In operation since July, the levy on uplift from rezoning adds another layer of cost and complexity to land acquisitions.
How Victoria sows uncertainty with land Windfall Gains Tax
The Victorian Windfall Gains Tax (WGT) came into operation on 1 July and applies at the rate of 50 per cent on the uplift in the capital improved value (CIV) of land (less any prescribed deductions of which there are presently none) resulting from a rezoning (WGT event).
Land is rezoned through an amendment to the planning scheme. Not all rezonings will trigger WGT as there are exclusions, exemptions and waivers, including for:
(a) Residential land up to 2 hectares
(b) Land subject to or from growth areas infrastructure contribution (GAIC)
(c) Rezoning errors
(d) Public land zones
(e) Charitable land
(f) Certain rezonings underway, and contracts entered into, prior to 15 May 2021
A person served with a notice of assessment (NOA) of WGT in relation to a WGT event must notify the Commissioner of any error or omission in the notice within 60 days from the date of issue of the NOA. Additionally, a taxpayer may object to the CIV.
Deferral of WGT
It is possible for a taxpayer to elect to defer payment of up to 100 per cent of WGT, but a deferral will attract interest on the deferred amount at the rate of the 10-year bond rate, and in this way is akin to a loan. With certain modifications available in limited circumstances (such as transfers for no consideration), the deferral will last until the occurrence of the earlier of:
(a) A dutiable transaction (the most common being a transfer of the land)
(b) A relevant acquisition (the most common being an acquisition of shares or units where the company or trust owns the land)
(c) 30 years after the rezoning
Unpaid WGT will automatically give the Commissioner a first charge on the land which has priority over all other encumbrances up to the value of the unpaid WGT plus interest and penalty tax under the Taxation Administration Act 1997, as well as any deferred WGT interest.
A bona fide purchaser can seek a certificate from the Commissioner as to how much WGT is outstanding and then the charge does not secure any amount of WGT (including any interest and penalty tax) in excess of the amount set out in the certificate.
Lenders will need to be careful with this automatic charge, as it may not be registered, yet it could still outrank even a first-ranking registered mortgage. Accordingly, lenders should insist on a purchaser obtaining such a certificate from the Commissioner before advancing any funds. Provided the lender is aware of any deferred WGT, this should all be manageable as part of the settlement process.
Managing WGT between parties
Transacting parties and their advisers will need to be alive to the need to include special conditions in a contract involving land that has been or may become the subject of a WGT Event.
Standard clauses are unlikely to work, as the default position is that the registered proprietor at the time of the rezoning will be liable to pay WGT, and will be the sole party that can elect to defer WGT and that can object to the NOA and/or the CIV.
Accordingly, the contract will need to be carefully drafted to give effect to the parties’ commercial negotiation where it deviates from the default position. Where appropriate, the contract should have a mechanism for sharing the economic cost of the WGT, for effectively ‘transferring’ objection rights, and for making the election to defer WGT. Similarly, it may be advisable for the contract to permit an accelerated settlement in the event of an imminent rezoning, given a purchaser will not be able to defer WGT if the rezoning occurs before settlement.
Other issues – risks
It’s early days yet, but there may be unintended consequences arising from the introduction of the WGT, because:
- Deferred WGT attracts interest immediately which will significantly increase the holding costs of the land.
- It will be difficult for parties to price a prospective future WGT liability as the amount of WGT will be unknown until after rezoning and the valuer-general has calculated the CIV.
- Adapting the contract to economically adjust the WGT default position creates complexity, and costs and may amplify counterparty risk.
- Banks don’t typically lend to fund a tax liability and a lender’s reluctance to lend at an economically viable rate may be exacerbated by the prospect of an automatic security charge that outranks all other security interests.
- While WGT was announced in early 2021, it has commenced operation at a time when interest rates, skills shortages and inflation have all substantially increased.
- While WGT will likely increase the CGT cost base of the land for federal income tax, it remains to be seen for how long the Victorian government will be permitted to effectively tax 50 per cent or more of the capital gain in priority to the federal government.
WGT substantially adds costs, complexity, uncertainty and risks.
The likely way purchasers will seek to manage this heightened risk is by discounting the purchase price. Yet, that may reduce and delay transactions – and subsequent desirable developments – as purchasers and vendors adjust and try to price this new tax.
Parties, including lenders, should carefully work through the contract to ensure it achieves what is commercially desired in a way that provides adequate protection and agility.
WGT adds to a list of costs and complexity surrounding land acquisitions in Victoria, including, stamp duty, foreign purchaser additional duty, GAIC, land tax, sub-sales duty, landholder duty and the economic entitlements provisions.
Jeremy Makowski is a partner at Coghlan Duffy Lawyers.