Victoria introduces windfall gains tax and build-to-rent land tax concession

15 minute read  15.10.2021 Gary Choy, James Hamblin, Melinda Waduge, Aaron Chisholm

On 12 October 2021, the Victorian Government introduced the long-awaited legislation containing the new 'windfall gains tax' and the build-to-rent land tax concession. In this alert, we note the key features of what is one of the most significant pieces of state tax legislation in recent years.

Key takeouts

  • Windfall gains tax of up to 50% to apply in respect of gains made as a result of most types of land rezonings other than those already subject to the Growth Areas Infrastructure Contribution regime.
  • 50% land tax concession (and absentee owner surcharge exemption) for qualifying build-to-rent projects for up to 30 years. Special land tax liability if fail to meet qualifying criteria for a continuous period of at least 15 years.
  • We do not expect there to be significant changes to the Windfall Gains Tax and State Taxation and Other Acts Further Amendment Bill 2021 prior to it becoming law.

On 12 October 2021, the Victorian Government introduced the Windfall Gains Tax and State Taxation and Other Acts Further Amendment Bill 2021 (Bill) into Parliament.

The Bill is one of the most significant pieces of state tax legislation in recent years. It sets out:

  • the detailed mechanics for the imposition of the windfall gains tax (WGT) that was first flagged in the 2021-22 Budget;
  • the criteria to be satisfied in order for build-to-rent (BTR) projects to qualify for generous land tax concessions (first announced as part of the 2020-21 Budget); and
  • various other duty and tax measures.

Windfall gains tax

After targeted consultation following the announcement of the WGT in the 2021-22 Budget, the Victorian Government remains committed to its proposal to capture a 'fair share' of the private economic profits arising from rezonings of land. The Bill reflects a number of changes that the Government has made in response to feedback and concerns raised by stakeholders during the consultation process.

Commencement date and transitional arrangements

One hotly debated issue was the proposed date from which the WGT regime would apply. The Government initially proposed a 1 July 2022 start date, however this has now been postponed by one year. WGT will only be triggered if a relevant rezoning (a 'WGT event') takes effect under the Planning and Environment Act 1987 on or after 1 July 2023.

The May 2021 announcement of the WGT caused great concern for some taxpayers that had rezoning projects or associated arrangements already underway. Pleasingly, the WGT will not apply where land is rezoned on or after 1 July 2023 if prior to 15 May 2021:

  • Pre-existing contract of sale or option: A contract of sale or an option to acquire land was entered into (and the sale had not completed before the rezoning occurred). For land that is the subject of a pre-15 May 2021 option, the terms of the contract of sale for the land must have been settled at the time that the option was granted. This excludes, for example, a right of first refusal where the price and other terms of sale have not been settled.
  • Rezoning underway: A proponent-led rezoning process had been sufficiently progressed, and the owner had incurred specified costs above a 'threshold amount' (being the lesser of $100,000 or 1% of the pre-rezoning valuation). We expect that disputes could arise in relation to the calculation of such costs – it will be important for affected taxpayers to maintain good records in this regard.

In addition to the above transitional exemptions, the Bill excludes various types of rezonings from the WGT regime and also provides for various other exemptions (refer below).

How the WGT will be calculated

The WGT will be imposed (at a rate of up to 50%) on the 'taxable value uplift' that results from a WGT event.

Taxable value uplifts up to $100,000 will not be taxed. For a WGT event which results in a taxable value uplift:

  • above $100,000 but below $500,000, a tax equal to 62.5% of the taxable value uplift above $100,000 will be imposed (noting that this equates to an effective tax rate less than 50%); or
  • of $500,000 or more, a tax equal to 50% of the taxable value uplift will be imposed.

In the case of a WGT event occurring in respect of multiple titles that are held by the same owners (or the same group of companies / trusts), the Bill includes integrity provisions which can operate so that the benefit of the tax-free threshold is only available once.

The taxable value uplift of the relevant land is defined as the 'value uplift' less any deductions prescribed by the regulations.

Broadly, the value uplift will be equal to the increase in the 'capital improved value' (CIV) of the land as a result of the WGT event. The CIV is the Valuer-General Victoria's (VGV) estimate of the unencumbered market value of the land including improvements. The post-rezoning CIV will be based on a supplementary valuation prepared by or on behalf of the VGV, by reference to the same date as the pre-rezoning CIV valuation date (but assuming the new zoning applied to the land at that time).

Given the subjectivity inherent in a hypothetical valuation exercise, we expect to see a rise in valuation disputes following the introduction of the WGT. The Bill gives taxpayers objection rights in this regard.

The Government has not provided guidance on what deductions might be available in determining a taxable gain. To ensure that the taxable gain approximates a taxpayer's true economic gain, arguably a series of costs should be deductible (including costs incurred as part of the rezoning process, for example costs associated with any pre-rezoning remediation requirements).

Who is liable to the WGT

The owner of the land at the time of a WGT event will generally be the person liable to pay WGT. There are limited circumstances in which a transferee of land can make an election to assume the WGT liability (and any interest that may have accrued following an election to defer that liability).

For income tax purposes, we expect that WGT will generally be either deductible or included in a taxpayer's CGT cost base. Consequently, in most instances WGT collected by the Victorian Government is likely to be at the expense of the Federal Government's income tax collection.

When the WGT is payable

The Commissioner of State Revenue (Commissioner) will issue a notice of assessment of the WGT liability to the landowner specifying the pre-rezoning value, post-rezoning value, taxable value uplift, WGT liability and the due date for payment (typically 60 days from the date of assessment).

Recognising that some landowners will not have the capacity to pay the WGT liability at the time of rezoning, all landowners will have the ability to defer payment until a later date. This mechanism is welcome given that it will generally better align the due date for payment with the time that the landowner realises any economic gain from the rezoning.

Similar to the GAIC deferral regime, a landowner that wishes to defer payment of a WGT liability must notify the Commissioner prior to the original due date for payment. Interest will be payable and accrue daily on a deferred WGT liability at the Victorian 10-year bond rate (1.52% at August 2021).

The WGT liability may be deferred until the first of the following events, at which point the deferred WGT liability and all accrued interest must be paid to the Commissioner within 30 days:

  • the next 'dutiable transaction' that occurs in relation to the land (other than certain excluded dutiable transactions) – generally this would be a transfer of land pursuant to a contract of sale;
  • the next 'relevant acquisition' that occurs in relation to a 'landholder' company or unit trust that is the owner of the land (other than an excluded 'relevant acquisition') – an example of a typical 'relevant acquisition' would be the acquisition of 50% or more of the shares in a company that holds the relevant land; or
  • the expiration of 30 years after the WGT event – this ensures that taxpayers cannot indefinitely defer payment of a WGT liability.

The following events will not cause a WGT deferral arrangement to come to an end:

  • an acquisition of an economic entitlement in relation to the land;
  • the transfer of the land to a legal personal representative of a deceased registered proprietor;
  • a dutiable transaction for no consideration where the transferee elects to assume the deferred liability;
  • a dutiable transaction between charities if the land has and will be used continuously and exclusively for charitable purposes after the WGT event and where the transferee elects to assume the deferred liability (see our comments below regarding a waiver for charitable land);
  • a 'relevant acquisition' for landholder duty purposes where, broadly:
  • an existing investor (or an associate) increases their interest in the landholder entity; or
  • all shareholders or unitholders in the landholder entity make a pro rata acquisition of interests in the entity.

Importantly, WGT deferral arrangements will not cease due to a subdivision of the land. If a plan of subdivision is registered in respect of the relevant land, the WGT liability (and accrued interest) will be apportioned to each lot created by that plan of subdivision by reference to the proportional area comprised by each lot (excluding roads, reserves or common property). This carve-out is important in aligning the payment of WGT with the realisation of the economic benefit of the rezoning.

If the WGT is not paid

Failure to pay a WGT liability (and / or interest in the case of a deferred WGT liability) by the due date will constitute a 'tax default' for the purposes of the Taxation Administration Act 1997 (Vic). This may give rise to additional interest and / or penalty tax being imposed by the Commissioner.

Further, unpaid WGT (including any deferred WGT and accrued interest) is a first charge on the land to which the WGT liability relates and will have priority over all other encumbrances on the land. This mechanism is similar to that in other state taxes contexts (e.g. unpaid land tax). Accordingly, the commercial impact of the statutory charge on the landowner's borrowing capacity, finance arrangements and debt covenants will need to be monitored.

The Bill provides for the inclusion of WGT liabilities on clearance certificates to give certainty to purchasers in respect of any unpaid or pending WGT liability.


Excluded rezonings

The following rezonings will not trigger a WGT liability even if they were to result in an increase in land value:

  • rezoning to a GAIC contribution area, or the first rezoning of a GAIC contribution area after 1 July 2023;
  • rezoning to (but not from) a public use zone;
  • rezoning between schedules in the same zone; and
  • rezoning from or to a zone that is declared by the Treasurer in the Government Gazette to be an excluded zone. The Treasurer has announced an intention to use this power (prior to the commencement of the WGT) in order to exclude rezonings of agricultural land to a Rural Zone (other than the Rural Living Zone).

Residential land

'Residential land' that does not exceed 2 hectares and has a dwelling affixed to it is exempt from WGT, regardless of whether the dwelling is the owner's principal place of residence.

The concept of 'residential land' is specifically defined for the purposes of the WGT regime. Broadly, land will not be 'residential land' unless it currently has an existing residence on it (including residences under construction or renovation). Accordingly, greenfield developers will generally not be able to access this exemption even if they have an intention to develop residential premises.

If the size of the residential land exceeds 2 hectares, the taxable value uplift is proportionately reduced to spread the benefit of the 2 hectare exemption across each title.

Importantly, 'residential land' generally does not include commercial residential premises, a residential care facility, a supported residential service or a retirement village (those terms each being specifically defined in the Bill). These carve-outs are similar to those used for the purposes of the foreign purchaser additional duty regime. They will need to be considered carefully for each matter, noting that relevant definitions differ to those used in planning schemes.


Where a WGT event occurs in respect of land that is owned, used and occupied by a charity exclusively for charitable purposes, an upfront exemption is not available. However, the Bill provides for a full or partial waiver of the WGT liability (including any interest payable) if the charitable land remains as charitable land continuously for 15 years after the occurrence of the WGT event.

Rezoning errors

Land that is rezoned to correct an obvious or technical error in the Victoria Planning Provisions or a planning scheme is also exempt from WGT. In such circumstances, a taxpayer will generally have rights to a reassessment and refund in respect of an earlier WGT liability.

BTR land tax concessions

In an effort to support investment in the BTR sector, in its 2020-21 Budget the Victorian Government announced a proposal to provide qualifying BTR projects with a 50% land tax concession and a full exemption from the 2% absentee owner land tax surcharge (AOS) for the period from 2022 to 2040.

Following industry and stakeholder consultation, these concessionary measures (referred to in the Bill as 'BTR benefits') have been extended to a period of up to 30 years. These measures provide significant annual tax savings for owners of eligible BTR developments.

Various aspects of the model compare favourably to the recently legislated regime in New South Wales (which is currently proposed to end in 2040): NSW announces Land Tax discounts for build-to-rent developments. Unlike New South Wales, the Victorian model has no mandated labour requirements for construction and no minimum quota for affordable / social housing. Further, the Victorian model caters for subdivision of the site.

The Bill sets out the following eligibility criteria:

  • There must be at least 50 self-contained dwellings (newly constructed or substantially renovated) fixed on the same parcel of land.
  • The dwellings must be owned by a single person / entity or 'owned collectively' (i.e. all co-owned by same persons / entities).
  • Unless dwellings are provided for affordable or social housing purposes, the dwellings must be managed by a single entity.
  • The dwellings are issued occupancy permits between 1 January 2021 and 31 December 2031 (i.e. developments that commenced operation in the 2021 calendar year may be eligible, however existing or future dwellings that have been issued permits outside the specified period are not eligible).
  • The dwellings must be rented or available for rent under a 'residential rental agreement' for a fixed term of at least 3 years (unless the tenant and owner agree otherwise).

To maintain the BTR benefits, a BTR development must satisfy the eligibility criteria for at least a continuous period of 15 years, and up to the maximum 30 years. Future dwellings can be added as part of the eligible BTR development provided the eligibility criteria for the whole BTR development is satisfied. For an additional dwelling, the continuous 15 year period requirement commences from the date that an occupancy permit is issued for the dwelling.

If a BTR benefit has been applied to land and there is a change in circumstances that results in the land or part of the land no longer being used and occupied solely for an eligible BTR development, there is an obligation on the owner to notify the Commissioner within 30 days of that change in circumstance. Where the change in circumstance results in a breach of the continuous 15 year period requirement, a liability for a 'BTR special land tax' will be triggered. The BTR special land tax is essentially a clawback of the BTR benefits obtained over the period, plus a charge of interest based on the Commonwealth 10-year bond rate. No BTR special land tax will be charged in the event that there is a change in circumstances after the continuous 15 year period has elapsed. It will be important to ensure that all criteria is maintained for the required period, particularly if there are staggered starts for occupancy dates for dwellings in the BTR development.

A new owner (or co-owners) of an eligible BTR development that can satisfy (and continue to meet) the requirements for the BTR concession may be able to retain the BTR benefits following a change of ownership.

As the eligibility criteria for BTR benefits requires the issue of an occupancy permit, full land tax and AOS will still generally be payable during any pre-development holding or construction phase. However, subject to meeting certain criteria under the existing exemption regime that is administered by the State Revenue Office, foreign purchasers / owners of development sites may still be able to obtain:

  • an exemption from the 8% foreign purchaser additional duty surcharge in respect of the acquisition of the site; and
  • an exemption from the AOS during the construction phase.

The Victorian Government has indicated that it will assist with facilitating planning assessments, as well as advance the case for BTR discussions with the Commonwealth. From a Federal tax perspective, we note that income tax and GST outcomes remain a potential disincentive to investment in the BTR sector.

Other amendments

The Bill also proposes a number of other changes to the Victorian tax regime including to:

  • require charitable institutions to physically occupy land exclusively for charitable purposes in order to qualify for a land tax exemption (this change being made in response to the outcome of the recent case of University of Melbourne v Commissioner of State Revenue [2021] VSC 156);
  • remove the land tax exemption for private gender-exclusive and gender-restrictive clubs unless the Commissioner is satisfied that the club has genuinely opened membership to all sexes and gender identities;
  • extend a point of consumption framework to keno tax to ensure that providers of keno products pay tax on their net wagering revenue from Victorian customers regardless of where the provider is located;
  • provide an exemption from duty for vehicles that are specially converted for wheelchair access;
  • provide for tax offsets in relation to emergency tax relief measures and clarify that a taxpayer cannot object to an assessment or decision relating to these measures;
  • provide for the recovery of administrative overpayments; and
  • provide for technical amendments to the State Taxation and Mental Health Acts Amendment Act 2021 to rectify errors in certain formulae for calculating the mental health and wellbeing surcharge which is set to commence on 1 January 2022.

While we await the passage of the Bill through Parliament, we do not expect there to be significant changes prior to it becoming law.

Our team is well placed to assist existing and prospective owners and developers of land that may be impacted by the WGT or BTR regimes. Please contact us if you have any questions regarding how these changes might impact you, your business or your investments.


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