Windfall gains tax – Victoria’s slice of the property development pie

Recap: What is the Windfall Gains Tax

It has been more than a year since the windfall gains tax (WGT) was announced and less than a year until the WGT commences operation.

The WGT is a whole new State based tax which purports to impose a tax on property value gains that have arisen due to the rezoning of land or a ‘taxable value uplift’. The WGT is set to apply from 1 July 2023, to any land that has been rezoned under the Planning and Environment Act 1987 (Vic).

What is the ‘taxable value uplift’?

After the land has been rezoned per the Planning and Environment Act, the Valuer-General is required to evaluate the land to determine its capital improved value immediately after the rezoning (referred to as the WGT event). The capital improved value is then compared with a valuation of the land before the WGT event. Essentially, the ‘taxable value uplift’ can be calculated as follows:

'Taxable value uplift' = Land value immediately after rezoning - Land value right before rezoning

How much tax will I be looking to pay?

The amount of WGT to be paid will be determined according to your ‘taxable value uplift’. The rates of tax are as below:

Exemptions

A number of exemptions to the WGT were already announced last year. These exemptions included:

1. GAIC land
2. Residential land (up to two hectares)
3. Charities
4. Pre-existing contractual arrangements; and
5. Rezonings already underway

For a more detailed explanation on the Windfall Gains Tax, see our insight on the topic from 13 October 2021. Please click here to be taken to this article.

Has anything changed since last year?

A new exemption has been added which exempts land owned by a university.

In addition to being land held by a university, the university also has to:

1. be a charity; and
2. satisfy the Commissioner of State Revenue that all land revenue incurred from the land (that would have otherwise been subject to WGT), will be used to further the universities charitable purposes.

Why are they letting universities off the hook?

The Victorian Government has expressed that the intention of the exemption is to further the charitable objects of universities. The additional eligibility requirements above, highlight that the newly added exemption does indeed present high barriers to claim immunity from the WGT, as the requirement that revenue generated from the land be used only for charitable purposes may be difficult to satisfy because universities often utilise resources for mixed purposes.

Things to watch out for….

A. Double taxation – How will WGT and CGT work together simultaneously?

Whilst the State Government has implemented the WGT to tax unrealised gains directly from rezoning land, capital gains are also taxed by the Federal Government through the Capital Gains Tax provisions (CGT).

The scope of the two taxes, overlap to some degree. A gain may be both a taxable ‘windfall gain’ for WGT purposes and a ‘capital gain’ for CGT purposes.

There have been no announcements from either the State Revenue Office (SRO) or Australian Tax Office (ATO) or amendments to either legislative regime to address this issue.

B. Development Contracts

Practitioners need to be cautious in examining long term sales contracts or land purchase agreements where the settlement date is after 1 July 2023. As the WGT will apply from 1 July next year, it is important to put clients on notice of the new tax and the consequences it may entail where the tax applies to their land.

Land under sales contracts entered into and options granted before 15 May 2021 may be exempt from WGT. In relation to contracts, risks may arise where significant variations are contemplated. Where contracts are materially amended, the WGT may be lost. In relation to options, the option granted must not be exercised and the contract not be completed before any rezoning occurs, for the exemption to apply.

Transitional arrangements

Land under sales contracts entered into and options granted before 15 May 2021 may be exempt from WGT. In relation to contracts, risks may arise where significant variations are contemplated. Where contracts are materially amended, the WGT may be lost. In relation to options, the option granted must not be exercised and the contract not be completed before any rezoning occurs, for the exemption to apply.

Next Steps

Although the WGT has now been legislated on, and we’re one step closer to its operation – there are still many questions on its operations. Landowners who may be affected should seek appropriate professional advice.

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This article in no way constitutes legal advice. It is general in nature and is the opinion of the authors only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.