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.

If ‘subdivision of land’ is one of the payment triggers, then linkages between the WGT regime and planning scheme events such as SoC seem inevitable. The GAIC legislation is interlaced with a range of exclusions, special circumstances and non-taxing events, all of which operate as exceptions to SoC as a trigger event. It seems reasonable that in the design of the new WGT the Government will need to build in a similar array of special rules into the new legislation. Whilst a lot of those rules are likely to be both reasonable and necessary, they will create complexity and they risk pushing the Government’s new WGT into a similarly multifaceted space as GAIC.

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.

Practical examples

If the principles outlined above are reflected in the WGT legislative model, then a liability for WGT may arise and be payable in the manner outlined below.

1. Regional Land Project

Assume:

• a 40 ha site (Property) on the outskirts of a Victorian regional town
• the Property is zoned for farming use and has a site value of $320,000 ($8000 per hectare)
• on account of being within in Investigation Area the Property has a market value of $2 million ($50,000 per hectare)
• the Property is rezoned by local council on 1 Nov 24 to a mixed use commercial and residential purpose
• VGV determines that the value of the Property increases to $200,000 per hectare as a result of the rezoning decision (so $8,000,000)
• the Landowner does not contest the VGV’s value determinations

WGT Liability and Payment:

• if the site value at farm rates is adopted by VGV as the ‘before value’, a $7.680 million ‘value uplift’ will occur
• WGT at a rate of 50% will be $3.840 million
• the $3.840 million WGT liability will arise at the 1 Nov 24 ‘rezone event date’ and be payable within 90 days of that date unless deferred (probably within the 90 day period)
• if the Landowner elects to defer, it becomes liable to pay interest on the $3.840 million deferred liability at the Treasury Corporation of Victoria (TCV) Bond Rate applicable at the time, and a notice is registered on title confirming the Property has an applicable deferred WGT liability
• the Landowner elects to defer payment of the $3.840 million WGT liability until the next ‘rezone event’ in respect of the Property (a ‘rezone event’ either being the next dutiable transaction or registration of a plan of subdivision affecting the Property)
• the Landowner embarks on a planning process and obtains a permit 18 months later (1 May 26)
• the permitted master plan for the Property provides for 10 x 4 ha stages to be delivered over a 5 – 8 year period (approximately 2 stages every 18 months)
• the Landowner promptly proceeds to prepare and submit to Council a plan of subdivision (PoS) providing for registration of lots from stages 1 and 2 of the 10 stage master plan (reflecting 20% of the total land area of the Property)
• SoC on the stage 1 and 2 PoS is expected on 1 May 27 (12 months after the permit and 30 months after the rezone event date)
• In anticipation of SoC on stages 1 and 2 the Landowner enters into a Staged Payment Arrangement (SPA) with the VPA agreeing to pay a mandatory 30% upfront minimum amount of the $3.840 million WGT liability ($1.152 million) and progressively repay the $2.688 million balance as SoC on stages 3-10 is achieved over the next 6 or so years.
• SoC on stages 1 and 2 is obtained on 1 May 27 as expected. The Landowner pays $1.152 million to the SRO plus accumulated interest at TCV Bond Rate.
• Given that stages 1 and 2 only represent 20% of the land area of the Property, but the initial (mandatory) WGT payment reflects 30% of the WGT liability, the Landowner is effectively in credit for 10% of the mandatorily pre-paid WGT
• SoC on stages 3 and 4 is obtained 18 months later. The Landowner uses its 10% credit ($384,000) and pays a further 10% ($384,000) for stage 4 plus applicable interest.
• At this point the Landowner’s land utilisation aligns with the amortisation of its WGT liability (both being 40%)
• As SoC on stages 5-10 is progressively obtained the Landowner pays WGT of $384,000 per stage plus applicable interest
• At the conclusion of all 10 stages the Landowner has paid its $3.840 million WGT liability plus applicable interest

Under this practical example it is arguable that the WGT does actually approximate a windfall tax, as the Landowner will make a gain of $7.680 million as a direct result of the rezoning decision. However, if the assumptions are changed slightly to reflect the reality of how land situated in a regional Investigation Area gets transacted, it becomes apparent that the WGT is not a simple windfall tax at the liability rates set down in the legislation.

For example, if it was also assumed that a third party developer (Developer) acquired the Property on 1 Aug 22 for $2 million ($50,000 per hectare) in anticipation of the rezoning, the Developer’s WGT liability would be the same as the Landowner’s despite the fact the Developer’s gain would only be $5.680 million. WGT of $3.840 million would equate to an effective tax rate of 67.6% on the Developer instead of the legislated 50%.

This example demonstrates the importance of government devising clear and fair rules around what is the ‘before value’ of rezoned land.

2. Inner Urban Residential Renewal Project

Assume:

• a 5000 sqm site in Williamstown (Property) is acquired by a Developer under a Contract of Sale executed 1 Aug 22 and settled 1 Nov 22 for $5 million ($1,000 sqm rate)
• the Property is rezoned 24 months later (1 Nov 24) from industrial to a mixed (residential) use
• VGV determines that the value of the Property before the rezoning decision was $5 million and the value after the decision was $50 million
• the Developer does not contest either of the VGV’s value determinations

WGT Liability and Payment:

• the $45 million ‘value uplift’ will be subject to WGT of 50%
• a $22.5 million WGT liability will arise at the 1 Nov 24 ‘rezone event date’ and be payable within 90 days of that liability date unless deferred by the Developer within the 90 day period
• if the Developer elects to defer, it becomes liable to pay interest on the $22.5 million deferred liability at the TCV Bond Rate applicable at the time and a notice is registered on title confirming the Property has an applicable deferred WGT liability
• the Developer elects to defer payment of the $22.5 million WGT liability until the next ‘rezone event’ occurs in respect of the Property (a ‘rezone event’ either being the next dutiable transaction or registration of a plan of subdivision affecting the Property)
• the development scheme for the Property provides for 80 apartments over 10 levels to be constructed over an 18 month period
• the Developer commences the planning process, deals with Council, endures VCAT, and obtains a permit 18 months later (on 1 May 26) for 76 apartments over 10 levels with revised front street set-backs and additional public space
• the Developer promptly appoints a builder, accepts a funding proposal from a third party bank and commences pre-sales
• the Developer pre-sells 68 of the 76 apartments and satisfies all other pre-conditions to achieve financial close and commence construction by 1 Mar 28 (10 months after the permit date and nearly 40 months after the ‘rezone event’)
• in anticipation of construction commencement the Developer enters into a Staged Payment Arrangement (SPA) with the VPA or SRO agreeing to pay a mandatory 30% upfront minimum amount of $6.75 million at the same time as paying its open space contribution, and repay the balance $15.750 million upon registration of the apartment titles.
• the Developer commences construction and pays the $6.75 million 30% minimum (plus accumulated interest) to the SRO in conjunction with payment of its open space contribution payment
• titles register for the 76 apartments 18 months later promptly after PC.
• the Developer pays the outstanding WGT balance of $15.750 million (plus interest) prior to settlement of the pre-sold titles.
• at the conclusion of all the project the Developer has paid its $22.5 million WGT liability plus applicable interest

Obviously Maddocks’ crystal ball is no better than the next person’s. However, if the new WGT is to embody a deferred payment regime similar to GAIC (as foreshadowed by government), the above examples are fairly well informed guesses as to how the new regime might operate from 1 July 2022.

Notice on title – if WGT is going to be triggered by a ‘rezoning event’ and then paid (by election) on the next dutiable transaction or subdivision event (which could be several years later), then it is both logical and practical that government will need to register the amount owing in some way on the relevant tile the subject of the earlier rezone event. Such notices on title are used under the GAIC regime and generally work quite well. They are an inevitable consequence if the deferred payment model and protect the interests of government, landowners and would-be purchasers of WGT-pregnant land.

Administration and collection - in the same way GAIC was added as a new SRO business line immediately upon introduction, expect WGT to be added to the Commissioner’s portfolio of taxes. The WGT may be established as a separate Act like Land Tax or Duty, or may get folded into the P&E Act like GAIC. Either way, it makes sense that the new tax is handed over to the SRO to administer and collect, consistent with the well-trodden principles already set out in the Tax Administration Act 1997. What will be interesting is the role VPA get to play in the administration of the new regime. Presently the VPA is responsible for GAIC SPAs and WIKs, and is a lot closer to the development process for land than the SRO. If subdivision is therefore going to operate as a WGT event in the same way as it presently operates for GAIC, and SPAs feature as a payment model, it seems logical that government would draw on the VPAs existing skill set in the formulation and agreement of SPAs.

Assessment and appeals process – expect government to devise a regime with an emphasis on self-election, self-assessment and payment in a similar manner to GAIC.

WGT funds – the WGT has been rationalised on the basis of the funding of future public infrastructure, however nothing has been said by government as to whether WGT revenue will actually be dedicated to that use. GAIC is currently paid into two separate funds and the Government has struggled to satisfactorily utilise those monies to fund the big public infrastructure initiatives that were heralded at the time of GAIC’s introduction. It will therefore be interesting to see if WGT revenue is paid into infrastructure specific funds, or just dropped into general revenue along with duty, land tax and payroll tax.

Income tax implications – in taxing value uplift attributable to rezoning decisions the State Government will be taxing value that is otherwise already taxable by the Federal Government under the Income Tax Assessment Act 1997 (Cth). For developers that hold land on revenue account, federal taxation is generally achieved under the trading stock provisions in section 70 of the ITAA97. For landowners who hold their land on capital account, it is achieved under the CGT provisions. There has been no suggestion by Federal Government that value uplift subjected to WGT will be taxed any differently. Accordingly, that value increase will first be taxed by the Victorian Government and secondly by the Federal Government. For value uplifts of less than $500,000, the combined tax rate across the state and federal jurisdictions will be in the order of 74% for developers (assuming a 30% company rate) and 80% for private landowners (assuming a 48% marginal CGT rate). As staggering as those tax rates are, both also assume that WGT paid to the State Government is recognised for both trading stock and CGT cost base purposes. If it is not, the total effective tax rate on rezoning related value uplifts in Victoria will be in the order of 92% for developers and 110% for private landowners.

Foreign developers – at this stage there hasn’t been any suggestion from government that foreign developers will pay a higher rate of WGT than local developers. However, given past steady increases in Foreign Purchaser Additional Duty and land tax Absentee Owner Surcharge, in one or two years after introduction, the Government may circle back to increase WGT rates for foreigners.

Consultation – a new tax as complex as the WGT is deserving of an extended and genuine consultation process between government and industry. If GAIC and the Economic Entitlement Rules are anything to go by, government is unlikely to get the design and implementation of the new WGT right on its own. Industry groups should therefore be pushing early and hard for a genuine consultative process in connection with the new legislation. Government and the SRO don’t need to look much further than the ATO for guidance on best practice consultative models for new legislation.

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.