New rezoning taxes coming for Victoria and NSW landowners

On July 1, Victoria lifted the stamp duty rate for properties valued over $2 million and plans to slug individual farmers millions of dollars in "windfall gains" taxes when their properties are rezoned from July 1 next year.

At the same time, the NSW government is reviewing its property taxes, openly canvassing what it calls "infrastructure contributions system".

It's designed to tax some of the increase in property values that flow from rezoning of land by councils, which is called "property uplift value-capture" in policy circles.

The new Victorian tax is on the "windfall gain" or "property value uplift", which is the difference rezoning makes to the value of a property. If, for example, a farm valued at $3m is revalued at $9m by the Valuer-General Victoria after it is rezoned from rural to residential, the windfall gain or uplift is $6m.

If that windfall gain is less than $100,000, it won't be taxed but if it is $100,000 to $500,000, the government will take a 62.5 per cent slice. For more than $500,000, it will take half.

So, in our example, the Victorian landowner would have to pay $3m in tax.

Because rezoning doesn't instantly deliver that windfall, the Victorian government's advisory says taxpayers will have the option to defer paying the liability until the land is sold or subdivided.

"This mitigates cash flow issues for some landholders when the tax liability is incurred at the time of the rezoning," the advisory states.

It will still be difficult for farmers to take property from subdivision through to settlement, Pitcher Partners executive director and property taxation expert Craig Whatman said.

"When the subdivision of that land occurs, the landowner's still not getting any revenue because the subdivision can be years away from actually settling the lots and getting the revenue from the purchasers of that land," he said.

"On subdivision, that liability could crystallize and there's no way the farmer is going to have the cash to pay that liability, so it's a significant issue.

"It's an absolute nightmare of a tax that the government's bringing in and they really don't understand how it's going to flow through the supply chain to property prices for ordinary purchasers buying these lots."

There is one more catch, too. While the Victorian government advisory doesn't mention it, the current proposal under consultation suggests that interest would have to be paid on the deferred tax bill.

Rezoned land right across Victoria will be captured by the windfall gain tax, except for properties in the Urban Growth Zone around Melbourne.

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The NSW government is less clear about the process it will follow in its parallel proposal, which it calls the "infrastructure contributions system".

It has, however, already laid out that it will, "apply a statutory charge on the land at the time of rezoning that requires land contribution be made or require the contribution on sale of the land, or subdivision development application, whichever comes first."

A spokesperson for the Department of Planning, Industry and Environment said the system would not impact farmers until the land use changed.

"While the charge is applied at the time of rezoning, it is not payable until the sale or development of the land," the spokesperson said.

"There are no annual payments beforehand."

While the NSW proposal is also undergoing consultation, it appears councils will be allowed to vary the way the infrastructure contribution is applied.

"Councils will have more choice and control over how they charge these contributions," the department spokesperson said.

"They can either put a general levy on development at one to three per cent of construction cost, or a detailed contributions plan based on the specific infrastructure needed that determines the rate to be paid."

Victorian Farmers Federation president Emma Germano said the state farmer lobby group was largely left in the dark about the windfall gains tax.

"We asked immediately for a briefing and got some rough notes on it, but no decent consultation," she said.

"We certainly haven't seen a paper or anything to say 'here is what we're thinking' or been asked about the implications."

Ms Germano said the mounting interest costs, coupled with rising municipal rates, could be crippling for farmers.

"The unintended consequences of this tax could mean that farmers are forced off their land, and we lose prime agricultural land," she said.

"On the flip side, it could be that, where we want to open up areas for development, the increase in the tax is going to make it not feasible to do so.

"None of the consequences have been thought through."

NSW Farmers president James Jackson is not opposed to the concept of infrastructure contributions.

"I think the idea of capturing some windfall gains from rezoning or infrastructure development to help pay for infrastructure is a reasonably modern way of funding some of those infrastructure projects we need," Mr Jackson said.

"The principle that all the beneficiaries should chip in is probably sound."

But to win the support of the farmer lobby body, the system will need to be free of unintended consequences for farmers near growing regional centres.

"If the intention is just to help pay for critical infrastructure, there probably is merit," Mr Jackson said, "but if the intention is to tax people who happen to have a block at the edge of town and the substantial change in the value of those properties is not related to a specific piece of infrastructure, I'll probably disagree with that," Mr Jackson said.

"The devil is in the detail of exactly how far ranging the tax is intended to be."