assessed LVC of more than $100,000. For projects that meet this monetary threshold, Crown lessees will be able to enter into deferral arrangements with the Commissioner of Revenue until such time as a Certificate of Occupancy is issued, or for up to four years – whichever comes first. Interest will be paid on the amount of LVC deferred.

What property owners and developers need to be aware of:

  • given that LVC is a tax under the Taxation Administration Act 1999 (TAA), penalty tax and interest may accrue if there is a subsequent default in payment of the LVC by the specified timeframes within the deferral arrangement
  • the LVC payable will also be secured by a first ranking charge over the Crown lease of the land, which is the subject of the lease variation. If required, the Commissioner may exercise powers under the TAA to sell the land to recover the debt due to the Territory, meaning the charge will rank ahead of any mortgage granted in favour of a financier of the new development.

Remissions scheme

Currently, property owners receive a 25 percent reduction on the LVC amount that would otherwise be payable on a non-codified Crown lease variation. The Amending Act has made changes to the remissions scheme so that the entitlement to specific remissions have been moved from within the PDA to become the subject of separate dis-allowable instruments. This means the Minister for Planning determines the circumstances which will attract an LVC remission and the Treasurer determines the amount of the remission without needing to vary the PDA.

The economic stimulus remission has been discontinued. Of the remissions that remain available, the remissions for environmental remediation of service stations and approval of environmentally sustainable buildings that meet particular energy efficiency requirements and a 25 percent remission on some codified LVC situations, are the most relevant to property developers. There is also a remission related to chargeable variations of Crown leases held by the housing commissioner.

The current intention by the Territory Government is that these remissions will operate until mid-2019 when the new remission regime is expected to be finalised.

What will be the impact of the amendments?

Deferral is, therefore, meant to provide greater flexibility for developers to pay the LVC towards the end of the project, better matching the development cash-flows. However, as it has to be paid when a certificate of occupancy is issued, this will still require payment before sale proceeds are realised on any project involving a build to sell model. Developers who do not need external finance will likely benefit most from this arrangement.

For those developers who need to secure finance to proceed with a proposed development project, the deferral scheme could make the project less attractive. It is expected that the financiers will view deferred LVC payments as an additional liability, when determining whether to approve funding. Financiers will also need to be comfortable that their security will rank behind the Territory’s first ranking charge for securing repayment of the deferred LVC amount.

Reception of the Amending Act

While the proposed changes are welcomed, we consider the debate surrounding the acceptability of the amount of LVC that is assessed will continue, and the property industry will closely monitor the take up of deferral options in order to gauge the success of the deferral measure.

Need advice on the lease variation charge?

Contact the Property & Development team.

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