There is an ‘interesting’ issue about how a new bread of State ‘gains’ taxes on land gains, sit with Federal taxes on gains of most asset types. The new bread of State taxes are regimes to capture part of the gain arising from rezoning of land. The key issue is whether one exaction can be used to reduce the taxable gain for the other, or whether neither will count in calculating the taxable gain for the other (and there’s a real risk of this). Another issue is whether the state legislation is constitutionally invalid, as being inconsistent with the Federal legislation that imposes both income tax and capital gains tax. The argument would have to be that the federal taxing legislation ‘covers the field’ (which seems unlikely, but I might publish further on this, in due course).
Victoria already has so called ‘Windfall Gains Tax’ (WGT) legislation, which will commence on 1 July 2023. I’ve set out below, a summary of its operation (taken from SRO website). I understand that New South Wales has also recently proposed a value capture mechanism where permitted use of the land is changed, and the Australian Capital Territory already has an existing Lease Variation Charge that is a similar form of value capture or betterment tax.
The Victorian system is (broadly) to tax 50% of the uplift in value, pre and post the rezoning, and then allow payment to be deferred, at 10-year bond rate interest, until the next dutiable transaction, or 30 years (which ever is the later). This system seems to be based on the Valuer-General’s pre & post rezoning values, without regard to any federal CGT, which wouldn’t be imposed at that time, in any event, as the rezoning is not a CGT event.
For general income tax purposes, the state impost ought to form part of the ‘cost’ of land held as ‘trading stock’, and similarly as part of the cost used to calculate the assessable portion, of the sale proceeds, brought to assessment, for land held as part of a profit making undertaking or scheme.
For Federal CGT, the answer is less clear. It will depend on whether the State impost can form part of the land’s ‘cost base’. The key provision is s110-25 of the ITAA97, which sets out the 5 elements of an assets cost base. It is in the following terms.
SECTION 110-25 General rules about cost base
110-25(1) The cost base of a *CGT asset consists of 5 elements.
110-25(2) The first element is the total of:
(a) the money you paid, or are required to pay, in respect of *acquiring it; and
(b) the *market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition).
110-25(3) The second element is the *incidental costs you incurred. These costs can include giving property: see section 103-5 . [see s110-35]
110-25(4) The third element is the costs of owning the *CGT asset you incurred (but only if you *acquired the asset after 20 August 1991). These costs include:
(a) interest on money you borrowed to acquire the asset; and
(b) costs of maintaining, repairing or insuring it; and
(c) rates or land tax, if the asset is land; and
(d) interest on money you borrowed to refinance the money you borrowed to acquire the asset; and
(e) interest on money you borrowed to finance the capital expenditure you incurred to increase the asset ‘ s value.
These costs can include giving property: see section 103-5 .
110-25(5) The fourth element is capital expenditure you incurred:
(a) the purpose or the expected effect of which is to increase or preserve the asset ‘ s value; or
(b) that relates to installing or moving the asset.
The expenditure can include giving property: see section 103-5 .
110-25(6) The fifth element is capital expenditure that you incurred to establish, preserve or defend your title to the asset, or a right over the asset. (The expenditure can include giving property: see section 103-5 .)
Finding a ‘cost base’ slot for a rezoning land value recapture tax (like the Victorian WGT) is no ‘slam dunk’. The candidates are as follows.
- The most prospective might be the ‘third element’. A tax that partially recaptures value increases from rezoning land is not ‘land tax’ as currently understand it, but that our understanding arises prior to these recapture taxes on land, and they may answer the description of ‘land tax’ (because they are a tax on land).
- It is quite likely that the WGT is included in the Third Element of the cost base, under its general words: “costs of owning the [land] you incurred” noting that the section merely says that this general test stands on its own and merely ‘includes’ the following list of 5 costs.
- Another (more remote) possibility is that it is part of the Second Element of the land’s cost base, as an ‘incidental cost’. Section 110-35(4) lists ‘stamp duty or other similar duty’. The WGT is not imposed under the Victorian Duties Act, but it may well be a ‘similar duty’. ‘Stamp duties’ doesn’t really exist now – no longer is it a duty on documents, but an impost on transactions. The most common form of duty, is on transfers of land, but it comes in many other forms. So what is ‘similar’ is an interesting question (there’s that word again: ‘interesting’).
Requesting the Commissioner to rule on such issues, would seem to be an important issue.
Likewise, bringing it to the attention of Treasury, the relevant minister’s office, the IGOT or the chair of the relevant Parliamentary Committee, could be productive.
The Victorian ‘Windfall Gains Tax’
What is the windfall gains tax?
From 1 July 2023, a windfall gains tax (WGT) will apply to land that is subject to a government rezoning resulting in a value uplift to the land of more than $100,000.
A rezoning is an amendment of a planning scheme that causes land to be in a different zone from the zone that it was in immediately before the amendment. The taxable value uplift is the difference in the capital improved value (CIV) of the land before and after the rezoning takes effect, less any deductions. The Valuer-General Victoria will be responsible for determining the value of the land before and after a rezoning. These valuations will be based on the CIV of the relevant land.
How much is the windfall gains tax?
For a rezoning of land that results in a taxable value uplift:
- more than $100,000 but less than $500,000: the tax will apply at a marginal rate of 62.5% on the uplift above $100,000
- $500,000 or more: a tax rate of 50% will apply to the total uplift.
Are there any exclusions?
A small number of rezonings are excluded from WGT:
- rezonings to and from the Urban Growth Zone within the Growth Areas Infrastructure Contribution (GAIC) area, recognising that these properties are already subject to GAIC
- rezonings to Public Land Zones to reflect that such land will be used for public purposes.
Additionally, transitional arrangements exempt some rezonings which were underway by the announcement date of 15 May 2021, as well as rezonings of land which were subject to a pre-existing contract of sale or option arrangement entered into by 15 May 2021.
Are there any exemptions?
Exemptions are available for:
- land that is capable of being used for residential purposes at the time of the rezoning, up to a maximum of 2 hectares of such residential land, owned by the same owner or group and rezoned by the same planning scheme amendment
- in relation to rezonings, to correct obvious or technical errors in the Victoria Planning Provisions or a planning scheme.
A waiver is also available for land owned by a charity if the land is used and occupied by a charity exclusively for charitable purposes for 15 years after the rezoning.
Who pays WGT?
The owner of the land that is subject to the rezoning pays WGT.
Grouping and aggregation provisions can apply so that the $100,000 threshold applies only once to properties owned by the same owner or group of owners and rezoned under the same planning scheme amendment.
When does WGT have to be paid?
Owners of land liable to pay WGT will be issued with a WGT assessment with a due date for payment.
They will have the option to defer payment of any liability until the next dutiable transaction (or relevant acquisition) occurs, or until 30 years after the rezoning event, whichever occurs first. Certain excluded dutiable transactions and relevant acquisition will not cease deferral.
Who administers the WGT?
WGT will be administered by the Commissioner of State Revenue (Commissioner) as a taxation law under the Taxation Administration Act 1997 (TAA), which provides rights of objection to the valuations used in the calculation of WGT.
Unpaid or deferred WGT will constitute a first charge on the relevant land, with provision to include WGT information on property clearance certificates issued under the TAA.
SRO website
[Tax Month – May 2022 – Previous Month, 13.5.22]