This update outlines at a high level:

• how Windfall Gains Tax (WGT) will apply to a sale of Victorian land;
• how WGT will be calculated;
• who will be liable for WGT; and
• who can challenge a WGT assessment.

How WGT will Apply

To trigger a liability for the new WGT a planning scheme amendment on or after 1 July 2023 must give rise to a ‘Rezoning’ and ‘WGT Event’ which is not otherwise exempted under the WGT Act.

A ‘Rezoning’ means an amendment of a planning scheme that causes land to be in a different zone from the zone it was in immediately before the amendment.

A ‘WGT Event’ means a rezoning other than an excluded rezoning.

There are a number of important exemptions in the WGT Act. Three of the more notable are:

1. Land that is liable for GAIC will not also attract WGT;
2. Certain land that is rezoned on or after 1 July 2023 as a consequence of a rezoning process initiated before 15 May 2021 may be exempt from WGT; and
3. Certain land that is rezoned on or after 1 July 2023 but subject to a contract of sale or option entered into before 15 May 2021 may also be exempt.

For a Rezoning initiated before 15 May 2021 to be exempt (further to 2 above) the rezoning process must have been initiated by a council or the Minister and satisfy a number of mandatory conditions. Chief among these conditions is a requirement for the planning scheme amendment to have been registered on DELWP’s Amendment Tracking System before 15 May 2021 and a ‘C’ number issued. A landowner must also have paid for, or have otherwise performed or procured, ‘relevant work’ or ‘relevant costs’ of the lesser of $100,000 or 1% of the capital improved value of the land immediately before the WGT event.

For land subject to a contract of sale entered into before 15 May 2021 to be exempt (further to 3 above) the contract must be settled after the Rezoning occurs. For land subject to an option entered into before 15 May 2021 to be exempt, the option must either be exercised and the resulting contract of sale settled after the Rezoning, or the option exercised before the Rezoning and the resulting contract of sale settled after the Rezoning.

Where an exemption does not apply, the WGT Act makes the registered owner of land at the time of the Rezoning liable for the WGT. However, instead of paying the WGT in full within 60 days of having received an assessment notice, an owner can defer the WGT by election (in part or full) until the earlier of 30 years or the time that a dutiable transaction next affects the land (such as a sale event).

If land subject to a pre-15 May 2021 contract or option is settled before the Rezoning (such that the land is not exempt), the new owner will still be entitled to defer the WGT and pay the liability off progressively as it develops and sells the land.

If an owner elects to defer the WGT, the deferred liability will accrue interest at the Treasury Corporation Victoria bond rate. This interest will not however be payable until the land is transacted or the 30 year outer payment limit is reached.

An owner considering a sale of land will need to carefully consider the WGT profile of its land. Irrespective of whether land is pre-Rezone (with a likely future WGT liability) or post-Rezone (with a deferred actual WGT liability), the terms of any contract will need to deal with the payment of WGT as between vendor and purchaser. It is possible for a vendor to pass on any WGT liability (future or deferred actual) to a purchaser. However for this to occur the terms of the contract must clearly set out the basis upon which the WGT liability will be transferred to a purchaser and then paid.

If land is put to contract before it is Rezoned and the Rezoning is expected to occur before the settlement date set down in the contract, it is very likely that a purchaser who has agreed to pay the WGT will want flexibility to settle the contract (at its election) early, before the Rezoning, or otherwise require the vendor to defer the WGT until settlement. By settling the contract before the Rezoning and becoming the registered owner at the date of the Rezoning, a purchaser will be able to defer the WGT and pay the liability down progressively as it subsequently develops and sells off the land. If a purchaser does not settle the contract before the Rezoning, the owner can defer the WGT and the WGT will then become payable by the purchaser (under the contract’s terms) at settlement. The purchaser will be unable to ‘re-defer’ the WGT.

The inability of a purchaser to re-defer deferred WGT upon acquisition of Rezoned land is a major difference between the WGT regime and the GAIC regime. The later regime was designed to align the payment of GAIC with the development of the land in question. The former WGT regime has not been designed to align payment with development. It has been crafted to capture more tax earlier in the development process.

Calculation of WGT Liability

In circumstances where a property is Rezoned and the planning scheme amendment gives rise to a WGT Event, WGT will be assessable on the ‘taxable value uplift’ attributable to the Rezoning.

Very broadly, the taxable value uplift will be calculated as the ‘value uplift’ less any deductions prescribed by the regulations (at this time no deductions have been prescribed by the regulations).

The ‘value uplift’ will be calculated as the difference between:

• the capital improved value of a property immediately before the Rezoning occurs (so called CIV1); and
• the capital improved value of a property after the Rezoning occurs (so called CIV2).

If CIV2 exceeds CIV1 by an amount less than $500,000, WGT is imposed at a rate of 62.5% on the difference in excess of $100,000. If CIV2 exceeds CIV1 by $500,000 or greater, WGT is imposed at a rate of 50% on the difference.

CIV1 will be sourced from annual council rates notices or otherwise determined by the Victorian Valuer General (VVG) at State Revenue Office (SRO) request after a Rezoning. CIV2 will in all cases be determined by the VVG at SRO request after a Rezoning.

WGT will be administered by and collected by the SRO. The VVG will only assist with determinations of CIV1 and/or CIV2 at SRO request.

Liability for WGT

Liability for WGT will sit with the registered owner of land that is subject to a Rezoning and WGT Event.

If a contract of sale for a property is settled before the property is Rezoned, the purchaser (as the new registered owner of the Property at the Rezone date) will be liable for and assessed for the WGT. Unless the terms of the contract expressly provide otherwise, the purchaser (as the new owner) will have no right to recover the WGT from the vendor.

Alternatively, if a contract of sale for a property is settled after it is Rezoned:

• the vendor (as the registered owner of the Property at the Rezone date) will be liable for the WGT; and
• the contract may either leave that liability entirely with the vendor, or it may seek to pass that liability on to the purchaser under its terms (in whole or part).

Irrespective of who is liable for the WGT under a contract, only the vendor at the Rezone date will be entitled to elect to defer payment of the WGT until the contract is settled. At settlement the deferred WGT will need to be paid – either by the vendor or the purchaser under the contract’s terms.

If the contract makes the purchaser liable for the WGT and the vendor defers payment, the purchaser will not be entitled to defer a second time the WGT already deferred by the vendor. Thereby, the purchaser will be required to pay 100% of the WGT at settlement of the contract and will lose the ability to stage the payment of deferred WGT as the land is developed and progressively sold off.

The possible loss of the right to stage the payment of WGT will likely be a key consideration for any purchaser that agrees to pay the WGT in connection with a property. Settlement of the contract before the Rezoning will preserve the purchaser’s ability to defer the WGT and subsequently stage the payment of the tax as the land in question is developed and progressively sold-off. Settlement after Rezone will mean the purchaser must pay 100% of the tax at settlement, potentially many years earlier than under a staged payment scenario.

Objection Rights

The WGT assessment will be issued by the SRO to the registered owner of the property at the Rezone date. Depending on how efficiently the VVG is instructed by the SRO and determines CIV2, a WGT assessment may be issued within 1-3 months of a Rezoning.

If an owner disagrees with a WGT assessment, it is entitled to object to the SRO within 60 days of receipt of the assessment notice.

It is anticipated that most objections will relate to the quantum of CIV1 and CIV2 used by the SRO to determine the WGT liability.

If a purchaser accepts liability for WGT under a contract of sale a vendor can assist the purchaser in managing and paying any WGT liability in a number of ways:

• objecting to any valuation of the property under the Valuation of Land Act 1960 (Vic) (i.e. CIV1) before the Rezoning;
• objecting to or appealing any WGT notice of assessment; and
• allowing the purchaser to settle the contract of sale before the settlement date specified in the contract of sale ahead of the anticipated Rezoning.

Each of these WGT management options will however need to be the focus of specific negotiation and agreement between a vendor and purchaser before execution of a contract of sale.

Not Legal Advice

This overview does not constitute legal advice. Prior to entering into any contract of sale for a property, vendors and purchasers should obtain their own independent legal advice in relation to the WGT profile of a property and the proposed WGT treatment.