In a major upheaval to Victoria’s land tax regime, the Windfall Gains Tax became effective from 1 July 2023 – leaving property owners facing losses of up to half of rezoning value uplifts overnight.
In the world of real estate, things rarely stand still for long – and as we enter the second half of 2023, this year is no different. If you are a property owner or developer in the State of Victoria, you may be about to feel the impact of far-reaching changes to the way that the tax regime treats windfall profits.
In a major update to the tax system, the Windfall Gains Tax (WGT) became effective from 1 July 2023. Targeting the windfalls enjoyed by land owners in Victoria as a result of planning scheme rezoning amendments, WGT will impose significant charges on any land which accrues an uplift in taxable value of more than $100,000 as a result of being rezoned.
WGT has the potential to impact any land transactions entered into State-wide on or after 1 July – and is now a major factor to be taken into account in relation to any property transfers, loans secured against property, or planning work which involves potential rezoning of land.
What is Windfall Gains Tax, and why is it being introduced?
It’s an issue which has not previously been addressed by the State Revenue Office – until now. With fast-growing land development leaving planning zones in a constant state of flux across Victoria, it is becoming increasingly common for land to have its legal “use” changed overnight via changes to State-level planning schemes.
As more and more land is re-categorised to meet infrastructure demands, this process of “rezoning” often results in substantial capital gains for those holding an interest in the land in question. This is particularly true when land is upgraded from agricultural or industrial utility to far more valuable residential or commercial use.
Until now, these gains have remained in the pockets of landowners – and many have already felt the advantages. Perhaps the best known example is Fisherman’s Bend, which saw 250 hectares rezoned from industrial to commercial and residential use, causing property values to skyrocket overnight.
Much to the relief of property owners, these windfalls have effectively fallen through the cracks of the Victorian tax system. However, as of 1 July 2023, WGT will capture a large portion of these funds, redirecting them back into community infrastructure and services.
The new legislative framework
Windfall Gains Tax was established by Windfall Gains Tax and State Taxation and Other Acts Further Amendment Act 2021 (Act).
For the purposes of the Act, a planning “zone” is defined by reference to Clauses 32 to 37 of the Victoria Planning Provisions (VPP). Rezoning dates are determined under the Planning and Environment Act 1987 (Vic).
Which land is affected by Windfall Gains Tax?
WGT is broad in scope. It applies to the vast majority of land which becomes subject to rezoning throughout Victoria, including central Melbourne and all regional areas. The tax prima facie covers all privately owned land, whether it is used for agricultural, residential, retail, or industrial purposes, as well as most publicly owned land.
As has been widely anticipated, there are some limited exemptions to WGT liability built into the legislation. The most significant of these is the exemption for smaller plots of residential land. A comprehensive list of all exclusions exemptions is discussed in detail later in this article.
Who has to pay Windfall Gains Tax?
A critical characteristic of WGT is that liability for payment falls on the land owner at the date of rezoning, and not on the date of any sale transaction. This will need to be factored in by any parties buying, selling, or investing in property in Victoria going forwards. Any WGT due is held as a first charge on land until it is paid.
If the land in question is owned by more than one individual, they will share joint and several liability for payment. If the land is held on trust, liability will fall to the trustee of the legal owner. There are also counter-avoidance measures in place to ensure that the tax is paid in respect of land held by related corporations and trusts.
How is Windfall Gains Tax calculated?
The WGT scheme is currently in its infancy, and it is likely that further guidance will be issued by the State Revenue Office as further nuances of the framework develop. However, at a basic level, the calculation of liability is a fairly straightforward process. With only three liability bands, WGT kicks in when a landowner experiences a significant “value uplift” as a result of rezoning.
What is a significant value uplift? In simple terms, WGT only becomes payable where there is an uplift of $100,000 or more as a result of rezoning. The “value uplift” itself amounts to the difference between the “Capital Improved Value” (CIV) of a piece of land immediately prior to, and following, a rezoning event.
In practice, the process of determining WGT liability looks like this:
- CIV1 assessment: The pre-zoning CIV (otherwise known as the CIV1) is determined by reference to the General Rating Valuation immediately before rezoning takes place.
- CIV2 assessment: Once rezoning has taken place, the Commissioner of State Revenue will instruct the Valuer General to prepare a supplementary valuation of the relevant land in order to determine the post-rezoning CIB (otherwise known as the CIV2).
- Final WGT assessment: The total sum of WGT due will be assessed by reference to the difference between the CIV1 and CIV2 (less any exemptions). The landowner will then be issued with a tax assessment by the State Revenue Office.
The amount of tax charged following a rezoning event is dependent on the total value uplift gained in respect of the relevant piece of land. There are effectively three WGT bands:
- Total value uplift of less than $100,000 – no WGT liability.
- Total value uplift of over $100,000 but less than $500,000 – 62.5% of uplift above $100,000.
- Total value uplift of over $500,000 – 50% of total uplift.
The example scenarios below illustrate how each of these tax bands works in practice.
Windfall Gains Tax liability - examples
Example 1 – No WGT liability
- A client owns a piece of land originally purchased for $50,000. The CIV1 of the property immediately before rezoning is assessed by the Valuer General at $60,000.
- The land is rezoned through a planning scheme amendment from agricultural to residential use. Following rezoning, the Valuer General assesses the CIV2 at $100,000.
- The difference between the CIV1 and CIV2 is $40,000. Because the total value uplift is below the threshold of $100,000, it is excluded from WGT, and no tax is payable.
Example 2 – 62.5% WGT liability
- A client owns a piece of land originally purchased for $200,000. The CIV1 of the property immediately before rezoning is assessed by the Valuer General at $400,000.
- The land is rezoned through a planning scheme amendment from industrial to commercial use. Following rezoning, the Valuer General assesses the CIV2 at $600,000.
- The difference between the CIV1 and CIV2 is $200,000. Because the total value uplift is above the threshold of $100,000 but below $500,000, it will be subject to WGT at a rate of 62.5%. However, only the amount which exceeds the threshold is liable for tax. In this case, the amount exceeding the threshold is $100,000. The total WGT payable is therefore $62,500.
Example 3 – 50% WGT liability
- A client owns a piece of land originally purchased for $600,000. The CIV1 of the property immediately before rezoning is assessed by the Valuer General at $1 million.
- The land is rezoned through a planning scheme amendment from agricultural to commercial use. Following rezoning, the Valuer General assesses the CIV2 at $4 million.
- The difference between the CIV1 and CIV2 is $3 million. Because this total value uplift is above $500,000, the entire amount will be subject to WGT at a rate of 50%. The total WGT payable is therefore $1.5 million.
The above examples are provided here for illustrative purposes only. If you are concerned about becoming liable for payment of WGT, it is vital to seek specialist legal advice as early in the process as possible.
When must Windfall Gains Tax be paid?
A key element of the new WGT scheme is that liability is triggered on the date that the relevant land is rezoned – at which point a notice of assessment with a due date for payment will be issued to the landowner. Upon receipt of a WGT assessment, the property owner has three options:
- Pay: Pay WGT liability in full before the stated due date in the notice of assessment;
- Defer: Give notice before the due date for payment to defer WGT liability in full or in part; or
- Object: Lodge an objection against the WGT liability assessment within two months.
More information about the procedure for both deferral and objection is set out below.
How do I defer payment of Windfall Gains Tax?
The WGT is, in many cases, likely to be a significant charge which may be difficult for landowners to meet within the designated time frame. Thankfully, there is a deferral option on the table. Provided that notice is given within 30 days of the liability assessment, payment can be deferred, either in full or in part.
Deferral is not a decision to be taken lightly. Interest will accrue at the ten year treasury bond rate on any deferred amounts, which will also sit as a first charge against the land until paid off. Deferral can continue for a period of up to 30 years, unless one of the following events occurs first:
- A dutiable transaction (for example, sale of the land); or
- A relevant acquisition.
If either of these events occurs before the 30 year period is complete, deferral of WGT liability will immediately cease. Payment must then be made in full within 30 days of the date of the event which ceases the deferral. This is subject to the limited exceptions set out below.
The following excluded transactions will not cease a WGT deferral:
- The acquisition of an economic entitlement in relation to the land (for example, an agreement for development of the land in return for share of sale profits).
- A transfer to a legal personal representative of a deceased party.
- A dutiable transaction which occurs for no consideration (for example, the gift of property. However, the recipient must assume WGT liability, including any accrued interest).
- Certain transfers of land between charities (Again, the recipient must assume liability for WGT).
The following excluded acquisitions will not cease a WGT deferral:
- Acquisitions which are due solely to a pro rata increase in the interests of all shareholders.
- Acquisitions of a further interest (for example, shareholders issued with additional shares).
The decision to apply for a full or partial WGT deferral can be a complex one, with multiple factors to be taken into account. If you are considering, or are impacted by, a deferral application or decision, you should seek specialist legal advice promptly.
How do I object to paying Windfall Gains Tax?
If you wish to lodge an objection to a WGT liability assessment, this must be done within a strict two month time limit. The State Revenue Office has no discretion to accept late objections. Any objections will fall under one of the following categories:
- Valuation: An objection to the WGT valuation on the basis that it is too high (usually based on the supplementary CIV2 valuation); or
- Exemption: An objection to the WGT liability assessment itself on the basis that an exemption should apply..
Whatever your basis for lodging an objection, it is critical that the process is completed correctly and on time in order to maximise your chances of success. If you are seeking to challenge a WGT liability assessment, you should seek expert legal advice as quickly as possible after receiving the notice.
What exemptions are available?
Residential land exemption
In a move which will be welcome to many, up to two hectares of residential land owned by any given landowner will be exempt from WGT under each planning scheme amendment. For residential land which is larger than two hectares, WGT will still be charged on the excess, and the total charge adjusted accordingly.
“Residential land” has a specific meaning under the Act. To fall under this exemption, residential land must fall under one of the following categories:
- Existing property: Land containing a dwelling which can lawfully be used for residential purposes, and is designed and constructed primarily for the same (this does not include caravans or mobile homes);
- Constructions and renovations: Land which has previously contained a lawful residential dwelling (habitable or not) which is now being either re-constructed or renovated; or
- Primary production land: Land used for primary production which contains a dwelling that can lawfully be used for residential purposes, and is designed and constructed primarily for the same. “Primary production” means land which is primarily used for one of the following:
- Cultivation for commercial farming purposes;
- Maintenance of animals or poultry for commercial farming purposes;
- Keeping of bees for commercial farming purposes;
- Fishing, including preparation, storage and preservation of fish and fishing gear for commercial farming purposes; or
- Cultivation or propagation of plants, seedlings, mushrooms, or orchids for commercial farming purposes.
In order for either of the first categories to apply, the Commissioner of State Revenue must be satisfied that the primary use of the land is residential. In the case of primary production land, this is not required as long as the land meets the definition of primary production.
Other exemptions
The following exemptions and exclusions are also included within the WGT scheme:
- Transitional exemptions: There are provisions built into the new regime to protect property owners whose land was subject to rezoning or sale prior to the original announcement date of the WGT (15 May 2021).
- Urban Growth Zones within the GAIC area: Any land which is rezoned to or from the Urban Growth Zone within the Growth Areas Infrastructure Contribution (GAIC) area is excluded from liability, as this land is already subject to GAIC contributions.
- Charity and university land: WGT is waived in respect of land owned by charities, provided that it is exclusively owned and occupied exclusively for charitable purposes for 15 years following rezoning. Universities are also exempt provided that any revenue generated from the land in question is used for charitable objectives.
- Public land: Any land which is rezoned to become a public land zone is excluded from WGT.
- Land rezoned to correct an administrative error: If a piece of land has to be rezoned because of an obvious or technical error in either a planning scheme or in the Victoria Planning Provisions, it will be excluded from WGT.
- Land rezoned to a rural zone: Further to a declaration made in May 2022 under the Act, any land rezoned to a rural zone (with the exception of the rural living zone) is excluded from WGT liability. This includes:
- Green Wedge Zone (GWZ);
- Green Wedge A Zone (GWAZ);
- Rural Conservation Zone (RCZ);
- Farming Zone (FZ); and
- Rural Activity Zone (RAZ).
Finally, pursuant to section 3 of the Act, any “rezoning” of land from one schedule to another within the same zone will not fall within the scope of WGT liability.
If you have received a WGT liability assessment, and believe that you may be eligible for an exemption or exclusion, you should seek specialist advice promptly to ensure that you act within the two month time limit.
Key takeaways
Windfall Gains Tax represents a major shift in the landscape of land taxation in Victoria, and is likely to have a knock-on effect on property owners, developers, buyers and investors as they navigate the new implications and risks involved in rezoning. Some of the key takeaways for stakeholders to be aware of at this stage are as follows:
- Risk management: Any party entering into a contract for sale, purchase or development of land in Victoria should seek expert advice in respect of any potential impact of WGT on the transaction. Because unpaid WGT liability attaches to land as a first charge, this should become a key element of the due diligence process in advance of any proposed transfer. Any ongoing WGT liability can be identified via a WGT property clearance certificate.
- Implications of deferral: Whilst WGT liability falls to the owner of land at the time of rezoning, the deferral provisions in the Act create a high likelihood of unpaid WGT rearing its head at the point of any sale transaction. Because interest will accrue throughout a deferral, this creates an additional risk for both buyers and sellers (particularly if there is a downturn in the property market) and may influence the timing of sale decisions.
- Time limits: For any party in receipt of a WGT liability assessment, it is critical that action is taken within the time limits set by the legislation, as there is no discretion granted for late responses. This means either paying in full or electing to defer by the due date, or lodging an objection within two months of the date of the notice of assessment. It is also vital to be aware of events which will cease a deferral, and re-start the 30 day clock for payment.
If you are a property owner, developer, or investor, or are considering purchasing property within the State of Victoria, you should seek expert advice at an early stage to ensure that you are prepared for the implications of Windfall Gains Tax.
At Madison Branson Lawyers, our Property, Construction & Conveyancing team provides experienced advice across a full breadth of property concerns, including taxation matters. For a confidential discussion, contact us today.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only.
