The battle for the future of Sandown Racecourse may be the clearest example yet of why Victoria’s proposed windfall gains tax is bad for housing affordability.
But for those not intimately engaged in horse racing in Victoria, it is possible the turf war has passed them by.
So what is at stake at Sandown, and what might it mean for other developers looking to meet the demand for housing land in the state?
The 112-hectare Sandown Racecourse (better known as Ladbroke Park) is one of Melbourne’s four horse racing venues, 25km south-east of the CBD in Springvale.
It’s part of a big racing complex, surrounded by a motor racing circuit, Sandown Raceway, and a greyhound racing facility called Sandown Park, to the south-west.
A number of years back, the Melbourne Racing Club decided it wanted to review its landholdings, and in 2019 it confirmed it was working on a plan to rezone the site for housing.
Keeping Sandown open was reportedly losing the club $5 million a year, so under a plan put to the local council early this year, the club sought to rezone the site to ‘special use’ to allow up to 7500 homes to be built on the racecourse.
Proceeds from the land sale would be invested in Caulfield Racecourse, where the Melbourne Racing Club has plans for an entertainment precinct 10 times the size of the MCG, worth $570 million and creating thousands of jobs.
Then came the state budget and the government’s announcement that it intends to introduce a windfall gains tax.
The tax, once it is legislated, means from July 1, 2022, the total value uplift from a rezoning decision will be taxed at 50% for windfalls above $500,000.
For a location like Sandown, the switch from racing to residential could see the site’s value rocket from an estimated $100 million to between $500 million and $600 million, attracting a minimum tax bill of $200 million.
This could not only rein in the Racing Club’s ambitions in Springvale, but drain the capital available for Caufield, and remove the equivalent of a suburb the size of Wangaratta from the future housing supply.
What the situation illustrates is how blunt the windfall gains tax really is.
It will apply to swathes of under-utilised land across Victoria that need to be developed for the future — a trend made clear in the steady climb of housing prices.
Areas already subject to the growth areas infrastructure contribution (GAIC) are excluded from the tax, but the GAIC only covers a portion of outer-suburban Melbourne.
Other regional areas like Geelong and its surrounds are seeing significant rezoning of land amid the residential boom and will be severely affected by the new tax.
Making suppliers of land in this equation subject to a hefty tax will inevitably put a dampener on development.
Some have already made it clear that their planned projects will no longer be feasible if the windfall gains tax applies to their land.
And modelling shows exactly how the tax makes prospective projects less viable.
We speak regularly to farmers who have discovered the suburbs have encroached and want to make use of land no longer suitable for crops or cattle — usually for good commercial reasons.
With farm land at record highs, selling unwanted property in areas where residential demand is high provides the capital needed to invest in other locations.
Consider the impact of rezoning a farm block in Armstrong Creek near Geelong, an area where the state needs to find homes for an estimated 15,000 new residents in 20 years.
A block that could ultimately house 700 residential lots might be worth $5 million as farmland, but could see its value jump to $40 million if rezoned as Urban Growth Zone land.
The government has the $35 million uplift firmly in its sights.
But to characterise that amount as a ‘windfall’ for the farmer is nonsense.
For one thing, it is likely to be years between when the land is rezoned before the farmer eventually starts to receive revenue from purchasers of developed lots — assuming the development actually proceeds.
Furthermore, it ignores the significant costs the farmer will incur in order to bring the land to market, including land tax, development contributions and other fees and charges payable to local government, as well as the likely need to engage an experienced developer and share the upside with them.
But from next July, the farmer will become liable for the windfall gains tax of $17.5 million (half of the $35 million uplift), even if they hold on to the rezoned land, and will start incurring interest on that liability from the date of the rezoning.
If they sell the land to a developer, the increased cost of the land will reflect the tax bill — which then gets pushed on to home buyers.
Provided the subdivision and the associated processes go well, each 300 square metre lot will need to sell for about $25,000 more to cover the cost of the windfalls gain tax.
And if the subdivision plans fail to eventuate or no developer wants to buy the lot? The tax liability remains for the landholder regardless of the success or otherwise of the venture.
Faced with this prospect, expect many property owners to rethink their plans, and for fewer housing projects in new areas to get underway.
Like Sandown, the tax means development plans are hobbled before they even get out of the gate.
Craig Whatman is a partner at Pitcher Partners in Melbourne, where he heads up the transaction taxes team.
