Victoria’s Windfall Gains Tax Regime: Initial Bill introduced

The Victorian Windfall Gains Tax (‘WGT’) was first introduced during the 2021 and 2022 State budgets, but this is the first-time detailed information, scope and application has been released through the introduction of the Windfall Gains Tax and State Taxation and Other Acts Further Amendment Bill 2021 (‘Bill’). 

What is a Windfall Gains Tax?

WGT aims to tax property on the unrealised gain (windfall) that is the result of rezoning the land from one zone type to another. The commencement of WFT has been proposed as 1 July 2023 in the Bill. 

The tax payable will be calculated by reference to the taxpayers aggregated ‘taxable value uplift’ for all land that has been re-zoned. The uplift amount will be calculated by taking the difference between the land pre-rezoning and post-rezoning. Importantly, the Bill specifies that the calculation will be on the ‘capital improved value’ rather that the ‘site value’. 

The proposed tax rates are:

Unlike the tax-free threshold in the income tax regime, the tax-free threshold in WGT only applies where the taxable value uplift is less than $500,000. Uplifts over $500,000 are entirely taxable at 50%. Unfortunately, the Bill does not currently provide a mechanism for correction where the property is later sold at a lower cost. In addition, it should be noted that the cost of having land re-zoned, which can be quite significant, is not immediately deductible (where the land is held on capital account). This will further impact cashflow of many landholders. 

When will the Windfall Gains Tax be payable?

The current proposal has foreshadowed a deferred payment regime, to recognise that a rezoning event may occur many years after the rezoning decision that triggers that WGT. This is in line with the payment regime for the Growth Areas Infrastructure Contribution (‘GAIC’) regime. 

The current proposal, is that landowners will be able to pay the WGT at either:

• Time of rezoning decision, or
• Deferred period (most likely via election) until the next dutiable transaction or subdivision of the land

The deferred payment method recognises that payment is best aligned with a revenue generating event. However due to the different times that subdivision and revenue generating events occur, this will create further complexity in the payment model for the WGT regime. We hope that further clarity is provide when the legislation is enacted. 

Exemptions to Windfall Gains Tax

A number of exemptions will be available including:

1. Growth Areas Infrastructure Contribution areas: Where the rezoning causes the land to be brought into the ‘Growth Area Infrastructure Contribution’ area, it will be excluded from WGT

2. Land rezone to a Public Land Zone: Where land is rezoned to Public Land Zone, it will be excluded from WGT

3. Land previously zoned as residential (up to two hectares) with a dwelling fit for occupancy: Land that was previously used primarily for residential purposes (up to two hectares) and has a dwelling that is/can be occupied is excluded from WGT. The dwelling does not need to be a ‘main residence’ and can include investment properties.

4. Charities: Where land is exclusively used for charitable purposes and is used for a charitable purpose for 15 years after the rezoning event, it will be excluded from WGT. 

5. Land rezoned to rural land: Where the land is rezoned for Rural Zone (and not Rural Living Zone), the uplift will be excluded from WGT. 

6. Transitional relief: Where lands is subject to a contract for sale before 15 May 2021 and the transfer has not occurred before the rezoning event, the uplift will be exempt from WGT. Further, land that was subject to a planning scheme amendment and has made the appropriate application in relation to the rezoning, the uplift will be excluded where the uplift the threshold of the lesser of 1% of the capital improved value prior to rezoning or $100,000). The transitional relief is quite complex, and further analysis for eligibility will be required once the legislation is enacted.

Aggregation and Grouping

To ensure that taxpayers do not access multiple tax-free thresholds for WGT, it has been proposed that all landholdings of the taxpayer that are affected by a rezoning event are aggregated. Further, companies and trusts will be grouped with their ‘controllers’.

There is currently a gap in the Bill and Explanatory Memorandum for discretionary trusts. Under the current Bill, discretionary trusts that are landowners will be grouped with other discretionary trusts in a family group.

Interaction with Federal Taxes

As WGT effectively taxes an unrealised capital gain, there is a real question about the interaction with Federal capital gains tax (‘CGT’). Complexities that have been identified by practitioners include the potential double taxation that isn’t covered by a regime similar to the Foreign Income Tax Offset (‘FITO’), whether the WGT will form part of the cost base for land on capital account, whether the WGT paid will be deductible for land on revenue account, and whether the current Federal limitations on deductions for vacant land will limit the deductibility of WGT paid for vacant land. 

How can Tax Controversy Partners help you?

Firstly, it is important that you carefully consider your position as early as possible if the land you own is subject to rezoning. You becoming liable to an unexpected taxation debt arising the WGT rules are not carefully considered can impact your cashflow and your potential profits from the property. More guidance on this newly introduced State tax will be published as further announcements are made. 

Obtaining legal advice before it is too late is important. As expert tax lawyers, we can provide you with detailed advice on your circumstances, guide you through making the best choices for you and help you to manage any engagement with the ATO or State Revenue Offices.  

At Tax Controversy Partners, our experienced lawyers can represent your best interests in providing advice that is compliant with the current case law and legislation and based on understanding likely ATO and State Revenue actions. 

Please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.