By Aaron Gadiel, Partner

The NSW Government is barrelling-on with new ‘affordable housing’ and infrastructure development levies — despite the onset of recession and the anticipated downturn in construction activity.

On Friday (14 August 2020) — for the first-time in eight years — the NSW Government has given its approval for an exceedance of the standard one per cent cap on local council (percentage-based) infrastructure levies.  This new levy is now in effect.

On the same day, the NSW Government also approved the first in a series of new ‘affordable housing’ levies (that were originally foreshadowed in 2017 and 2018).   This new levy is also now in effect.

The NSW Government is also now exhibiting proposals for a ‘Housing Diversity State Environmental Planning Policy’ (the Housing Diversity SEPP).  The proposals include a new measure that is likely to result in additional ‘affordable housing’ levies when existing dwellings are to be demolished or upgraded.

New town centre levies exceeding the one per cent cap

Background

When local councils impose infrastructure levies, they have a choice about how they structure the levy.

A local council can impose an (indexed) dollar-amount calculated on, say, each new dwelling or square metre of floor area.  This type of levy was traditionally known as a ‘section 94’ contribution.  It is now known as a ‘section 7.11’ contribution.

Alternatively, a local council can also impose a percentage-based levy (calculated on the cost of carrying out the development). This type of levy was traditionally known as a ‘section 94A’ contribution.  It is now known as a ‘section 7.12’ contribution.

The key difference between a dollar-amount levy and a percentage levy, is that the former can only be imposed when there is a ‘nexus’ (clear link or relationship) between:

• the development being levied; and
• the purpose for which the money raised is to be used.

A percentage levy can be used for any purposes set out in the relevant contributions plan, but there is no formal requirement for there to be any actual connection between a given levied development and the expenditure of any money raised.   For this reason a percentage levy is ultimately arbitrary (and is simply a form of taxation).

Due to the lack of any requirement for nexus, the state government has traditionally placed (what was once) an ironclad cap on the size of the levy.  For a development of any size, this cap was one per cent of the cost of carrying out the development.

Steps were taken to partially unwind the cap on percentage levies between 2007 and 2012.  Levies were allowed to exceed one per cent in:

• Liverpool’s city centre (2- 3 per cent);
• Willoughby’s ‘commercial core’ zone (2 per cent);
• Gosford’s city centre (4 per cent);
• Parramatta’s city centre (3 per cent);
• Newcastle’s city centre (3 per cent); and
• Burwood’s town centre (4 per cent).

We understand that, in some of these areas, these levies have impacted on development feasibility.  The government hit the pause button on such adjustments to the levy cap in 2012.  There have been — until last week — no adjustments since.

In April this year the NSW Government signalled that it was again interested in supporting increases in percentage levies — above the one per cent cap.  The Department of Planning, Industry and Environment released a discussion paper for public comment, that foreshadowed that levies of 2-3 per cent may be approved by the NSW Government on a case-by-case basis.  The discussion paper proposed criteria that would be considered when a local council requests state-endorsement for a higher levy.  In very broad terms the criteria relates to whether the proposed levy:

• is for land identified within a strategic plan;
• is for an area that is to be the subject of significant employment growth; and/or
• sits alongside local planning controls that are directed towards achieving relevant strategic directions and targets for a centre.

Significantly, the criteria does not directly require a local council to address any impacts of an increased levy on the likely financial viability or timing of anticipated development.

The first step in the new approach

It seems that the NSW Government has now taken the first step in the new approach.  Last Friday (on 14 August 2020) it published an amendment to the Environmental Planning and Assessment Regulation 2000.  The amendment took effect immediately.

The amendment authorises percentage infrastructure levies of up to 2.5 per cent of development cost (excluding land value) in the Kingsford and Kensington town centres.

This is the first change of the kind since 2012.

The introduction of this new levy is linked with simultaneous amendments to the Randwick Local Environmental Plan 2012 for these town centres.  Randwick City Council says that these changes to planning controls will provide approximately 2,000 of the estimated 4,300 new dwellings across the local government area under its 6-10 year housing target.

Given the recent discussion paper — and the green light for this levy increase — it seems likely that further town/city centre planning control adjustments will also be accompanied by similar levies.  Of course, it is still open to the government re-assesses its new policy in the light of the continuing economic fall-out of COVID-19.

New affordable housing levies — linked to changes in planning controls

There have been ongoing campaigns by local councils and community housing providers for the imposition of ‘affordable housing’ levies in NSW for decades.

The idea was (and is) to levy new housing stock, so as to create or fund housing that is available for rent for low income households (and, depending on who is advancing the argument, middle income households).  Levies could (at times) be in the form of actual dedication of housing or made by way of cash contribution to an authority.

SEPP 70

The (former) NSW Labor Government showed an initial burst of enthusiasm for such levies in the years 2000-2002 when it amended the Environmental Planning and Assessment Act 1979 and first published State Environmental Planning Policy No 70—Affordable Housing (Revised Schemes) (SEPP 70).

Initially ‘affordable housing’ levies were limited to land in:

• what is now the City of Sydney; and
• the City of Willoughby.

This was not extended before the former NSW Labor Government left office in 2011.

In 2018 the current NSW Government amended SEPP 70 to pave the way for future ‘affordable housing’ levies in a further five local government areas, being

• Canada Bay;
• Randwick;
• Ryde;
• Inner West; and
• Northern Beaches.

This apparently provoked other local councils to demand a wider ability to impose such levies.  The NSW Government obliged.  In 2019 it amended SEPP 70 to facilitate the imposition of such levies across the whole state.

However, despite these amendments, there have not yet (until now) been any new such levies.  Despite the amendments to SEPP 70, new formal ‘affordable housing’ levies still need to be authorised under a separate environmental planning instrument.  This requires case-by-case NSW Government approval.

The Greater Sydney region plan — A Metropolis of Three Cities

Until now, (some) local councils have been seeking to obtain ‘affordable housing’ contributions through ad-hoc planning agreements linked to changes in planning controls —rather than through any systematic levy system.  By pursuing ‘affordable housing’ contributions though planning agreements, local councils have been generally able to avoid seeking any explicit approval from the NSW Government.

This approach has been pursued, in part, because the NSW Government has erected some significant policy hurdles that were supposed to govern consideration as to whether a new ‘affordable housing’ levy should be imposed.

The NSW Government’s 2018 Greater Sydney region plan, A Metropolis of Three Cities, described ‘affordable housing’ levies as ‘affordable housing targets’.  It envisages that such ‘targets’:

• would be applied in defined precincts prior to rezoning;
• would not affect projects already underway;
• would be used as a mechanism to deliver an additional supply of affordable housing for ‘very low’ to ‘low’ income households in Greater Sydney (this means households whose gross incomes are less than 80 per cent of the median household income for either Sydney, or the ‘rest of NSW’);
• would be subject to consideration of viability — on an area-by-area basis — taking into account (among other things):
  • the necessary allowance for an increase in land value for vendors so that land is willingly sold into development projects that create housing supply; and
  • the necessary allowance for development companies to achieve a normal profit margin on the capital invested and risk taken on projects.

The metropolitan plan says that — within Greater Sydney — targets ‘generally’ in the range of 5–10 per cent of new residential floor space ‘are viable’.

The first of new series of ‘affordable housing’ levies

On Friday (14 August 2020) the NSW Government also approved the first in a likely series of new ‘affordable housing’ levies.

The new levy applies in the Kensington and Kingsford town centres and has been introduced in conjunction with the amendments to local planning controls mentioned above.

In very broad-brush terms, the levy is (subject to some exclusions):

• for development applications lodged from 13 August 2020 — three per cent of the total floor area of the residential component of a development (or a cash contribution in lieu); and
• for development applications lodged from 13 August 2022 — five per cent of the total floor area of the residential component of a development (or a cash contribution in lieu).

At first blush it seems difficult to reconcile this new levy with the approval criteria nominated in the Greater Sydney region plan.  We observe the following:

• This new levy plainly affects some projects already underway. According to the Department of Planning, Industry and the Environment the provision will apply to all land within the town centres (‘land zoned B2 Local Centre within Kensington and Kingsford’) and is not restricted to land identified for uplift.  The levy comes into effect now and applies to all development applications lodged now.  However, any development application lodged in say, in August 2020, would have been under preparation for many months already.  In our experience, the price the developer paid for the relevant land would have been settled a long time ago (quite possibly years ago) before this levy could have been factored-in.
• There is no requirement for the new levy to be only used for households whose gross incomes are less than 80 per cent of the median household income (as per the Greater Sydney region plan). The Randwick City Council is not restricted as to how it may use any dwellings that are dedicated to it (and in the past the council has published ‘affordable housing’ principles that would permit the use of such dwellings for households whose incomes exceed the median household income by up to 20 per cent).
• If the levy is paid by a cash contribution (rather than the dedication of housing) the local council is supposed to use the cash for either ‘boarding houses’ (whose lodgers are not presently means-tested) or ‘serviced apartments’ (which ordinarily means self-contained accommodation to be provided to tourists or visitors on a commercial basis).
• The economic ‘viability’ justification for the levy was originally prepared prior to the COVID-19 pandemic. Randwick City Council apparently recognised that this initial advice was no longer current and commissioned additional analysis this year.  This advice recommended that the higher five per cent levy be deferred until mid-2025 (rather than mid-2021 as was previously proposed). However apparently ‘[f]ollowing a discussion between the Department [of Planning, Industry and the Environment] (bold added)’ this deferral was reduced to one-year only.  Hence, the five per cent levy will commence in 2022.  If we are to take the published material of the Department at face value, the kind of robust economic analysis anticipated under the Greater Sydney region plan has not informed its approval.

The key take-home point is that the NSW Government plainly does not consider ‘affordable housing’ levies to be problematic — even in the midst of the current economic crisis.  The Government also does not appear to expect any prolonged delay in the implementation of the full extent of ‘affordable housing’ levy regimes merely because the state is now in recession.  This sends a clear ‘green light’ message to the other local councils who are also pursuing such levies.

Affordable housing levies when existing ‘median’ rental dwellings are to be demolished or upgraded

The NSW Government is also presently exhibiting proposals for a new ‘Housing Diversity State Environmental Planning Policy’ (the Housing Diversity SEPP).  Mills Oakley published an article outlining some key aspects of the proposed new Housing Diversity SEPP earlier this month.  Our article is available here.

However, there is an additional aspect to these proposals that needs to be highlighted — in the context of the new, increased, local infrastructure levies and new affordable housing levies discussed above.

The government is proposing that the Housing Diversity SEPP, among other things, repeal and replace the State Environmental Planning Policy (Affordable Rental Housing) 2009 (the Affordable Housing SEPP).

The government is proposing to retain (and re-enact) existing provisions that allow ‘affordable housing’ levies to be imposed when development applications are lodged in relation to ‘low-rental residential buildings’ for their demolition or upgrade. The existing provisions only apply in the Sydney region, Newcastle and Wollongong (and this aspect is not proposed to change).

In brief terms (and ignoring some subtleties), the existing regime:

• allows a consent authority to impose a levy when it is satisfied that the proposed demolition/upgrade will (or is likely to) reduce the availability of affordable housing within the area; and
• sets the levy at five per cent of the replacement cost of the number of bedrooms available for use in a low-rental dwelling that would be lost as a redevelopment.

This levy is additional to any other affordable housing levy (such as the new levy in Kensington and Kingsford above).

In broad brush terms, a building can only be regarded as a ‘low-rental residential building’ if it has been used as:

• a residential flat building containing a ‘low-rental dwelling’; or
• as a boarding house

A ‘low-rental dwelling’ is (in simplified terms) a dwelling rented at — or below — the median rental level for dwellings:

• of the same type;
• having the same number of bedrooms; and
• located in the same local government area.

However, the impact of this existing regime is limited by the fact that (in brief terms) it only applies to buildings that were ‘low-rental residential buildings’ as at 28 January 2000.  The scheme does not presently apply to any building that becomes a low-rental residential building after that date.

This is crucial as it means that any building whose quality has only degraded in the last 20 years (such that it recovers rental at or below the median level) is not subject to this existing levy regime on re-development.

The NSW Government is now proposing to abolish this date restriction.

This effectively means that the levy regime will be extended to apply to the re-development of existing buildings that were previously exempt, by reason that their deterioration post-dated the year 2000.

For some projects, this now may become a new financial hurdle that may need to be jumped in development feasibilities.  (Noting that a typical commercial trigger for re-developing a residential property is the fact that the existing housing stock has become aged and is no longer well-suited to market requirements.  A symptom of such a situation is lower rents.)

Additionally if the proposals proceed, the new Housing Diversity SEPP will create a perverse incentive for some landlords to take active steps to ensure that their buildings do not rent out at or below median market rents (even at the expense of bringing forward minor upgrades to make rents more expensive).  If landlords take this step, the changes may actually reduce the availability of affordable housing.

This particular proposal is currently open for public comments.  Submissions can be made until 9 September 2020.  The details for lodging submissions are here.

New levies abound

The economic crisis does not seem to have materially diminished the appetite of the NSW Government for the imposition of additional levies on new housing development.

It seems that the government will be approving such levies — on multiple fronts — despite the new economic circumstances.