The Windfall Gains Tax is a tax on property value gains which arise as result of a rezoning or amendment to a planning scheme (referred to as the ‘taxable value uplift’).
The Windfall Gains Tax applies where land is rezoned under the Planning and Environment Act 1987 (Vic) on or after 1 July 2023.
There are several exemptions.
The Windfall Gains Tax (WGT) was first announced on 15 May 2021. Despite it being a major announcement, very little detail was provided on the scope and application of the new tax in the 2021-22 Victorian State Budget.Finally, after an almost 5-month wait, the Windfall Gains Tax and State Taxation and Other Acts Further Amendment Bill 2021 (Bill) was released on 13 October 2021. The Bill establishes a new Act called the Windfall Gains Tax Act 2021 (WGT Act).
The WGT Act is not yet law, and may be subject to change through the Parliamentary process. Nonetheless, the purpose of this article is to discuss some of the headline items and issues regarding the WGT.
Broadly, the WGT is a tax on property value gains which arise as result of a rezoning or amendment to a planning scheme (referred to as the ‘taxable value uplift’).
The WGT is not a duty, nor is it a form of land tax. It is in fact a whole new State based tax which has elements similar to the Growth Areas Infrastructure Contribution (GAIC) and elements similar to the capital gains tax regime under the Income Tax Assessment Act 1997 (Cth).
The WGT applies where land is rezoned under the Planning and Environment Act 1987 (Vic) on or after 1 July 2023.
The rate of WGT depends on the amount of the ‘taxable value uplift’ as per the below table:
Unlike tax-free threshold for income tax, the WGT-free threshold of $100,000 only applies when the taxable value uplift is less than $500,000. If the uplift reaches or exceeds $500,000 then the entire uplift is assessed for WGT.
To determine the ‘taxable value uplift’, the Valuer-General is required to undertake a supplementary valuation to determine the capital improved value of the land immediately after the WGT event. This is then compared with the capital improved value as determined under the most recent valuation in force before the WGT event.
According to the Explanatory Memorandum, the supplementary valuation will value the land as at the previous valuation date, although on the basis that the rezoning had occurred at that earlier time. So, for example if the previous valuation was made by the Valuer-General on 1 January 2023 and the land was rezoned on 1 July 2023, the supplementary valuation would need to assume a 1 January 2023 date albeit with the new zoning. Conceptually this methodology should ensure that market increases not related to the rezoning are not subjected to the WGT. Practically however, this will likely be an exercise that will lead to significant dispute and disagreement between the State Revenue Office and affected landowners.
Liability for the WGT is based on the valuation methodology described above. There appears to be no mechanism for redress if a property is later sold for less than the supplementary valuation amount (for example, due to a significant economic downturn).
The WGT Act contains a suite of exemptions. This includes:
The WGT does not require any ‘dutiable transaction’ for the liability to arise, and therefore effectively taxes unrealised capital gains. Many landowners are unlikely to be able to pay the WGT when it arises. This is particularly the case where the landowner has not initiated the rezoning application themselves.
To address this, the WGT Act permits a landholder to make an election to defer payment of up to 100% of the WGT, until 30 days after one of the following events:
Where the WGT is deferred, interest is charged and calculated daily at the 10-year Treasury Corporation of Victoria bond rate (currently 1.84%).
To secure the SRO’s interest, a first charge will be placed on the land in respect of any unpaid WGT and accrued interest. This charge will take priority over all other encumbrances over the land and would therefore rank ahead of a financier’s mortgage (such as a bank or other lender), even if earlier in time.
The choice to defer WGT must be made in an approved form to the Commissioner of State Revenue and before the WGT is payable. While the Commissioner can accept a late deferral request, it appears that he is under no obligation to do so.
The WGT Act contains wide reaching aggregated and grouping provisions. The provisions are complex, however broadly:
The WGT effectively taxes unrealised capital gains, at more than double the rate of the federal capital gains tax. The interaction between the WGT and CGT remains up for debate. Practitioners would welcome guidance from the ATO on the interaction between the two (assuming the WGT becomes law). Some issues are as follows:
Thomas Paine, one of the founding fathers of the United States, once famously said “What at first was plunder assumed the softer name of revenue.” He may well have been talking about taxes on property. When combined with land tax, stamp duty, various surcharges and federal Income Tax, the WGT could result in situations where almost 100% of the value of land is subject to some form of taxation.
The above summary covers the broad features of the WGT, but the devil is in the detail. The proposed WGT Act is complex and technical, even for lawyers. It requires a strong understanding of the Duties Act 2000 (Vic) and elements of Land Tax 2005 (Vic) to apply it in practice. Given the significant cost of the WGT, care must be taken to ensure that the rules are understood and applied correctly.
While the WGT is still in Bill form and has not been enacted, if prior experience with Victorian Revenue matters is anything to go by, it is unlikely that the final WGT law will differ materially from the Bill which has been described above.
This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.
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