In an effort to tackle housing affordability and generate additional revenue for public services, the Victorian government has introduced a progressive and controversial policy called the Windfall Gain Tax (WGT). The WGT targets property owners who experience substantial increases in the value of their land due to rezoning or planning scheme amendments. As the policy unfolds, it is essential for property owners to understand its detailed application and the potential implications it may have on their investments and finances.

UNDERSTANDING THE DETAILED APPLICATION OF THE WINDFALL GAIN TAX

With limited exemptions, the WGT applies to most land in Victoria rezoned after 1 July 2023. Exempt land may include, for example, certain residential land that does not exceed 2 hectares, current exemptions for pre-15 May 2021 contracts and options, individual units within certain land within commercial residential premises or certain land used for charitable purposes. Excluded rezoning ensures that the WGT does not apply, for example, to land zoned for public uses or land subject to Growth Area Infrastructure Contribution (GAIC).

The WGT applies to properties where the land value has increased significantly after rezoning or changes to the planning scheme. The exact criteria and thresholds for determining a ‘windfall gain’ vary and are set by the state government. Typically, properties located in areas with high growth potential are more likely to experience significant value increases and, therefore, be subject to the tax.

CALCULATION METHOD

The tax is calculated as a percentage of the unearned gain made by the property owner. To calculate the unearned gain, the current market value of the property is compared to its value before the rezoning or planning scheme changes took place. The difference between these two values represents the windfall gain (Value Uplift), and the WGT is applied to this amount.

To ensure fairness, the WGT typically employs a graduated tax rate structure. This means that higher rates are applied to larger windfall gains, while smaller gains may incur a lower tax rate or be exempt altogether. The government aims to strike a balance between revenue generation and discouraging speculative practices. For example, currently, the tax-free threshold is $100 000, and the WGT is 62.5% of that part of the taxable value uplift (the Value Uplift less any available deductions) that exceeds $100 000 if the taxable value uplift is more than $100, 000.00 but less than $500, 000.00.

TIMING OF TAX PAYMENT

The property owner’s liability to pay WGT will arise when the rezoning occurs. After the rezoning, the owner of the land will receive an assessment notice and must pay the WGT before the due date for payment. However, the liability, including any accrued interest, can be deferred from 30 days up to 30 years. Nevertheless, a first-ranking charge that has the highest priority over all other encumbrances will apply to the land until the WGT is paid. Any objection to an assessment for WGT must be made within 60 days of receiving the notice of assessment of WGT.

IMPLICATIONS FOR PROPERTY OWNERS

INCREASED TAX LIABILITY

Property owners who experience substantial windfall gains may face higher tax liabilities as a result of the WGT. Depending on the property’s location and the magnitude of the gain, this tax could significantly impact the profits earned from selling or developing the property.

DISCOURAGEMENT OF SPECULATIVE PRACTICES

The WGT is designed to discourage short-term speculative practices where individuals buy properties with the expectation of making a significant profit from rezoning decisions. Property owners may need to reconsider their investment strategies in light of this tax.

IMPACT ON PROPERTY MARKET SENTIMENT

The introduction of the WGT may influence property market sentiment, affecting both buyers and sellers. Some investors may become more cautious about purchasing properties in areas with potential for rezoning, while others may seek out properties with less speculative potential. The Seller may transfer the costs of WGT to the purchaser or other party when selling its property, which may trigger additional transfer duty liability.

NEED FOR EXPERT LEGAL ADVICE

The IP House Lawyers can provide property owners with expert legal advice to understand the tax implications specific to their property. Property owners are recommended to consult real estate experts and financial advisors.

For any further information or queries on the above content, please contact us.

The Author

Jean Kallmyr | Lawyer, The IP House Lawyers | t: 0435 799 831 | e: admin@theiphouse.com.au

Key Contact

Claire Darby | Managing Director/Lawyer, The IP House Lawyers | t: 0412 998 951 | e: claire@theiphouse.com.au

Disclaimer

The information and contents of this publication do not constitute any legal or financial advice. This publication is intended only for reference purposes for The IP House Lawyers’ clients and prospective clients.

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