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Victorian Windfall Gains Tax and Build to Rent Amendments

15 October 2021

In brief

The long awaited details of Victoria's “Windfall Gains Tax” (WGT) and concessions to land tax for the Build-to-Rent (BTR) industry have now been tabled in the Victorian Parliament with the Windfall Gains Tax and State Taxation and Other Acts Further Amendment Bill 2021 (Vic) (the Bill).

The WGT measure was foreshadowed in the most recent Victorian Budget. It reflects the Victorian Government’s desire to share in gains made in uplifts in value resulting from amendments to planning schemes (within the meaning of the Planning and Environment Act 1987 (Vic)) that take effect on or after 1 July 2023.The Bill seeks to impose the WGT on the increase in value of land resulting from a rezoning. A small number of rezonings are excluded and certain transitional provisions will be in place for particular contracts, option arrangements and proponent-led rezonings that were underway when the measure was announced on 15 May 2021. 

The BTR measures were foreshadowed even earlier in the previous State Budget in November 2020 and seek to provide concessions to the BTR industry in the form of a 50 per cent reduction to the taxable land values relied on for land tax for an eligible BTR development and (where relevant) a full exemption from the absentee owner land tax surcharge. 

In detail

Windfall Gains Tax 

Since the original announcement of the WGT, many property industry participants have lobbied the Victorian Government on the announced changes, including the basis on which the WGT is to be calculated, when the WGT is to be paid and the types of land and rezonings that are to be impacted. The Bill seeks to address these issues, including deferring the introduction of the WGT to 1 July 2023.

The WGT will be imposed on a WGT event, which is defined as a rezoning other than an excluded rezoning. A rezoning means “an amendment of a planning scheme that causes land to be in a different zone from the zone that it was in immediately before the amendment”. 

An “excluded rezoning” includes: 

a) a rezoning between schedules in the same zone; or 
b) a rezoning relating to Growth and Infrastructure Contribution areas as defined under the Planning and Environment Act 1987 (Vic);
c) a rezoning of land to a “public land zone” or to a “different public land zone”.

The Victorian Treasurer also has the ability to declare a rezoning to be an excluded rezoning for purposes of the WGT.

When does liability for the WGT arise? 

The liability will arise when the rezoning takes effect under the Planning and Environment Act 1987 (Vic) and where the gain (or “Taxable Value Uplift”) is more than AUD 100,000. The owner of the land is liable to pay the WGT. While the Commissioner of State Revenue (Commissioner) will issue assessments on a WGT event, payment of the WGT can be deferred. 

Rate of WGT 

The rate of WGT is set out in the following table and is based on the Taxable Value Uplift.

Taxable Value Uplift Rate of Windfall Gains Tax
Not more than AUD 100,000 Nil
More than AUD 100,000 but less than AUD 500,000 62.5 per cent of that part of the Taxable Value Uplift that exceeds AUD 100,000
AUD 500,000 or more 50 per cent of the Taxable Value Uplift
Taxable Value Uplift  

As noted above, the liability to pay WGT, and the rate of WGT, depends on the “Taxable Value Uplift”. This is defined as the “value uplift” of the land less any deductions prescribed by the regulations. The value uplift is determined in accordance with the following formula: 

VU = CIV2 - CIV1 

CIV1 and CIV2 are references to the capital improved value of the land (as defined under the Valuation of Land Act 1960 (Vic)). CIV1 reflects the capital improved value for the land immediately before the WGT event occurs and CIV2 is determined by a supplementary valuation certified by the Valuer General.  The supplementary valuation is intended to value the land at the same date as CIV1 but as if the new zoning resulting from the WGT event was in place at that time. This means the WGT should only capture the value uplift from the rezoning. 

It will be interesting to see what, if any, regulations will be proclaimed and the type and extent of deductions that will be permitted in calculating the Taxable Value Uplift. 

There are also aggregation rules that will mean members of a group are assessed for the WGT on the aggregated taxable value uplift on land owned by the separate members of the group that is rezoned by the same WGT event. This removes the ability to split the WGT across separate landholdings held by different taxpayers and potentially paying less (or no) WGT on certain landholdings.

Grouping provisions for corporations, similar to those used under the current Land Tax Act 2005 (Vic) will be used for these purposes. Trustees holding separate parcels of land for different trusts can be assessed on a “group” basis where the same person or persons have a “controlling interest” in each trust. Discretionary trusts do not escape the grouping provisions, with separate land holdings held under different discretionary trusts also capable of being aggregated in certain circumstances.

Deferral of payment 

WGT will initially be payable on the due date given in a notice of assessment provided by the Commissioner. However, the owner of land that is the subject of a WGT event can choose to defer payment of the WGT and must elect to do so prior to the day on which the WGT is payable. Interest will accrue at the 10 year bond rate on deferred WGT. The unpaid WGT and accrued interest becomes a first charge on the land. 

Where a taxpayer chooses to defer the WGT, the amount deferred and any accrued interest must be paid within 30 days after whichever of the following occurs first: 

a) a dutiable transaction occurs (other than certain excluded dutiable transactions) in relation to the land; 
b) a relevant acquisition occurs (other than certain excluded relevant acquisitions) in respect of a company or unit trust that is a landholder who is the owner of the relevant land; and
c) 30 years after the WGT event. 

Transactions giving rise to an economic entitlement as defined under the Duties Act 2000 (Vic) are excluded transactions, as well as certain other transactions (for example, transactions where no consideration is payable) where the transferee “elects” to assume the WGT liability including the accrued interest. 

WGT on land used for charitable purposes can also be deferred where the transferee “assumes” the WGT liability. A waiver of any WGT on land used for charitable purposes is available if the land has remained as charitable land for 15 years after the WGT event. 

For acquisitions in land holding entities, it will be important to determine whether the land of the landholder company or trust is “encumbered” by a WGT liability as the payment of that liability may arise on the making of a relevant acquisition. 

Exemptions and transitional arrangements

There are a number of exemptions from the WGT introduced into the Bill. They include the following: 

a) Up to 2 hectares of residential land (including primary production land with a residence) will receive an exemption where it is rezoned by the same planning scheme amendment.
b) Rezoning occurs to correct technical errors in the Victorian planning provisions or a planning scheme (referred to as a “correcting event”). 
c) WGT events for land subject to a contract of sale or options entered into before 15 May 2021 that have not been completed by a transfer of the land before the WGT event. This is to recognise that the parties would not have anticipated when negotiating the terms of the deal that a contemplated rezoning of the land would result in a WGT for the vendor. 
d) Where the land is subject to certain rezonings underway before 15 May 2021, subject to certain conditions. The owner of the land must establish, to the Commissioner’s satisfaction, that the owner requested the amendment before 15 May 2021, the request was created and registered in the Amendment Tracking System before 15 May 2021 (where relevant) and the owner had incurred costs above a threshold amount in relation to relevant work.  

The WGT will be administered by the Commissioner and rights of objection to the valuations used in the calculation of the WGT are provided. 

Land tax changes for BTR land 

The measures contained in the Bill, foreshadowed in the previous State Budget in November 2020, are welcome changes for the BTR industry.  The changes go further than those previously announced as the concessions will be available for up to 30 years from the time of commencement of the BTR benefit.  

Under the proposed measures, an owner of land that is eligible for the “BTR benefits”: 

a) is to be assessed for general land tax as if the taxable value of the land were reduced by 50 per cent; and 
b) an absentee owner of land is to be assessed for land tax as if the owner of the land were not an absentee owner.  

Land is eligible for a BTR benefit in a land tax year if the land is used and occupied solely for an eligible “BTR Development” on 31 December in the year immediately preceding the tax year. The BTR benefit is available for one continuous period and for no more than 30 years from the date that a BTR benefit first applies to the land. 

What is a BTR Development?

A BTR Development is defined as “one or more buildings that are constructed or substantially renovated for the purpose of providing multiple dwellings for lease under residential rental agreements”. An “eligible BTR development”  is a BTR development that provides at least 50 self contained dwellings that are:

a) fixed on the same parcel of land (and include common areas for the use of residents); 
b) owned by one owner or owned collectively (e.g. jointly owned by co-owners and where no owner is entitled to a specific part of the land);  
c) managed by a single management entity (although exceptions to this apply where dwellings are used to provide affordable housing or social housing); 
d) suitable for occupancy between 1 January 2021 and before 1 January 2032 (that is, on the date that an occupancy certificate is issued in respect of the dwelling); and 
e) rented or available for rent under a residential rental agreement (the agreement must be for a fixed term of not less than 3 years although a renter can agree to a lesser period).

The concession extends to common areas where (a), (b) and (c) above are satisfied. 

The effect of the provisions is that only newly constructed or substantially renovated buildings may be considered as eligible BTR developments. Dwellings in a BTR development that have an occupancy date on or after 1 January 2032 cannot form part of an eligible BTR development. 

The above requirements must be satisfied for a continuous period of at least 15 years from the occupancy date of the eligible BTR development (being the date an occupancy permit has been issued in respect of each of the dwellings that comprise the BTR development). The above requirements will also apply to any expansion of a BTR development, with the 15 year eligibility requirement commencing from the occupancy date of those additional dwellings. 

An owner of a BTR Development is required to apply to the Commissioner to access the BTR benefits. 

Failure to meet the 15 year requirement (for example, due to a change in circumstance where one or more self-contained dwellings no longer satisfy the requirements or the BTR development no longer consists of at least 50 self-contained dwellings) will result in the imposition of BTR special land tax.

The takeaway

The WGT measures are complex, and whilst the excluded zonings and other associated exemptions are welcome, there is still a degree of subjectivity as to the Taxable Value Uplift that will be adopted on any rezoning, particularly as some of the detail will be dealt with by regulation and gazette notices. The good news, however, is that there is the option to defer payment of the WGT.  

On the other hand, the BTR measures are a welcome relief. It is now hoped that BTR developments will increase, following a hiatus period where BTR operators waited for more detail on the measures.  The 30 year BTR benefit is a very good outcome for the BTR industry, but care should be taken to ensure the continued application of the relief measures for a continuous 15-year period.  

For those projects under construction where the BTR benefit is not yet available, the focus may continue to be on the Treasurer’s guidelines issued in October 2018 in relation to any relief from the land tax absentee owner surcharge.

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