By Aaron Gadiel, Partner

The NSW parliament has passed new laws for the imposition of broad-based development levies —  with the final stage of the parliamentary process completing on 13 July 2023.

The new law is known as the Environmental Planning and Assessment Amendment (Housing and Productivity Contributions) Act 2023.  The legislation amended the Environmental Planning and Assessment Act 1979 (the EP&A Act).

The new law has not yet come into legal effect.  This will not happen until it is ‘proclaimed’ by the Government.  This is expected to happen by 1 October 2023 (based on the guidance material published by the Department of Planning and Environment).

The existing system

At present, infrastructure contributions are imposed on developments that are the subject of development consents in three ways.

Firstly, local councils impose infrastructure contributions under ‘section 7.11’ or ‘section 7.12’ of the EP&A Act.  These levies are intended to fund local council-owned infrastructure made necessary by new development.  Typically, these levies are calculated either:

• based on a percentage of the construction costs (‘section 7.12’ contributions); or
• based on the number of dwellings, the number of lots in a subdivision or square metres of floor space (‘section 7.11’ contributions).

Secondly, in declared ‘special contribution areas’ the state government can impose ‘special infrastructure contributions’.

For example, current contribution rates can be as much as:

• in the Western Sydney Growth Area, $233,583 per hectare of net developable area;
• in the Aerotropolis area, $526,831 per hectare; and
• in the St Leonards and Crows Nest area, $15,910 per additional dwelling.

Presently, 10 areas of NSW are declared as ‘special contributions areas’.

The Department of Planning and Environment presently has a list of five ‘draft’ special contribution areas.

Thirdly, development contributions can be imposed under a planning agreement.  Planning agreements can be reached with local councils or the state government.

The state government typically forces developers to enter into planning agreements when it identifies an area as a draft special infrastructure contribution area.  This may be required:

• before a rezoning is finalised; or
• by the imposition of a clause in an environmental planning instrument that requires — before development consent is granted — that ‘satisfactory arrangements’ be made for the provision of state infrastructure.

Thus, even when a special infrastructure contribution area is only a ‘draft’, developers are forced to enter into planning agreements to make ‘voluntary’ contributions that are set with reference to the ‘draft’ special infrastructure contribution rates.

The system of development contributions has generally been regarded as unsatisfactory by developers and the government more-or-less since it was first introduced.  The current system generally dates back to 2005.  Since at least 2007, the system has been under constant review with a view to ‘reforming’ it.

There have, over the years, been several aborted attempts at legislative reform. Most efforts, (by the government) to change the system have involved turning the ‘special’ state government development contribution into a more generalised levy on new development.  This has previously been met with industry resistance.

The government’s objective has been to increase the revenue the state government receives directly from development to fund its infrastructure and biodiversity programs.

The new legislation essentially achieves this 17-year-old (government) desire to change the system.

The changes

Special contributions areas are to be abolished.

A new legal regime for state government infrastructure contributions will be established.  The stated objective of the scheme ‘is to facilitate the provision of regional infrastructure that supports and promotes housing and economic activity in a region’ by enabling a ‘housing and productivity contribution’.

‘Regional infrastructure’ is defined to include measures to conserve or enhance the natural environment.

The reference to ‘productivity’ seems to be a way of making clear that the contributions will be imposed both on housing and employment-related development.

The regime envisages that infrastructure contributions will be set on a regional basis.  The actual contribution rates — and the regions to which they will apply — will be set by a ‘ministerial planning order’.  No such orders have been published at this time.  When they are finalised, they will be made by the Minister for Planning, with the concurrence of the NSW Treasurer.

The Department of Planning and Environment has published an information paper about the changes.  It says that housing and productivity contributions are planned for the ‘high-growth areas of Greater Sydney’, the Illawarra Shoalhaven, the Lower Hunter and the Central Coast.   When fully implemented, the housing and productivity contribution is expected to collect $700 million annually.

The information paper says that the housing and productivity contribution will apply to:

• residential development that intensifies land-use where new dwellings are created, such as houses, apartments, terraces and dual occupancies;
• commercial and retail development such as shops, neighbourhood shops, supermarkets, and commercial office buildings where new floorspace is created; and
• industrial development such as warehouses and industrial buildings, where new floor space is created.

The information paper also says that:

• the contribution will not apply to replacing existing houses (knock-down/rebuild); and
• that some types of development may be exempt from paying the contribution (such as public housing, seniors housing, affordable housing and secondary dwellings).

The information paper says that the rates will be as follows in the Greater Sydney Region:

• $12,000 per house/lot (detached, semi-detached and townhouses);
• $10,000 per dwelling/lot for all other residential development (residential flat buildings and units);
• $15 per square metre of new gross floor area for industrial development;
• $30 per square metre of new gross floor area for commercial development; and
• $30 per square metre of new gross floor area for retail development.

The information paper says that the rates will be as follows in the Illawarra, Shoalhaven, Central Coast and Lower Hunter:

• $8,000 per house/lot (detached, semi-detached and townhouses);
• $6,000 per dwelling/lot for all other residential development (residential flat buildings and units);
• $15 per square metre of new gross floor area for industrial development;
• $30 per square metre of new gross floor area for commercial development; and
• $30 per square metre of new gross floor area for retail development.

Like the current special infrastructure contribution regime, the new levy will be imposed by a condition of development consents (and complying development certificates).

The new housing and productivity contribution is more like a tax than a genuine user-charge.  This is because the legislation expressly says that no connection is required between the development on which a housing and productivity contribution is imposed, and the regional infrastructure provided from the contribution.  The only exception to this is that:

• a transport project component of the contribution may be imposed on development only for transport infrastructure that benefits the development’s area; and
• a strategic biodiversity component of the contribution may be imposed on development for measures to conserve or enhance the natural environment that were required for biodiversity certification of the development’s land.

The current prohibition on local councils from collecting ‘section 7.11’ contributions to part-fund infrastructure funded through a state government infrastructure contribution will be abolished.  The new regime specifically envisages that the state government levies could be used to make grants to local councils to fund ‘regional infrastructure’.

The funds raised will be used to create two large pots of money — controlled by the state government.

Firstly, there will be a ‘Strategic Biodiversity Contributions Fund’.  As the name suggests, this will be used to pay for measures to conserve or enhance the natural environment.

Secondly, there will be a ‘Housing and Productivity Fund’.  The money in this fund will be used to ‘support housing and promote economic activity’ in each region for which a housing and productivity contribution is required.

Transitional arrangements

The legislation provides for transitional arrangements.  However, the provisions essentially say that the specific mechanisms of how the transition will be handled will be determined by regulations and/or ministerial planning orders.  These have not yet been published (even in draft).  This means that there is no certainty as to what the transitional arrangements will actually be.

However, the Department’s information paper says that current planning agreements that ‘turn-off’ special infrastructure contributions will also turn-off the new housing and productivity contribution.

It is not 100 percent clear whether current planning agreements that provide for offsets against special infrastructure contributions will also be extended to allow offsets against the new housing and productivity contribution.  The Department’s information paper says that ‘planning agreements executed before the introduction of the Housing and Productivity Contribution will remain and continue to operate’.  Hopefully, this will mean the offsets will be able to be claimed.

(Having said this, the offsets may have less value if the higher special infrastructure contribution is abolished and replaced with the lower housing and productivity contribution.  This may mean that some projects under a planning agreement may have a higher infrastructure delivery costs when compared to nearby projects that are covered only by the new regime.)

The Department’s information paper says that initially, the scheme will be introduced with a 50 percent discount on the contribution rates — in the period from 1 October 2023 to June 2024.   The information paper does not make this clear, but we infer that this is a reference to development consents granted in this period.

The information paper says that from July 2024 to June 2025, there will be a 25 percent discount on contribution rates.

The full contribution rate will, apparently, come into effect from July 2025.

The Department’s information paper says that the existing special infrastructure contributions areas will be ‘transitioned’ on 1 October 2023, other than the Western Sydney Growth Areas and the Aerotropolis.  The latter two will apparently be ‘transitioned’ on 1 July 2026.

The Department says that the ‘Pyrmont Peninsula’ special contributions area will remain in place for the purpose of collecting contributions towards a metro station.

Nonetheless, developers should be clear that these transitional arrangements (and even the final rate of the contributions) have not yet been formalised into any legal instruments.  Based on past experience, things may change (and there may be ‘devil in the detail’).

Planning agreements and works-in-kind agreements

Even under this new regime, it may still be necessary for some developers to pursue planning agreements or works-in-kind agreements.

The Department’s information paper explicitly says that developers can dedicate land for infrastructure or build a piece of required infrastructure under a works-in-kind agreement.  This would, of course, require the agreement of the Minister for Planning and Public Spaces.

The legislation also provides for the continuation of existing EP&A Act provisions that allow a planning agreement to ‘turn-off’ or otherwise modify the power of future development consents to impose state government infrastructure contributions.

The Department’s information paper says that the NSW Government will consider the need for new planning agreements if a developer proposes a substantial greenfield or infill rezoning that will:

• benefit the region or support broader NSW Government objectives; and
• result in significant demand for infrastructure that the NSW Government has not yet planned for or prioritised.

Based on past experience, we expect that some developers will still be proposing planning agreements when they wish to fund infrastructure up-front themselves —  rather than waiting for their land to be ‘sequenced’ and for infrastructure to be funded own-the-track from the Housing and Productivity Fund.

A big ‘reform’?

Many developers will not consider these changes are a ‘reform’.  This is because the changes will not solve some key problems in the existing infrastructure contributions regime.

Firstly, the changes do not affect local council infrastructure changes at all (other than allowing councils to levy for projects that they may co-fund with the state government).

Secondly, the pool of funds created by the levies will likely be released based on ‘sequencing’ decided by the state government.  Past experience suggests that this sequencing may not be aligned with the preferences and capabilities of developers to actually develop land.  There is nothing in the announced changes that indicates how this long-running problem could be addressed.

Any misalignment between sequencing and the willingness of developers to develop land would need to be addressed, as they are now, through planning agreements.  In short, the need for planning agreements for some large developments (particularly greenfield land releases) may not be avoided.  When such planning agreements are negotiated (for land that was formally in a special infrastructure contributions area) a lower ‘housing and productivity’ levy may reduce the offset that a developer might otherwise have expected.  This may increase the infrastructure costs for developments taking place ‘out-of-sequence’ (in comparison to those that are sequenced).

What next?

Between now and 1 October 2023, we can expect that the NSW Government will finalise and publish regulations and ministerial planning order(s) to give effect to the new scheme

Anyone proposing to negotiate a new planning agreement with the state government should think carefully about how the planning agreement’s provisions may end up working under the new scheme.