Significant changes to local infrastructure contributions proposed

The NSW Government proposes to change the way local infrastructure contributions are levied. A new ‘land value contribution’ may be applied in certain circumstances either on the sale of developable land or on development, in addition to existing contributions. Will this potentially lead to increased complexity and act as a disincentive to development or will it rather create a public-private value-sharing mechanism to increase certainty that new development will be matched with the necessary public infrastructure?  

Snapshot

• The argument in favour of the new charge is that the current scheme for collecting contributions for local infrastructure development exposes councils to financial shortfalls when the value of land appreciates, eg as a result of changes to zoning. The NSW Productivity Commission believes that councils are not well equipped to address this potential shortfall by other means. Land dedication is difficult to organise in fragmented areas with multiple owners, and councils are often ill-equipped to acquire land early, before the value of land increases.
• The Environmental Planning and Assessment Amendment (Infrastructure Contributions) Bill 2021 (Bill), which was introduced in June 2021 as part of the State budget package, proposes to amend the Environmental Planning and Assessment Act 1979 (NSW) (EP&A Act) by introducing the concept of a ‘land value contribution’ for local infrastructure.
• A ‘land value contribution’ would be payable in ‘land contributions areas’ where changes to planning controls have allowed more intensive development and that has increased the value of the land. This reform seeks to create a scheme that requires additional contributions to be paid in certain circumstances, so that the costs of acquiring land for public infrastructure are not inflated by the development for which the infrastructure is required.
• The key difference to the current development contributions scheme is that a land value contribution would be payable by an owner of developable land if the land is sold, or as part of a development under the current system. It may be levied as an additional charge but it is unclear whether it is a “top up” to address a shortfall or an additional charge in the nature of a land tax.
• A NSW parliamentary committee is currently reviewing the Bill and accepting public submissions until 11 July 2021.

Current infrastructure contributions scheme

When development occurs, changes to the nature or intensity of land use often necessitate the development of additional public infrastructure, such as roadworks, sewerage, community facilities and open spaces. Part of this infrastructure is often provided by local councils, with the assistance of the proponent of the development by way of land dedication, works for or monetary contribution towards that infrastructure through local infrastructure contributions.

Under the current local infrastructure contribution scheme, a council estimates the cost of the development of this infrastructure in a ‘contribution plan’, pursuant to which payments (or land or works in kind) are collected from the proponent of the development. These payments are levied by planning agreement conditions imposed on development consent. Payments typically must be satisfied prior to obtaining an occupation or subdivision certificate.

According to the NSW Productivity Commission, an issue can arise when the value of land changes between the date of determining the quantum of infrastructure contributions and the date when infrastructure works are to commence. The cost of acquiring land makes up a large portion of the costs of infrastructure, and the value of land can increase rapidly in response to prospective development on or near that land. Consequently, it can be difficult for councils to accurately predict how much money is required for infrastructure development, resulting in significant shortfalls in infrastructure funds and incomplete infrastructure development.

While councils are often able to avoid this issue by imposing land dedication conditions in a development consent, the complexity of dedication from multiple different owners (and the equalisation calculations necessary to make dedication fair between multiple owners) can make land dedication expensive and time-consuming in some circumstances. On the other hand, cashflow issues make it difficult for councils to acquire land before or soon after rezoning, before the value of land increases.

Proposed value contribution scheme

The introduction of a land value contribution scheme in the Bill is designed to address this issue.

Under the proposed scheme, the EP&A Act will be amended to allow councils to designate land as a ‘land contributions area’ on a contribution plan. Land can only be designated as a land contributions area if there is a change to the land’s planning controls that:

• will enable more intensive development of the land (and require land to be provided for a public purpose as part of the development); and
• as a result, increase the value of the land.

The contribution plan must identify which part of the land in the land value contributions area must be acquired for a public purpose. The amount of land to be acquired is then used to calculate the value of a ‘land value contribution’ as a percentage of the land’s value. This effectively acts as a charge on the land, which must be discharged before the land is sold or, if required in a development consent, before development is carried out on the land.

As a result, the costs incurred in order to acquire land for public infrastructure should not be inflated by the prospect of the development for which the infrastructure is required.

The Bill envisages that the Environmental Planning and Assessment Regulation 2000 (NSW) (Regulation) will set out the process for preparing, exhibiting and approving the plans in which land value contributions are imposed. Currently, a contributions plan must be published on the website of the council that prepares the plan and opened for public comment before it comes into effect. However, it seems likely that if the Bill is passed, further changes to the Regulation will be made to ensure that persons with an interest in land that is subject to a land value contribution are notified of the contribution plan and have an opportunity to make submissions about it.

Our thoughts

An argument can be made that the proposed new charge logically addresses an issue with local contributions and is broadly reflective of recommendations made by the NSW Productivity Commission. However, it is not clear to us that it will make local contributions less complex, more efficient or more effective. Our initial view is that it has the potential to:

• act as another land tax rather than a public-private value sharing mechanism by adding additional charges on top of council rates, land tax and the current local and State infrastructure contributions regime at a pre-development stage;
• increase uncertainty and risk of delay to development by adding avenues for appeal (the land value contribution is in addition to the current scheme and may be challenged in a merit appeal to the Land and Environment Court);
• devalue developable land or disincentivise sale of land for development; and
• cause issues with development finance.

For these reasons, we would need to see further details on the proposed land value contribution to offer a clear view on these matters. The devil will be in the detail and we will be interested to see how the issues we have raised are addressed in the Regulation.

Next steps

This reform is one element of the NSW Government’s plans for infrastructure contributions reform. Other reforms include changes to reporting and accounting rules under the Regulation and a new regime for regional infrastructure contributions (proposed in the Bill to replace the special infrastructure contributions scheme), among other changes.

The NSW Legislative Council’s Planning and Environment Committee has been commissioned to report on the Bill by 10 August 2021. The Committee is accepting public submissions on the Bill until 11 July 2021. If passed, it is expected that the amendments will come into force in Q1 or Q2 2022.

Please contact us if you would like to discuss the proposed changes.

By Peter Briggs, Partner, Rebecca Davie, Senior Associate, and Ganur Maynard, Solicitor.