The Victorian Government’s introduction of the Windfall Gains Tax (WGT) is one of the most significant tax regime changes to affect the property industry since the Growth Area Infrastructure Contributions, otherwise known as GAIC, were brought in. WGT, however, is more challenging for councils than GAIC for a variety of reasons, including the fact that local government land is not exempt from the tax.

The Windfall Gains Tax Act 2021 (WGT Act) will establish a new tax on the uplift in land value resulting from a planning scheme amendment which changes the zoning of certain land in Victoria on or after 1 July 2023. The WGT will be triggered where the taxable value uplift of the subject land is more than $100,000.

It will apply to rezonings in and around central Melbourne and Victoria’s regional centres (only GAIC liable Urban Growth Boundary land is excluded). All land type usage will be subject to WGT (residential, industrial, retail and public). Additionally, ownership is not determinative – land owned privately and by all levels of government is subject to WGT.

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 ‘WGT Event’. A ‘WGT Event’ is defined in the WGT Act as a ‘rezoning other than an excluded rezoning’.

A ‘rezoning’ is also defined in the WGT Act and means an amendment of a planning scheme causing land to be in a different zone from the zone it was in immediately before the amendment.

The rezoning is taken to have occurred when it is approved by the Minister for Planning and the Notice of Approval is gazetted in the Victorian Government Gazette. The notice can provide for a different commencement day, in which case the rezoning takes effect on the specified commencement date.

The taxable value uplift is the difference in the capital improved value (CIV) of the land before and after the rezoning takes effect, less any deductions. The Valuer-General Victoria is responsible for determining the value of the land before and after a rezoning.

The owner of the land at the date of the rezoning is liable to pay the WGT.

Exemptions and exclusions

There are exemptions and exclusions from the WGT. These are:

• Rezoning between schedules in the same zone – a rezoning between schedules in the same zone is specifically defined as an ‘excluded rezoning’.
• Rezoning to Public Land Zones – the rezoning of land to or between public land zones is excluded from the WGT. So, a rezoning to or between zones such as (for example) the Public Use Zone, Public Park and Recreation Zone, and Public Conservation and Resource Zone, are ‘excluded rezonings’. Notably, rezoning of land from a public land zone is not excluded from the WGT. We say more about this below.
• GAIC liable UGB land – land which is rezoned to and from the Urban Growth Zone within the GAIC area is an ‘excluded rezoning’ and therefore not subject to WGT.
• Rezoning to a Rural Zone (other than the Rural Living Zone) – the following rezonings have been declared ‘excluded’ from the WGT by order of the Treasurer: Green Wedge Zone, Green Wedge A Zone, Rural Conservation Zone, Farming Zone and Rural Activity Zone. Accordingly, rezonings to one of these zones will not trigger the WGT.
• Residential land exemption – where a planning scheme amendment rezones land, up to two hectares of ‘residential land’ owned by the same owner or group will be exempt from the WGT. ‘Residential land’ is defined, and it can include a farm with a residence on it.
• Transitional exemptions – land will be exempt from the WGT where the rezoning was underway before the announcement date of 15 May 2021; or where a contract of sale or option arrangement was entered into before 15 May 2021.
• Correction of errors – a rezoning to correct an obvious or technical error in the Victorian Planning Provisions or a planning scheme is excluded from the WGT. To qualify for this exemption, the rezoning must be made pursuant to s 20A of the Planning and Environment Act 1987.
• Charitable and university land – a waiver is available for land owned by a charity, provided the land is used and occupied by a charity exclusively for charitable purposes for 15 years after the rezoning.

Implications for Council-owned land

The Local Government Best Practice Guideline for the Sale, Exchange & Transfer of Land (2009) (the Guideline) provides that councils should ensure land is offered for sale in a manner that will ensure the maximum price is achieved while protecting both the council and the public interest. Further, the Guideline provides that land zoned for public purposes must be appropriately rezoned prior to public sale. While this requirement is not set out in legislation, it has now been observed by most councils in their property transactions for more than a decade. It therefore brings the issue of WGT liability into sharp.

Unlike most other vendors, councils are obliged (in order to comply with the Guideline) to ensure land is rezoned prior to sale - that is, while the council is still the registered proprietor of the land.

Most contracts of sale for council-owned land provide for rezoning to be a condition precedent to settlement. As a result, the statutory liability for the WGT will invariably lie with the council, as opposed to the purchaser of the land. Accordingly, it will be incumbent on councils to deal with the WGT liability up front when negotiating contracts of sale. Depending on whether or not the price offered by the purchaser reflects the rezoned value of the land, a council may seek to contractually require the purchaser to accept all, or a significant portion of, the WGT liability on the basis that WGT is intended to be a tax on development. On the other hand, purchasers may resist accepting WGT liability if they consider the council is receiving a price equivalent to the rezoned value of the land. As a general rule, we expect the purchaser will be better positioned to absorb the impact of WGT as it can be incorporated as a development cost in the purchaser’s proposed development of the land.

Councils will also need to contend with the fact that the payment of the tax may only be deferred on one occasion under the new legislation, as opposed to, for example, the GAIC legislation which allows multiple deferrals. If councils elect to defer the payment of the WGT from the date of the rezoning until settlement, and pursuant to the contract of sale the purchaser is liable for the full amount of the WGT at settlement, the purchaser will be unable to further defer the payment of the WGT. Ordinarily, a purchaser would seek to defer payment of a tax like WGT to allow time to obtain additional planning approvals, secure finance or provide for the staged development of the project. This inability to defer WGT may impinge on the price a developer is prepared to pay council for the land.

An unknown element of the WGT legislation is the actual amount of tax which will be payable. WGT is calculated as 50% of the difference between the Capital Improved Value of the land assessed before the rezoning (CIV1) and the Capital Improved Value of the land at the date of the rezoning (CIV2) if the positive difference exceeds $500,000, WGT is 62.5% of the uplift if the difference between CIV1 and CIV2 is between $100,000 and $500,000. It will be in the council’s interest to ensure CIV1 accurately reflects the anticipated rezoned value of the land in the relevant rating year, in order to minimise the differential between the two valuations. Clearly, the less the difference between CIV1 and CIV2, the better for the council and the purchaser.

Such consequences of the WGT legislation may, in future, result in parties - including councils - documenting certain land transactions by way of development agreements rather than contracts of sale, so that vendors remain the owner of the land for an extended period before transferring title to the developer or, in some cases, directly to the ultimate purchasers of individual lots in a development. However, the desirability of this transaction structure will need to take into account the impact of the ‘economic entitlement’ provisions of the Duties Act 2000, which provide for land to be dutiable in some circumstances where a purchaser has acquired beneficial ownership of the land, even where the title has not passed.

The imminent introduction of the WGT legislation raises a number of significant issues for councils in their role as planning and responsible authorities but in particular in their capacity as vendors of land, which is subject to rezoning.

For further information about the implications of WGT on council-owned land, contact our Partner Briana Eastaugh from our Property Development and Planning & Environment Teams.