Windfall Gains Tax – What are the CGT and GST implications?

Windfall Gain Tax (WGT) is a tax levied on Victorian land that becomes rezoned after 1 July 2023 resulting in an uplift in the value of the land of more than $100,000. The policy behind the tax is to enable the Victoria State Government to access and use a share of the profits from rezonings for the community, such as to fund vital infrastructure such as public transport and schools.

Land can be rezoned in a number of ways including the landowner making a request to have their land rezoned or as part of a broader change to the area promoted by a planning authority. The person liable for WGT is the owner of the land at the time of rezoning. If a person or entity owns multiple parcels of land that become rezoned under the same planning scheme, their WGT liability is assessed on the aggregated taxable value uplift of all the land that they owned that was rezoned.

The taxable value uplift is the difference between the capital improved value of the land before and after rezoning takes effect, as determined by the Valuer-General Victoria. The assessment of any WGT is as follows:

• taxable value uplift of not more than $100,000, will result in a WGT of $nil;
• taxable value uplift of more than $100,000 but less than $500,000, will result in a WGT of 62.5% on the part of the taxable value uplift that exceeds $100,000;
• taxable value uplift of more than $500,000, will result in a WGT of 50% of the total value uplift.

CGT – Does WGT from part of the property cost base?

In the context of CGT, specifically the cost base of an asset, the pertinent question is whether a landowner who is liable for WGT can include the tax in the cost base of the rezoned land.

Broadly, capital expenditure forms part of an asset cost base if it falls within one of the five elements of cost base as set out under the general cost base rules in s.110 ITAA 1997, and these are:-

• the first element of the cost base generally refers to the cost of acquiring the CGT asset;
• the second element of the cost base are incidental costs incurred with acquiring a CGT asset or relating to a CGT event. Such incidental costs must also fall within the categories listed in s.110-35 ITAA 1997;
• the third element of the cost base are costs incurred of owning a CGT asset (but only if the taxpayer acquired the asset after 20 August 1991);
• the fourth element of the cost base refers to capital expenditure incurred, the purpose or expected effect of which is to increase, or preserve the asset’s value, or which relates to installing or moving the asset; and
• the fifth element of the cost base is capital expenditure incurred by a taxpayer to establish, preserve or defend the taxpayer’s title to the asset or a right over the asset.

WGT is a tax that arises from the rezoning of land. It is not a cost associated with acquiring the rezoned land. The rezoning of land does not give rise to any CGT event. So, prima facie, the tax is neither first element, nor second element of the cost base of the rezoned land. If WGT were comparable to stamp duty or other similar duty, it would still be excluded from second element of the cost base because it is not a cost relating to acquiring a CGT asset or to a CGT event. The tax neither enhances nor preserve the value of the rezoned land, nor is it a cost incurred in defending title to the land. Rather, it is a fiscal impost by the State Government as a consequence of windfall/unrealised capital growth; including in situations where the gain may arise wholly outside the landowner’s control (e.g., rezoning undertaken as a result of urban sprawl). It is therefore unlikely that WGT qualifies as fourth element cost base, as it is incurred as a consequence of the rezoning, whereas fourth element expenditure is incurred for the purpose or expected effect of increasing the land’s value.

It is at best only arguable whether WGT can qualify as third element cost base – prima facie it represents a cost of owning the land. However, the counter argument is that the tax is triggered by rezoning, rather than by the ongoing ownership of the land and if this is correct, then it would be excluded from being within the scope of third element of the cost base. There is therefore a risk that WGT may not form part of the cost base of the rezoned land.

In the more than two years since WGT began, the ATO has not publicly ruled as to whether it is included in cost base, so the concerns above remain.  No private rulings have issued on the matter either.

If the tax is excluded from the cost base of land, could the tax qualify as black hole deduction under s.40-880 ITAA 1997? In order for s.40-880 to apply the capital expenditure must be business related and does not fall within any of the categories of exclusion in s.40-880(5). Arguably, if the rezoned land in question is used in the course of the landowner’s business (or alternatively a business that used to be carried on, or a prospective business), it may be possible for the tax to be deductible under s.40-880 as business-related capital expenditure of a kind not otherwise recognised for tax purposes.  Again, there is no ATO guidance to assist taxpayers here.

WGT and GST

From 1 January 2024, vendors are prohibited from passing on a WGT liability to a purchaser under a contract of sale of land or option agreement in certain circumstances, where the liability has been in assessed in a notice of assessment.

So, if WGT is excluded from the purchase price and if the sale of the rezoned land is subject to GST, it will be based solely on the market value of the land (as opposed to land value plus the WGT component); thereby ensuring that the WGT itself does not form part of the consideration on which GST is calculated.

The effect of this is to impose GST on the WGT liability.

Exemptions and exclusions from WGT

There are various excluded or exempt rezonings and relief for certain landowners. For example, WGT will not be imposed with respect to rezoned property that is used primarily for residential purposes (up to 2 hectares). For primary production land with a residence, it is not necessary that the land be used primarily for residential purposes. However, the farming activity conducted on the land must meet the definition of primary production for land tax purposes. For more information regarding WGT exemptions and exclusions refer to SRO website here.

Food for thought…

Unpaid or deferred windfall gains tax will constitute a first charge on the land that ranks ahead of any existing mortgage or charge on the land. Accordingly, it would be prudent for potential buyers or sellers to request for a property clearance certificate to confirm how much tax is secured by a charge on the land, so that they can ensure the vendor pays the WGT in full as part of settlement. For more information about WGT including FAQs, please visit the SRO website here.

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