Windfall Gains Tax is a new Victorian State Government tax on land set to be introduced from 1 July 2023. The tax will be triggered where the value of land increases ‘due to the actions of government’. In this context, the ‘actions of government’ are essentially rezoning land. So, to all intents and purposes, this is a tax whereby if the land you own is rezoned and it goes up in value, you may well be taxed on the value uplift. The rationale is, some would argue not unreasonably, that you have benefited or had a ‘windfall’ due to the rezoning of land by the State Government, and that some of that windfall should go back to the community via a state tax. If you are the owner of the land with the increase in value, it may be the case that you initiated, paid for and managed the rezoning or you may have had little if any input at all into the rezoning. The tax will only apply to land that is rezoned after 1 July 2023.
In a metropolitan Melbourne context, typical land affected by this tax is likely to be farm land and potentially industrial and vacant land outside of the metro area. As the urban sprawl (by rezoning) creeps further and further, despite calls for higher density growth in already established suburbs, more and more farm land is being rezoned for residential purposes. Farm land prior to a rezoning may be subdivided to 20 acres lots. Once it gets rezoned to residential and could be subdivided down to 400 sqm lots and its value will skyrocket overnight by the ‘actions of government’.
Take this as an example. Suppose on 31 August 2023 80 year old farmer and widower John Smith owns 50 hectares of farm land currently used for grazing cows with a zoning that allows subdivision to 20 acre lots. On 1 September 2023 John’s farm land is rezoned to a residential zone. Overnight, the subdivisional limit goes from 20 acres lots to 400 square metre lots. As a result John’s land, which on 31 August 2023 was worth $5m, is now worth $25m on 1 September 2023 – truly a ‘windfall’ of $20m.
Of course, as is the case with all these things, it is likely not this straightforward, but it serves to highlight the forces at work. The new tax also applies to all land in Victoria, not just the type of land in our example. This means it can apply to any land in and around the CBD as well as rural and regional land.
The State Revenue Office website states: ‘From 1 July 2023, a windfall gains tax applies to land that is subject to a government rezoning resulting in a value uplift to the land of more than $100,000. In determining the value uplift, all land owned by the person or group and subject to that rezoning is taken into account.’
There are a number of elements such as what constitutes a ‘rezoning’ – what is the value, how is value determined. As to the value, that taxable value uplift is the difference in the capital improved value (CIV) of the land before and after the rezoning takes place (less any allowed deductions). This CIV is determined by the Valuer-General Victoria and there will be mechanisms in place for objecting to the value. There will be certain deductions permitted, but as yet we are not aware of what they are, however they could include things related to the costs of re-zoning – surveys, reports etc.
It is a significant tax. For rezoning that results in a taxable value uplift more than $100k but less than $500k, the tax will apply at a marginal rate of 62.5% on the uplift above $100,000. On $500k or more the rate is 50%.
In terms of our hypothetical example above, what does it mean for John and his family? Well, put simply, they will pay a tax of $10m, being 50% on the $20m windfall gain. It is a very substantial tax. But again, some might argue it was a substantial windfall.
As is the case with these things there are a number of exemptions. These include, residential land (which includes primary production land with a house on it) up to 2 hectares, transitional arrangements, land already subject to GAIC, charitable land, university land, land rezoned to Public Land Zone and land rezoned to a rural zone (other than rural living zone). In John’s example, supposing his land was primary production land with a house on it, then 2 hectares of his 50 hectares would be exempt.
Generally, it will be the owner of land that pays the windfall gains tax. Presumably, sometime after a rezoning the landowners will receive a letter from the State Government requiring the tax to be paid by a due date. There will be the option to defer payment of the tax until the next dutiable transaction (usually, but not always a sale) or 30 years after the rezoning, whichever occurs first. But note that if deferred, the amount due will attract interest on the 10-year Treasury Corporation of Victoria Bond rate.
Four scenarios:
1. What happens when there has been a rezoning before a property is sold?
The owner of the land at the time of the rezoning is liable to pay the tax. They will have the option to defer the payment for 30 years (interest will accrue over that period), but if a sale occurs before then, the payment must be made when the sale is settled. In this case the sale price will reflect the increased value resulting from the rezoning, and the vendor will be able to fund the windfall gains tax from the proceeds. There will be a certificate that can be obtained that will operate in a similar way to a land tax certificate so that payment is made at settlement.
2. What happens when there has been a rezoning after a property is sold and settled?
The purchaser as owner will take the benefit of the increase in value and as owner will be required to pay the tax.
3. What happens then if you have sold your land and in between the time of signing the contract and settlement, a rezoning occurs that triggers the tax?
It is not uncommon for developers to buy land with delayed settlement (sometimes years) with the intention of rezoning prior to having to settle (i.e. pay) on the land.
Under the new regime the owner of the land at the time of the rezoning is liable to pay the tax.
In this scenario the vendor will be the owner of the land at the time of the rezoning and so the vendor will be responsible for any windfall gains tax that applies.
But hold on. You may have sold for an amount that did not take into account the rezoning and the increase in value. That means you are liable for the windfall gains tax even though the purchaser gets all the benefit of the windfall!
Using John’s example, let’s say he sold the property on 31 August 2023 for $5m with a 3 year settlement. Six months before settlement the land is rezoned to residential and the value increases to $25m. John, as the land owner at the time of rezoning is liable to pay the government $10m (50% of the gain). After receiving $5m at settlement and paying it to the government, he is still owes the government $5m! For this reason it will be vital that sellers include in the contract a requirement for the purchaser to pay, at settlement, any windfall gains tax that may arise prior to settlement.
This example, as outrageous as it seems, serves to highlight the importance of land owners entering into sale contracts, especially long term contracts where rezoning is a possibility, expressly dealing with the risk of windfall gain tax arising before settlement and making sure the purchaser required to pay the tax.
4. What happens if a rezoning has occurred (with the amount of the windfall gains tax calculated at the time) but later when it comes time to sell, market conditions have deteriorated and the increase in value has not kept pace with the interest accruing on the windfall gains tax?
In that situation the windfall gains tax, including the accumulating interest, may represent more than 50% of the gain. This is a risk for the owner. On the other hand, if value growth exceeds the accumulated interest, then this is to the benefit of the owner.
For the most part the tax is unlikely to affect regular residential and commercial conveyancing transactions with settlement time frames of 30/60/90 days where there is no realistic prospect of a rezoning. We have to remember, rezoning a property is a process that takes quite some time. We consider the real risk is to those vendors of larger holdings (whether industrial, farming, rural or otherwise) with long term settlements.
Finally, it is not currently clear what the interaction of this Windfall tax is with Capital Gains Tax. We will provide an update when there is further clarity on this point.
