Industry insights | 01 March 2022

The Windfall Gains Tax has been approved – so what does it mean?

Hotly debated by industry, the Windfall Gains Tax was passed by parliament on 15 November 2021, to take effect from 1 July 2023. It will be the 19th property tax to be introduced by the Victorian Government since 2014. 

Here, Millar Merrigan summarises what landowners and developers need to know about the tax, including what it means for the industry. We’ve based our analysis on the current wording of the bill; and we note this may change pending any amendments and subsequent regulations which will guide its application. 


What is the Windfall Gains Tax (WGT)?

The WGT is a new tax, applicable to Victorian landowners and developers, that will be triggered when the rezoning of a property results in a land value uplift of more than $100,000 (some rezoning exclusions apply).

The tax will be applied at a rate of up to 50% of the uplift value, with the uplift value calculated using a formula that compares pre-zoning and post-zoning value, and is evaluated by the Valuer-General Victoria’s office, as follows (ignoring negative taxable value uplifts):

WGT = (aggregated value uplift – allowable deductions) x applicable WGT rate

With applicable tax rates:

  • Under $100,000 = no tax applied
  • $100,001 – $499,999 = 62.5% of the uplift above $100,000
  • $500,000 or more = 50% of the total uplift

In effect, this means the maximum tax payable will be 50% of the uplift.

Other key points to note include:

  • Taxpayers will be assessed on the ‘aggregated taxable value of all land’ that is rezoned.
  • In the case of land subdivision, the WGT will be divided to each lot by size.
  • The WGT will not be applicable for some residential land, charities, and special discretion areas, (with more information regarding rezoning exclusions below).
  • Tax liabilities may be deferred up to 30 years, or until the next dutiable transaction.


Who will be subject to the WGT?

The owner of the land, at the time the rezoning takes place, will be required to pay the tax.

  • Where there are multiple owners, they will be jointly assessed.
  • Where land is owned by a trust, the trustee will be assessed in relation to land subject to the trust.
  • Members of a group – including multiple corporations, trusts, or a combination – will be jointly liable.

And apart from certain excluded rezoning areas, any piece of land that is rezoned in Victoria may be subject to the WGT.

Excluded rezoning may include those:

  • Between schedules in the same zone
  • To the Urban Growth Zone within the Growth Areas Infrastructure Contribution area
  • To a public land zone, between different public land zones
  • Deemed excluded by the Treasurer

So, how will this affect the industry?

While positioned as a tax on wealthy landowners, WGT will likely create upward pressure on housing prices for everyone.

The WGT places pressure on the supply of homes, as developers opt out of land parcels affected by the WGT or factor it into their land acquisition and development costs. This decrease in supply is likely to increase the price of those housing developments that do exist, with greater competition among buyers. Thus, following an already-difficult year financially, thanks to COVID-19, homebuyers may have an even tougher time breaking into the Victorian housing market.

Adding to this is the cost of uncertainty, which is increased due to the tax liability relying on valuations conducted by the Valuer-General (or a nominated valuer). To avoid this uncertainty, developers are likely to opt for already-rezoned land, which won’t incur a future, WGT liability. This concentrated demand is likely to result in a premium, placing further pressure on property prices.

While the delaying of the bill’s commencement date (by one year) and rezoning exclusions provide some relief for developers and landowners, they are far outweighed by the cost-heavy implications on land valuations and developments.


How will this impact regional Victoria?

One positive of the pandemic has been to make home ownership an achievable goal for many, through the opening up of regional Victoria as a viable and affordable option.

Housing demand in metropolitan Melbourne has a fairly consistent flow. It may vary in intensity – from your ‘garden-variety hose’ type of demand, through to full-blown ‘firehose’ intensity. But, all in all, it remains steady and constant. Regional areas, on the other hand, have often had housing demand more akin to a ‘trickle’, or the tap turned off entirely. The Gippsland region is a case in point, with low housing demand largely linked to poor employment prospects in the region. For any development to be viable, there needs to be sufficient demand; the higher the demand, the more likely a development project will be viable.

The pandemic has changed the demand and viability equation in the regions.

It has provided an opportunity for many Melburnians to make home ownership an achievable goal, through the prospect of full or partial remote working. Millar Merrigan has seen the change in demand for regional areas since the latter part of 2020: we have seen numerous projects progress that were sitting ready with planning permits in the draw, but without the demand to make projects viable. Some of these projects are from land rezoned back in 2011. The demand in regional areas for affordable housing, that takes advantage of the lifestyle opportunities available through the social and community fabric of existing townships, has been the shining light from the pandemic in terms of providing an attractive and affordable housing opportunity to Melburnians priced out of metropolitan Melbourne.

The WGT will reverse the flow of new development sites becoming available in the regions; this will impact supply and have a negative impact on housing affordability and choice. That is because, in many regional areas, the rezoning process is driven by landholders, who put up the dollars and wear the risk over the substantial timeframe required to rezone land. Contrary to popular belief, a successful rezoning does not always result in a ‘pot of gold’ or windfall gain – there needs to be demand and there needs to be an ability to develop economically for land development to be financially worthwhile (i.e. viable), let alone a windfall.

In metropolitan Melbourne, well-resourced councils and the Victorian Planning Authority (VPA) are well placed to undertake strategic planning and ensure adequate pipeline of land supply. But regional councils do not typically have the resources to drive strategic initiatives with suitable landholdings, which are often more fragmented and dispersed. For the land supply pipeline in the regions to be delivered post the WGT, there will need to be more resources directed to regional councils or increased involvement from the VPA (perhaps some WGT revenue could contribute to this?). There does not appear, though, to be a willing band of experienced strategic planners ready to jump in to fill the void in the regions. Time will tell.

Why was the WGT introduced in the first place?

The purpose of the WGT is to return a share of profits from rezoning to the community for infrastructure.

Despite its seemingly positive purpose, the negative impacts of the WGT are likely to be bad news for the communities the tax is supposed to help by impacting housing affordability and project viability.

Speaking of the impact, one of Millar Merrigan’s clients, Damien King, notes:

“The WGT seems to have good intentions, but it’s difficult to see how this new tax is going to benefit the community. Not only will it significantly reduce the motivation for developers to purchase or seek any land to be rezoned, long-term existing landowners will also mothball their plans in the hope of a change in government or government policy.”

Damien is a prospective developer, with a land permit for low density development in Broadford, north of Melbourne.

In metropolitan Melbourne’s urban growth zones, contributions to community infrastructure is covered by the growth area infrastructure contribution (GAIC). The GAIC is a fixed levy that would in many instances be less than the contribution required by the WGT. It does not make sense for the WGT to require a greater contribution than the GAIC, and the additional cost could make projects unviable – or will at least be added on to homebuyers looking for an affordable alternative.

With an inevitable reduction in supply, the government will likely miss out on considerably more taxes, due to the withdrawal of sites from the market,” says Damien. “And any developments that do proceed will obviously have this additional cost built into the purchase price for new homeowners.”


And how has the industry responded to the WGT?

As a powerful example of industry lobbying from peak bodies such as The Property Council and UDIA, the exemptions to the WGT highlight the importance of purposeful discussions that can help shape regulations around newly introduced taxes. 

While the passing of the Windfall Gains Tax and State Taxation and Other Acts Further Amendment Bill 2021 has confirmed the lawful approval of the WGT, advocacy for exemptions has remained active.

The previously stated exceptions were a result of the lobbying that took place earlier this year, in May 2021, which granted specific waivers to be included in the Bill where the WGT will not be applicable.

Another recent example of industry lobbying was seen during the build-to-rent (BTR) land tax concession, which supports BTR projects over the next 30 years by offering a 50% land tax discount to eligible projects. Despite initial concerns, this concession has also been approved for taking effect from 1 January 2022 until 31 December 2031.

Even though the WGT is enshrined in legislation, through lobbying and advocacy by industry leaders, further changes may work to limit its negative effects.

Through our work advising developers, Millar Merrigan is invested in understanding the ins and outs, the timing and implications of the WGT for our industry, and communities.

If you would like to learn more about WGT and what it means for you, we’d love to talk.

Get in touch with our experts or check out the Victorian Government official WGT factsheet.

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