Windfall Gains Tax sends shockwaves through Victoria’s real estate sector: navigating the complexities of WGT

Introduction:

The introduction of the Windfall Gains Tax (WGT), which will come into effect in Victoria on July 1, 2023 and has created a flurry of activity in the state’s real estate sector. The “value uplift” that comes about as a result of rezoning is its aim and it will have far-reaching effects.

After May 15, 2021, this tax will apply to any contracts that were signed after that date. Let’s look at the complexities, consequences, and potential dangers of WGT, and then break it down.

WGT focuses on the increase in land value that occurs when its zoning changes, such as when it goes from agricultural to residential use.

The rise in the land’s Capital Improved Value (CIV) as a result of the rezoning is subject to the tax, which is determined by the Valuer-General and applied to that increase. The landowner who is present on the rezoning day is the one who will have to face the consequences. A tax of 62.5 per cent is applied to any amount over $100,000 that is considered an uplift between $100,000 and $500,000. It is a flat 50 per cent on uplifts that are greater than $500,000.

Practical Scenarios:

1.     Mr. Pappas’ Bonanza: His commercial property undergoes a transformation into a residential one, and as a result, the CIV increases from $1.5 million to $2.2 million. A WGT of $400,000 is expected in      response to an uplift of $700,000.

2.     Ms Karas’ Break-Even: Her farmland is converted for commercial usage, which results in an increase in CIV from $250,000 to $350,000. The WGT does not apply to her because she has received an uplift      of $100,000, which is the threshold at which it does.

3.     In BigCorp’s Puzzle, the property owned by BigCorp goes from being used for agricultural purposes to being used for industrial purposes, and the CIV increases from $400,000 to $800,000. In this scenario,      WGT computes 62.5 per cent of the amount that is greater than $100,000, which totals to $187,500.

Alternative with Delayed Payment:

A deferral is permitted by WGT, but only under certain conditions. A first charge that is placed against the land is the tax, which causes interest to accrue. In most cases, the postponement of the tax payment is terminated when a later dutiable transaction, such as the sale of land, takes place.

The landowner who is present on the rezoning day is the one who will have to face the consequences. A tax of 62.5 per cent is applied to any amount over $100,000 that is considered an uplift between $100,000 and $500,000.

Finding Your Way Around the Obstacles:

1.     The Rezoning Clock: The dates for rezoning are important but are out of the owner’s control so contracts need to be carefully drafted by the developer’s lawyers, and they need to be prepared for      unexpected zoning changes.

2.     The Deferred Payment Quagmire: Putting off paying your WGT might seem like a good idea, but the interest that will accrue plus the fact that it will remain a first charge might put your property in a difficult      financial position.

3.     The Compliance Countdown: Considering that there is only a strict two-month window in which to object to WGT assessments, time is of the essence. If you don’t do this, your right to compete will be      forfeited.

Guidelines and Risk Management:

Landowners need to exercise caution and account on how the WGT impacts on their transactions. It is important for advisors to keep precedents up to date and to ask clients questions about rezoning and WGT. The methods of duty and payment for WGT should be made clear in the contracts. It is imperative that one always get a WGT property clearing certificate in order to determine any deferred WGT liabilities. It might be a good idea to seek advice of a skilled lawyer.

A Few Closing Thoughts:

WGT will revolutionise the Victorian real estate market and landowners and property developers need to proceed with caution when navigating this new landscape. The use of legal advice and representation, the examination of contracts and thus obligations, and the monitoring of compliance deadlines are absolutely necessary. WGT is the next power player in the exciting world of real estate; it’s essential that you use it appropriately.

*Disclaimer: The material that is presented in this article is intended solely for the purpose of providing general information and should not be interpreted as legal advice. Readers are strongly encouraged to consult with qualified professionals for any specific advice relating to Federal and or State taxes.