The Victorian State Government (State) has responded to the Supreme Court decision in Frontlink by seeking to change the law so that Growth Areas Infrastructure Contribution (GAIC) is paid on land used for State infrastructure purposes.

If the changes are enacted, landowners and developers will pay GAIC on land to be transferred to the State, or its receiving agencies, for State infrastructure use like OMR, major roads, wetlands, retarding basins and utilities.

Landowners, developers and industry groups may well be surprised by the proposed changes given the GAIC model originally agreed with Government in 2010 did not impose GAIC on State infrastructure land.

The proposed changes represent a material increase in the area of Urban Growth Zone (UGZ) land effectively subject to GAIC, and therefore a material broadening of the tax base upon which GAIC is payable.

Details of the proposed changes are in the State Taxation Acts Further Amendment Bill 2016, released on Thursday 13 October 2016. However in simple terms:

• section 201RF(a) and (b) of the Planning and Environment Act 1987 will be repealed
• land earmarked for State infrastructure use will be termed ‘public purpose land’ (section 201R)
• section 201S will be amended so if a plan of subdivision creates a lot to house so-called ‘public purpose land’, GAIC attributable to that new lot will be payable
• new section 201SGA will be inserted to apportion GAIC between public purpose titles and other titles
• new sections 201SPAA and 201SR will be inserted to ensure GAIC attributable to a public purpose lot is paid within three months of issuance of the statement of compliance and cannot be staged
• section 201TC(2) will be repealed, thereby removing the GAIC exemption for Council-initiated compulsory acquisitions.

In practice, the changes will mean:

• GAIC will be paid on OMR, major roads, road widenings, wetlands, retarding basins, AOS, POS and other State utility land
• landowners and developers will be less incentivised to excise land earmarked for State infrastructure use early in the development cycle
• public purpose land will be treated differently to other land, such as schools and private farm houses
• landowners and developers will be incentivised to leave land earmarked for State infrastructure use within parent titles for as long as possible, as by not excising it and instead triggering GAIC on the parent title (inclusive of the public purpose land), GAIC will be stageable on the public purpose land
• landowners and developers will be less incentivised to talk to the State and its receiving agencies about the early delivery of State infrastructure
• landowners and developers will be less incentivised to enter into both land-transfer and works-based Work in Kind (WIK) Agreements with the State.

The Property Council, UDIA and Maddocks all made submissions to the government following the SRO’s loss in Frontlink. Those submissions supplemented earlier submissions encouraging the Government to consider broader legislative reform, such as a superlot exemption. None of those suggestions are however adopted in the Bill.

The proposed changes appear to evidence a long-held Government policy preference to impose GAIC on State infrastructure land. Until the Supreme Court decision in Frontlink, this policy outcome was achieved through the SRO’s administrative practice of narrowly applying section 201RF(a) and (b) of the Act. However, following Frontlink, it appears the Government has decided a more permanent legislative solution is needed.

The Explanatory Memorandum to the Bill describes the changes in the usual way, but notably fails to elaborate in any meaningful way on the policy behind the changes. The Second Reading speech to the Bill states the changes are designed to overcome ‘unintended consequences’ of the current legislation. It would be useful to hear from Government why OMR, major roads and Melbourne Water assets, as pieces of key State infrastructure, should be treated differently to schools and privately owned farm houses.

Whilst the changes will not affect the rate at which GAIC is currently levied, they will materially increase the tax base upon which GAIC is collected. By way of simple example, if a 100 hectare Type B-1 title has land earmarked in a PSP for use in OMR (say 5 ha), retarding basins and wetlands (say 6 ha), road widening (say 1.5 ha), AOS (say 3 ha) and POS (say 1.5 ha), before the changes GAIC will effectively be paid on 83 hectares (i.e. $9.054 million), whereas after the changes GAIC will be paid on 100 hectares (i.e. $10.908 million).

Given a large number of master planned estates in Melbourne’s UGZs are spread across multiple titles and many hundreds of hectares, it is not difficult to understand how material the changes will become in practice.

As GAIC is a direct cost of bringing new residential house lots to market, the increased tax may translate into an increase in the retail selling price of new house lots in UGZ estates. A large proportion of new UGZ residential lots are sold to first home buyers. Escalating production costs may therefore create upward price pressure within this segment of the market.

The changes come at a time when a relatively small amount of GAIC revenue has been spent by the State. The Victorian Planning Authority’s 2015 Annual Report confirms that of the $108.6 million in GAIC raised so far, by 30 June 2015 only $3.988 million had been spent on State infrastructure projects across all five growth corridors, and only $10.311 million committed to future projects.

Imposing GAIC on public purpose land and removing the exemption for Council-initiated compulsory acquisitions takes GAIC one step further towards operating as more of a realisation tax (like CGT) than a tax on land development (as originally formulated).

The staging regime was introduced to soften the effect of the GAIC as a realisation tax and better align the payment of GAIC with income generated from actual development activity. By preventing the staging of GAIC on public purpose land, the State is creating conditions for a more front-ended tax burden.

The transitional rules for the changes are important and not necessarily equitable. There are two basic principles:

Plan of subdivision submitted before changes announced

1. The current rules continue to apply to any statement of compliance issued on or after 12 October 2016 (being the date the Bill was second read in Parliament and was publicly released) provided the plan of subdivision was submitted for certification under the Subdivision Act 1988 before that date.

Plan of subdivision submitted after changes announced

2. The current rules continue to apply to any statement of compliance issued before the date the amending Act receives Royal Assent if the plan of subdivision was submitted for certification under the Subdivision Act 1988 on or after 12 October 2016.

The transitional rules favour any landowner or developer that was well progressed in excising State infrastructure land before 12 October 2016.

Although the changes are in response to the Supreme Court decision in Frontlink, they do not directly address the implications of that decision. Landowners and developers wrongly refused exemption by the SRO under section 201RF(b) remain entitled to seek a refund and redress from the SRO.

In seeking to make the changes, the State is not addressing a gap in the law or a current loop-hole. Since GAIC was first introduced in 2010, the exempt excision of State infrastructure land has been possible. The changes therefore deprive landowners and developers of a lawful entitlement that existed from inception of the regime.

Landowners and developers should carefully consider their position in light of the proposed changes. For those dealing with pre-PSP UGZ land, it is probably too late to do much before the law changes. However, for those dealing with post-PSP land, opportunities remain under the transitional rules.