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Re-Zoning with or without moving the Urban Growth Boundary

Property Law: 22 March 2019

A number of owners of properties on the fringe of Melbourne's urban sprawl are being approached by developers offering to assist in having those properties re-zoned with or without being included within the Urban Growth Boundary. It is important to seek legal advice before entering into such an agreement to avoid unforeseen consequences, as well as making sure you get the right price for your land.

While a change in the planning controls can significantly increase the value of property, caution needs to be exercised to ensure that:

  • you do not "paytoo much for the assistance;
  • the assistance is directed towards you receiving the benefit (not a "competingneighbour);
  • your property is not "tied upfor too long, waiting for something to happen while you suffer increased holding costs (council rates, land tax etc.)as you wait; and
  • the benefit you think you will receive is not diluted by income tax, capital gains tax, GAIC, etc.

What Price?

The fee charged by developers offering to assist in having properties re-zoned with or without being included within the Urban Growth Boundary can have any one or more of the following elements:

  • a fee for services (calculated as either a fixed amount or on an hourly basis);
  • a success fee (calculated by reference to the value of the property or the increase in value);
  • an option to purchase or a right of first refusal to purchase the property at a discount.

In order to decide whether or not the proposed fee is too much, owners need to have an appreciation of how much the developer will help to achieve the desired end result. In other words, the question is, "Would the result be achieved without that assistance and how long would it take?Normally property owners should engage an independent town planner to answer these questions. At the very least owners should obtain a quotation from a town planner to perform the services.

In either event, the town planner will assist in defining what is the desired "end result. Is it inclusion within the UGB, preparation of a Precinct Structure Plan or re-zoning so as to permit a specified use or range of uses? The choice can have a profound effect on the end value.

Of course, if the fee is to be calculated by reference to value, the basis of valuation needs to be carefully negotiated and where an increase in value needs to be determined, owners should retain their own valuer to ensure that the correct starting value is also used.

Who benefits?

If a "success feeis to be paid to a developer offering to assist in having properties re-zoned with or without being included within the Urban Growth Boundary, you might expect that the developer would do everything possible to maximise the value (and thereby maximize the fee). The same applies where there is an option to purchase or a right of first refusal.

There is a chance however that the developer will have a potential conflict between your property and the properties of your neighbours. It might be that not all of them can be included or can be ear-marked for the most desirable zoning or other planning control. It might be that a large area of public open space needs to be put somewhere. It might also be that the developer does not live up to normal expectations.

The agreement you have with your developer needs to be carefully worded in these respects and you need to be able to have your own town planner oversee the process and intervene if there are times when your property needs to be promoted. After all, land that ends up being zoned for one use, can have twice the value of land with a different zoning.

How long?

Developers offering to assist in having properties re-zoned with or without being included within the Urban Growth Boundary may seek a 5, 10 or even 12 year "windowin which to achieve the desired end result. Agreements need to be structured to ensure that the owners can afford to hold onto the property in the meantime or are able to mortgage or sell it without too much difficulty. The possibility of holding charges (rates, land tax etc) escalating also needs to be remembered.

Sometimes it is possible to negotiate for the developer to pay an annual fee to assist the owner to wait.

Hidden taxes and charges?

Re-zoning agreements made with developers will often result in the property being sold once it has been re-zoned or included within the Urban Growth Boundary or included within an adopted Precinct Structure Plan. If the agreement has not been carefully structured, owners might find themselves unexpectedly liable to pay capital gains tax, income tax or open space contributions. In some cases the price might be reduced by the Growth Area Infrastructure Charges (GAIC) that the developer will have to pay.

A simple decision to subdivide a property or build infrastructure too soon, could convert a tax free sale into one where income tax is payable on the entire sale price because the owner is deemed to be carrying on the business of property development. With good advice, that sort of outcome can be avoided - even where it is necessary for the owner to commence the property development.

The final decision is what to do with the proceeds. A tax professional (specialist lawyer or accountant) can assist in making the proceeds work for you in a tax-effective manner.

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