The Victorian Government has recently announced new and increased taxes in relation to land.

These changes are likely to significantly impact land owners, land developers, and ultimately private buyers of land looking to get into the housing market.

We are already seeing the real-world impacts of these changes, including:

• proposed developments being paused due to uncertainty and lack of confidence
• proposed developments being halted altogether due to no longer being considered feasible because of the increased costs
• projects being moved interstate to lower taxed regions
• all of the above ultimately impacting Victorian consumers by increasing the cost of land, decreasing the supply of land, and therefore potentially forcing private buyers out of the housing market.

We outline below details around the changes, likely impacts, as well as modelling conducted by the Urban Development Institute of Australia Victoria (UDIA Victoria) that highlights the significant impact these changes are likely to have.

What are the changes?

The changes include:

• Land tax increases
• Land transfer duty (stamp duty) increases
• Windfall gains tax (rezoning tax)

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Land Tax

Changes to land tax rates, being:

• For holdings between $1.8 million and $3 million, there will be an increase of 0.25% on the amount above $1.8 million (to become $9,375 plus 1.55% of the amount above $1.8 million); and
• For holdings above $3 million, there will be an increase of 0.30% (to become $24,975 plus 2.55% of the amount above $3 million).

Value of land holding	Current rate	Proposed rate
$1.8 million – $3 million	$9,375 plus 1.30% of amount above $1.8 million	$9,375 plus 1.55% of amount above $1.8 million
>$3 million	$24,975 plus 2.25% of amount above $3 million	$24,975 plus 2.55% of amount above $3 million

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Stamp Duty

For property transactions with dutiable value over $2 million, the stamp duty rate will increase from 5.5 to 6.5%.

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Windfall Gains Tax (rezoning tax)

The introduction of a rezoning tax is aimed at levying a tax on the uplift in value of land due to rezoning.

The new rezoning tax would be:

• a tax-free threshold for value uplifts up to $100,000
• for value uplifts between $100,001 to $500,000, a tax rate of 62.5% of the uplift above $100,000
• for value uplifts above $500,000, a tax rate of 50% of the total uplift.

The changes to property taxes are forecast to raise $2.4 billion over the Budget Forward Estimates.

Commencement dates

Stamp duty increases will apply from 1 July 2021 and are being given effect through the State Taxation and Mental Health Acts Amendment Bill 2021.

Land tax increases will apply from 1 January 2022, and are being given effect through the State Taxation and Mental Health Acts Amendment Bill 2021.

Rezoning tax will be subject to separate legislation and commence from 1 July 2022.

What is the impact of the changes?

Taxes, fees and charges are all inputs towards the cost of development. A project must be feasible for it to proceed, with developers directly requiring a minimum internal rate of return (which is unique to each developer’s, and the project’s, own circumstances), as well as both debt financiers and equity investors.

Often, in order for a project to remain viable, a developer will need to pass through the costs of development to homebuyers. If a project does not meet these requirements, the parties will not deploy their time, capital and effort. In some cases, this capital will be deployed interstate.

The proposed property tax amendments are likely to further reduce the number of projects that are viable and proceed to construction. The combined impact will reduce new housing supply while simultaneously increasing the cost of new housing, thereby forcing more Victorians out of the private housing market.

There is also the lack of clarity regarding how, and at what point, the rezoning tax will be applied, which is already creating significant uncertainty, and meaning investment decisions for sites that may be subject to the rezoning tax are already being indefinitely put on hold.

Increasing property taxes that directly impact on the viability of residential development is inconsistent with a range of other State Government initiatives that seek to reduce the cost burden on residential development (for example, the current Infrastructure Contributions Advisory Committee) and deliver new housing to market in a more timely manner (for example, Planning Systems Reform).

The property tax increases are likely to have a range of intended and unintended consequences on the residential development sector, the future location of new housing, and the cost to the home buyer of new housing. These are outlined below:

Impacts of the amendments to land tax and stamp duty:

• Land tax and stamp duty increases likely to increase the cost of new housing
• This may reduce the number of new dwellings and potentially worsening housing affordability in general
• The increase in the cost of new housing will make it more difficult for residential development projects to reach the pre-sales threshold to achieve finance and proceed to construction. This is likely to reduce the number of new dwellings delivered to market each year.

Impact of the rezoning tax:

• The rezoning tax has the potential to change the feasibility analysis of a residential development to the point where it is no longer viable to develop the site
• The rezoning tax may act as a significant disincentive to investment in residential development
• The consequences of the above may be to drive up prices of lands not affected by this tax.

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Case study – Victoria’s regional market

The regional residential development market is very price sensitive. Trying to make regional projects feasible at the best of times is difficult due to combined low sales rates and low retail values (relative to Melbourne metro fringe).

The proposed rezoning tax has the potential to have disastrous impacts on regional areas.

Cost impact of property tax increases on the regional case study

UDIA Victoria recently commissioned research from property economics firm Urban Enterprise to prepare modelling to quantify the impact of the development tax increases to a real case study in a regional development setting.

The case study is a 6.9 hectare site that required rezoning from Farming Zone to General Residential Zone and resulted in the development of 61 residential lots.

• The resulting combined taxes and charges applicable to this case study is approximately $73,100 per dwelling, plus a holding/interest cost of $10,800 per dwelling.
• The total combined taxes and charges are $83,800 per dwelling. This represents 34% of the final typical regional lot price ($250,000), and 21% of the typical final regional house and land price ($400,000).
• In this case study assessment, the new and amended property taxes would add $15,100 per dwelling to the cost of development.

Case study – Melbourne’s infill market

The apartment market in inner Melbourne faces enormous challenges. The collapse of overseas migration and student and tourism inflows has significantly impacted the rental market, particularly in central Melbourne.

UDIA Victoria analysis of SQM Research data illustrates the significant impact of COVID-19 on the apartment market across the CBD, Southbank and Docklands. Between March 2020 and March 2021 across these three postcodes, rents fell by 33%, rental yields dropped by 31% and vacancies more than doubled.

Charter Keck Cramer analysis shows the fall in apartment completions from:

• nearly 20,000 in 2016
• to 8,700 in 2022
• just 800 in 2024.

This market is the most affected by the proposed rezoning tax, which will reduce viability and supply in the areas which arguably need it the most.

Cost impact of property tax increases on the infill case study

UDIA Victoria recently commissioned research from property economics firm Urban Enterprise to quantify the development charges and taxes for new residential land in growth areas and new dwellings in established areas. Urban Enterprise has since updated its research to quantify the impact of the property tax increases announced in the Budget to the case study for established areas.

• The resulting combined taxes and charges applicable to this new case study is approximately $221,100 per dwelling, plus a holding / interest cost of $32,400 per dwelling.
• In this case study assessment, the new and amended property taxes would add $88,300 per dwelling to the cost of delivering the dwelling.
• The total development charges and taxes is $253,500 per dwelling. This represents 42% of the final apartment price ($600,000).

Importantly, Urban Enterprise’s case study identifies that the project is not viable. This result can be applied across a range of sites in Melbourne’s established areas designated for higher density residential development, resulting in job losses, a reduction in Victoria’s economic outlook, and worsening housing affordability due to the decline in the supply of new housing.

Source: UDIA Victoria Member Briefing Note: Proposed Property Tax Amendments