As a tax of uncertain timing and amount, the design of Victoria’s new Windfall Gains Tax (WGT) is likely to have continuing and serious effects on Victorian land transactions in the years ahead.

The design of the new tax does not accommodate well for the realities of how unzoned land is valued, priced and transacted in the open market. Unlike residential land, which is more or less valued based on proximate comparable land (give or take a little emotion), unzoned land is valued and priced based on its anticipated utilisation. Two neighbouring land parcels of comparable size can be valued materially differently if one is expected to yield 200 residences and the other 300. Starting with projected utilisation, developers therefore work towards determining the value of unzoned land by building feasibility models (like Estate Master) which rely on a range of assumptions and inputs, working backwards to determine the value of land reflective of a reasonable return on cost and funding (loosely, the IRR). The value of unzoned land is a product of such feasibility models, and the accuracy of the value estimate relies heavily on the integrity of the assumptions and inputs fed into the model.

Tax cost is one input that is important to get right. This is especially the case when the tax liability is upfront and coincides with a settlement of a contract of sale. Duty cost is known as 6.5%, GST 10%, land tax 2.65% and GAIC $130,000 per hectare. Developers can reliably estimate, and feed into their feasibility model, the timing and dollar amount of each tax to form a reliable estimate of value and what they can, therefore, realistically afford to pay for unzoned land.

Yet when it comes to estimating WGT at the contract entry date, developers will find it difficult to accurately estimate the new tax. That difficulty is a product of two design features:

• uncertainty of liability timing; and
• uncertainty of liability amount.

Both design elements combine to make it difficult for vendors and purchasers to accurately estimate the WGT, feed a reliable number into a feasibility model, and arrive at a reliable estimate of value. Value uncertainty translates into risk for developers, the logical response to which is to discount value. Such discounting might work for a developer trying to manage potential downside exposure, but risk is a subjective thing and is likely to be viewed differently by a vendor. A logical outcome will therefore be the vendor and purchaser having very different views on risk and therefore struggling to form a consistent view on value and price.

While value and pricing risk can be managed to some degree via contractual terms, a contract cannot do all the work. The new tax, by design, has therefore created the conditions for risk, value and price uncertainty in all Victorian land transactions which will rely on a future rezoning.