Windfall Gains Tax - how might it look?

As unpalatable as a Windfall Gains Tax (WGT) might be for the development industry, the Victorian 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 in some form, 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 other 2021/22 State Budget measures enacted on 8 June 2021. 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

Government has confirmed that WGT will not apply to land already subject to growth areas infrastructure contribution (GAIC). It is unclear whether WGT will apply to the urban growth boundary land to which GAIC does not always apply. Land in and around greater Melbourne is almost certain to be captured, as is land in so-called 'regional areas' that lie beyond Melbourne's Urban Growth Boundary. No distinction has been drawn so far by government between different land types. It is therefore reasonable to assume that the new tax will apply to all land classes equally - being residential, industrial and commercial.

Given the inequity in applying a tax to land that is already the subject of commercial arrangement (with the price agreed to struck without any allowance for the new tax), transitional rules will be necessary to deal with land already under contract, land under option and land under Development Agreement (DA). The following treatments would be reasonable:

• for land sale contracts entered into prior to 20 May 2021 (the announcement date), the site should not be subject to WGT despite a post 1 July 2022 rezoning decision;
• for contracts entered into between the announcement date and date of release of the draft legislation, the site should not be subject to WGT because developers will still only have had the barest of details about the WGT and its basis for operation;
• for contracts entered into between the date of release of the draft legislation and the 1 July 2022 commencement date, the WGT could apply to rezoning decisions made after 1 July 2022;
• for land the subject of an option entered into before September 2021 (when the draft legislation is proposed to be released), WGT should not apply; and
• for land under a DA entered into before September 2021, WGT should not apply.

In reaching a landing on transitional rules for the new regime it will be important for government to understand the reality of the planning system which they sponsor and moderate is that land regularly gets transacted many years ahead of actual rezoning. To impose a new tax on such land after pricing has been agreed between vendor and purchaser, can only leave one of those parties materially out of pocket.

What is a 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. The legislation will need to carefully define what a rezone event is, and what exceptions operate in special circumstances.

Calculation of windfall and tax rate

The new tax will only apply to rezoning decisions that generate a 'significant value uplift', meaning a value of 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. It is still unclear what 'value' will be used and at what point in time the 'before' value will be assessed. However it is anticipated that values used for local council rating and land tax purposes will be utilised, with the process managed by the Valuer General's office.

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. Like GAIC, the WGT legislation will likely rely on commercial negotiations between vendor and purchaser to transfer the new tax to a developer, and then on to the end-purchaser of newly created product. At this stage foreign developers will incur the same rate of WGT as local developers. However, the Government may circle back to increase WGT rates for foreign developers, as it has done with duty and land tax over recent years.

When is it payable?

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. The GAIC regime contains a further payment deferral rule in the form of staging. Staging is critical to the equity and efficiency of the GAIC model because it better aligns the payment of tax with revenue generation events for developers. It remains unclear whether 'staging' will apply to WGT. In an endeavour to recover the tax as early as possible, Government will be tempted to not build staging into the new WGT model. However, to do so would be short sighted and seriously undermine the equity and efficiency of the new tax. It would also treat developers in the same way as speculators, despite the obvious differences in the contribution each make to Victoria's land development system.

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 (Vic)) will trigger a requirement to pay a WGT liability crystallised in connection with an earlier rezoning decision.

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 deferred liability on the relevant title the subject of the earlier rezone event. This would protect the interests of government, landowners and would-be purchasers of WGT-pregnant land. The rules and processes for doing so already exist within the GAIC legislation.

Administration, Collection and Appeals

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, the new tax should be handed over to the SRO to administer and collect, consistent with the well-trodden principles already set out in the Tax Administration Act 1997.

The government is likely to devise an assessment and appeals process with an emphasis on self-election, self-assessment and payment in a similar manner to GAIC.

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 effective rates assume that WGT paid to the State Government is recognised for both trading stock and CGT cost base purposes by the federal legislation. 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. It is unclear from anything issued by the State government to date whether any sort of reconciliation between federal and state taxing codes was undertaken before announcement of the new tax.

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 will need to be equitable, efficient and administrable. As set out, some challenges lie ahead for the State Government in designing the new tax so that 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, for government, developers and end-consumers.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to Michael Taylor-Sands or a member of the Revenue Practice Group. A more detailed version of this article can be found on the Maddocks website here.

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