Practitioners need to understand the potential tax implications of their clients’ property, lending and commercial transactions and the Windfall Gains Tax is no exception.
Practitioners acting for landowners, developers, purchasers or lenders need to be across the incoming Windfall Gains Tax (WGT) (introduced by the Windfall Gains Tax and State Taxation and Other Acts Further Amendment Act 2021(Vic)) and how it impacts their clients’ transactions now. This tax has the potential to be a risk issue for practitioners if not understood and advice provided where appropriate ahead of its commencement on 1 July 2023.
WGT is a substantial tax on the increased value of most land in Victoria with limited exceptions. Landowners may incur significant WGT liabilities and there are potentially different tax outcomes for clients depending on how transactions are structured. This article explores the key features of the new tax, some key risk areas for practitioners and tips to avoid clams.
WGT applies to most land in Victoria that is rezoned land from 1 July 2023.
There is a tax-free threshold of $100,000. A tax rate of 62.5% will apply to value increases or ‘uplifts’ between $100,000 and $499,999 and a flat rate of 50% applies to value uplifts of $500,000 or more.
WGT is imposed on the landowner at the date of rezoning,. Limited exemptions apply for certain types of property including ‘residential’ land up to two hectares and land owned by charities used for charitable purposes for 15 years after the rezoning. Exemptions also apply to certain types of rezonings such as rezonings to public land zones, to and from the Growth Areas Infrastructure Contribution area and changes within a zone.
Landowners with multiple rezoned properties will be assessed for WGT on the aggregate value uplift of all land. Related companies and trusts may be grouped, with the potential result that companies or trusts within a group that don’t own rezoned land can be jointly and severally liable to pay WGT on rezoned land owned by other companies or trusts within the group.
Soon after rezoning the SRO will issue landowners with a WGT assessment with a due date for payment. Before the due date, landowners can elect to defer payment of the tax up to 30 years from the date of rezoning, or until the next ’dutiable transaction‘ such as when the land is sold, or to a ‘relevant acquisition’.
There are various ‘excluded dutiable transactions’ which will not bring the deferral period to an end. Interest accrues on deferred WGT and the deferred tax and interest will be a first charge on the land, ranking ahead of any existing mortgages.
Land values are determined by the Valuer-General after rezoning has occurred. There is a strict 60-day time limit for landowners to object to an assessment for WGT including the valuation on which the tax is applied.
Transition exemptions apply for land that is subject to a contract of sale or option entered before the announcement of the WGT on 15 May 2021 that has not been completed before the rezoning occurs.
Practitioners must ensure that clients proposing to buy, sell or develop land that is, will be, or maybe rezoned are informed of the potential WGT implications and the contractual arrangements clearly set out who is responsible for the tax. This may be difficult because the tax is incurred on the rezoning which is determined by the Minister for Planning under the Planning and Environment Act 1987 (Vic) and not the client. In addition, the amount of the tax is unknown and cannot be calculated until a revaluation of land is completed by the Valuer-General or their delegate.
There is also the potential for different outcomes in timing and payment of the tax depending on how transactions are structured. For example, a landowner that sells rezoned land to a developer will in most cases end any deferral of WGT and the tax liability will become payable in full at the time of settlement. On the other hand, if the landowner and developer instead enter into a development agreement to share the profits of any development, the deferral can remain in place and WGT won’t be triggered until the developed land is ultimately sold.
Clients need to understand the time-limit for deferring a WGT liability and the various events that could inadvertently bring the deferral period to an end. When advising on WGT deferral options and outcomes, practitioners also need to carefully consider and inform clients about the potential land transfer duty and economic entitlement tax implications, which may be different in each scenario. Practitioners should also be careful not to vary a contract or option for the sale of land entered before 15 May 2021, without investigating the consequences of losing the WGT exemption status, and clearly advising the client of their options.
Lending clients will also need to understand if there is deferred WGT liability and how that may impact the value of real estate used as security for a loan. They will also need to consider events that will end the deferral, the borrower’s ability to pay the tax and other cashflow considerations.
WGT is a complex tax that will impose significant liabilities. If practitioners do not have the expertise to advise fully on WGT or manage the objection process, they should refer clients for specialist tax advice from a suitably qualified tax lawyer and accountant.
|Practitioners should be alert to and warn clients of potential WGT implications of their transactions, including events that may trigger payment of deferred WGT. If you don’t have WGT expertise, refer clients for specialist tax advice.
|Keep up to date with new WGT developments by subscribing to SRO and industry alerts.
|For further information on WGT, see LPLC’s Windfall Gains Tax Alert and webinar ‘Beware the Sleeping Duties’ presented by Matthew Cridland, available on LPLC’s website.