This article was written by Chris Wheeler, Rowena Sturn and Alex Lam.
The ACT Government after prolonged deliberations with industry is looking to ease the lease variation charge (LVC) burden by introducing an option to permit the deferral of the LVC payment.
The Planning and Development (Lease Variation Charge Deferred Payment Scheme) Amendment Bill 2018 (Bill) introduced into the ACT Legislative Assembly on 15 February 2018 is proposing to:
- allow the option to defer payment of the LVC; and
- replace the current remission scheme framework.
These are steps in the right direction to ameliorate against the inherent nature of LVC as a disincentive to invest in city renewal. However, many questions still remain about the implementation of these latest reforms. Also they are only a prelude to the wider reforms that industry hopes may result from the broad LVC review promised by the Chief Minister that has yet to commence.
We have set out a summary below of the key provisions of the Bill and some questions still to be answered.
How will the deferred LVC payment work?
The Bill proposes to introduce a deferred payment of LVC allowing an applicant (who meets certain criteria) to apply to the ACT Revenue Office to defer payment of the LVC.
Essentially once the LVC has been determined then the applicant has a choice – to pay the LVC or apply to the ACT Revenue Office to enter into a deferral agreement. The deferral agreement is effectively a loan agreement.
The deferral agreement features
The deferral agreement:
- is available for a codified variation (276E variation) or a before and after value variation (277 variation), however the determined LVC amount must be at least $100,000;
- will require an interest payment on the deferred amount – expected to be around 3.5% pa;
- will require payment of the deferred amount plus interest on the earlier of:
- the date of issue of the certificate of occupancy for the approved DA building work; and
- 4 years from the date of the lease variation.
The intention of the deferral is to assist with developer's cash flow and better align the payment of the potentially significant tax amount with the receipt of revenue from in particular residential sales.
The arrangement is merely a deferral and so the LVC amount still needs to be ultimately paid. This impost will need to be properly planned in development budgets and will need to be monitored by those who deal with the land until the payment is made.
The lease can still be varied
The instrument of lease variation will be able to be registered if either the determined LVC amount is paid (in the conventional way) or the deferral agreement is entered into. This means that the lease is able to be varied without the payment of LVC as long as a deferral agreement is signed. So value will be able to be added to the crown lease without the actual payment of LVC.
The deferred amount of LVC plus interest payable to the ACT Government will be secured by a statutory charge against the land. This effectively is the same situation that applies for unpaid rates and any unpaid duty. This charge will rank ahead of any mortgage to a financier for the new development. This aspect appears to be creating some discontent among developers and financiers, despite the charge operating like a prior ranking vendor mortgage for a portion of unpaid purchase price.
Discussions are continuing with the Government regarding fine tuning the Bill. These include:
- delaying the LVC payment to be closer to actual settlement payments from buyers of new residential developments; and
- possibly delaying interest from accruing until a later time such as when the building approval issues for the new development.
The Bill also contains "transitional provisions" which have the effect of allowing the deferred payment scheme to apply to those development applications where the determined LVC amount has yet to be paid, even though the development application predates the date of commencement of the new statutory scheme.
An important feature of the LVC system is the remissions or discounts for particular outcomes or circumstances.
The carrot and stick
When the LVC regime replaced the change of use charge system in 2011, there was introduced a deliberate "carrot and stick" architecture around the new tax. To offset the large increase in the tax, the remission system allowed significant discounts to apply to encourage particular behaviour (ie sustainability, adaptable housing and environment initiatives) or to compensate for particular circumstances (such as service station contamination and economic stimulus).
A new but unknown system
In one of the more controversial aspects, the Bill proposes to reset the remission system and replace the existing remissions with new remissions. The new remission regime has not been revealed and this is causing some anxiety.
As an interim measure, the Government has extended the sustainability remissions under the Planning and Development (Remission of Lease Variation Charges–Environmental Sustainability) Determination 2018 (No 1) (Determination). The Determination applies for a section 277 chargeable variation if:
- the development application is approved after 7 March 2018; and
- the approval relates to the development of a building on the land under the lease.
The relevant remissions will be:
- Green Star rating of 5 (average) - 10%;
- Green Star rating of 6 (average) - 25%;
- NatHERS rating of 6.5 or 7 (average) - 10%; and
- NatHERS rating of 7.5 or more (average) - 25%.
The Government has stated that this is a temporary measure until the new remissions are engineered in consultation with the sector.
The Government is not extending the 25% economic stimulus remission claiming that the ACT economy is performing well at 4% annual growth levels and does not need the stimulus any longer. This means the economic stimulus remission that many have relied on to make proposals financially viable will expire on 6 March 2018. The Government to help ease the pain is expected to announce a transitional package for those development applications in the system by 6 March 2018.
What lies ahead?
There is still some way to go to clarify many questions with the Bill.
Financiers may not accept the concept of the statutory charge system ahead of their own financially secured position, despite the land/security value having been increased without payment of the LVC.
Smaller developers looking to manage their cash flow may find the new deferral concept attractive as they look to save valuable capital and as well as benefit from saving a margin on borrowing the LVC from a commercial financier. Larger developers may receive less benefit depending on their financial arrangements and capacity to pay. Nonetheless they will have a new option for payment that they did not have before.
The deferral regime could have significant benefits if it becomes more than just a discounted LVC finance system competing with financiers.