Treasurer Tim Pallas has confirmed that the Victorian Government will not introduce regulations to allow deductions in relation to the new Windfall Gains Tax (WGT) which commences on 1 July this year.
The WGT is a tax on property value gains that arise as a result of a rezoning event or an amendment to a planning scheme. From 1 July, any land that is rezoned in Victoria, other than under an excluded rezoning, may be subject to the WGT if the rezoning results in a taxable value uplift of more than $100,000. Further information on the operation of the new tax is available here.
The WGT legislation was drafted with limited consultation, however the need for a deductions regime was identified early on to ensure that the new tax is only payable on the true gain arising from a rezoning event. In this regard, the Treasurer has been given the power in the legislation to make regulations prescribing allowable deductions. Section 10 of the Windfall Gains Tax and State Taxation and Other Acts Further Amendment Act (2021) defines the taxable value uplift as being the value uplift of the land less any deductions prescribed by the regulations.
It had been hoped that the Treasurer would exercise this power and the deductions prescribed by the regulations would include a range of costs ordinarily incurred by land owners and developers in the lead up to a rezoning decision. Many of these costs are incurred as a result of requirements imposed by local and state governments as well as other regulatory bodies, and cannot be avoided. The property development industry was hopeful that regulations allowing deductions would be implemented prior to the commencement of the new regime. Unfortunately, that has not come to pass and the Government appears to have decided that allowing deductions is not appropriate as part of the WGT calculation process.
Pitcher Partners perspective
Rezoning is a complicated and expensive process, which often takes many years to complete. The cost and risk of achieving a rezoning in respect of a parcel of land is usually borne by the land owner or a developer. The associated costs can be significant and run into the millions of dollars for large land parcels, particularly in greenfield areas that can take many years to be approved for rezoning.
The Government’s decision not to recognise this very significant investment by land owners and developers in the rezoning process, is disappointing. The Government has chosen to share in the “windfall” without acknowledging how it is generated. In our experience, increases in land value are not solely attributable to a rezoning decision nor are decisions to rezone likely to be made without the land owner and/or developer’s significant contribution to and investment in the process. The Government’s decision to ignore the costs incurred in the pre-rezoning phase will result in an effective tax rate that is higher than the 50% in the legislation and could ultimately discourage private investment in the rezoning process.
The Government appears to have adopted the view that the relevant costs incurred in the lead up to a rezoning event will be captured as part of the valuation process that needs to occur in order to determine the taxable value uplift on which the WGT is imposed. We disagree. No 2 parcels of land in Victoria that will be subject to the WGT are identical and neither is the process that different land owners and developers must navigate in order to get land rezoned. In our view, the valuation process prescribed in the WGT legislation is unlikely to appropriately capture all of the relevant costs that are incurred as part of the process that ultimately results in the rezoning of a particular parcel of land.
Pitcher Partners has previously expressed its concern over the introduction of the WGT and the potential impact on land owners, developers and home buyers, particularly in regional areas. The rezoning of land is an essential service. It is necessary to accommodate population growth and to stimulate the economy. Ignoring the investment made by land owners and developers will further increase the cost of a house and land packages in Victoria and could act as a further deterrent to development activity in an increasingly difficult environment for developers.
Please contact your Pitcher Partners’ representative for further information.