By Aaron Gadiel, Partner

The NSW Government has released a draft ministerial planning order setting out the detail of its new state development levy regime. The new regime has some surprising elements — which may have significant financial implications for many pending development proposals.

In July this year, the NSW parliament passed the Environmental Planning and Assessment Amendment (Housing and Productivity Contributions) Act 2023.  The Government has announced that the new law will come into effect on 1 October 2023.  Mills Oakley has previously published an article about the terms of the new law here.

However, until now, some of the critical detail of the new regime has remained vague.  We’ve been waiting for the Government to publish the draft ministerial planning order that (once finalised) will govern the scheme.

The draft Environmental Planning and Assessment (Housing and Productivity Contribution) Order 2023 has now been released — and is open for public comment until 11 September 2023.  The draft order, together with an ‘Implementation Guideline’, is available here.

Our explanation below is based on the draft ministerial order. In this article, we highlight important aspects of the new regime, but we do not cover every element of the new scheme.  Some of our explanation below may no longer be current if the order is changed before it is finalised.

Three types of development

The new levy is called a ‘housing and productivity contribution’.  It will only apply in the following regions:

• the Central Coast region;
• the Greater Sydney region;
• the Illawarra-Shoalhaven region; and
• the Lower Hunter region.

The levy will be required when development consent (including a complying development certificate) is granted for:

• ‘residential development’;
• ‘commercial development’; and
• ‘industrial development’.

In brief terms, a ‘residential development’ is limited to either:

• a residential subdivision;
• a residential strata subdivision;
• development for the purposes of build-to-rent housing;
• development for the purposes of seniors living (but only if it consists of a group of independent living units); and/or
• development for the purposes of a manufactured home estate.

The significance of this is that a development consent for, say, a conventional residential flat building that does not authorise the strata subdivision, will not trigger the need for the payment of the housing and productivity contribution.  Such a requirement will be triggered when the building is strata subdivided (which is often carried out under a complying development certificate after the building has been approved by a development consent).

The scheme anticipates that:

• build-to-to rent housing (under Part 4 of the State Environmental Planning Policy (Housing) 2021); and
• seniors living (consisting of a group of independent living units),

will not normally be subdivided. So, in those two cases, development consent for the building itself will trigger the need for the housing and productivity contribution to be paid.

‘Co-living housing’ is treated as a type of ‘commercial development’ for the purposes of the levy regime.

Boarding houses, public housing, residential (aged) care facilities, certain ‘affordable housing’ — and some similar categories of housing — are exempt from the new levy regime.

A development will be ‘commercial development’ if it is one of 17 development types listed in the order.  These development types are:

• amusement centres;
• animal boarding or training establishments;
• centre-based child care facilities;
• co-living housing;
• commercial premises (being business premises, office premises and/or retail premises);
• entertainment facilities;
• function centres;
• highway service centres;
• marinas;
• medical centres;
• registered clubs;
• restricted premises;
• service stations;
• sex services premises;
• tourist and visitor accommodation, other than bed and breakfast accommodation and farm stay accommodation;
• veterinary hospitals;
• wholesale supplies.

Not everything that might be thought of as ‘commercial development’ in a plain-English sense will be captured by the above list.  For example, a private hospital will not be a ‘commercial development’.

A development will be ‘industrial development’ if it is development for any of the following purposes:

• an industrial training facility;
• industry (being general industry, heavy industry or light industry);
• storage premises;
• warehouse or distribution centre.

Trigger for payment — conventional residential apartment development

As explained above — for conventional residential apartment development — the trigger for the requirement to pay the levy is the strata subdivision of the building.  This breaks with past practice (in relation to the special infrastructure contribution).

For example, the existing $10,173 per dwelling special infrastructure contribution for Bayside (to be replaced by the new scheme) is payable prior to the issue of a construction certificate for a new building.

In the long-run, the switch in payment timing from construction certificate to strata certificate is good news for developers.  It means that the new state levy would only need to be paid before the issue of a strata certificate for a conventional residential apartment development.  As the strata certificate is typically issued near the end of the construction process, the levy will not have the same cash-flow burden that would have applied, if the old special infrastructure contribution regime had been adopted.

In the short-run, the arrangement is bad news for some developers. This is because most pending development applications for residential buildings will not seek any approval for  any strata subdivision.  A separate application for strata subdivision would ordinarily be made after the grant of development consent.  If the application is lodged from 1 October 2023, the new contribution regime will apply — even if the construction of the building was approved under a development prior to this date, or the development application for the building was pending as at that date.

Residential apartment developers who want to avoid the new levy (who have not already obtained a development consent or complying development certificate for strata subdivision) should consider ensuring that a formal application for strata subdivision is formally lodged before 1 October 2023.

To be clear, there is no change to any timing for the payment:

• of local development contributions (under ‘section 7.11’ or ‘section 7.12’); or
• under or existing state or local planning agreements.

The above changes only relate to the new state infrastructure contributions.

Trigger for payment — other development

The new state contribution for residential subdivision is to be paid before the issue of the first subdivision certificate in relation to the development.

Having said this, where a development consent (but not a complying development certificate) permits staging, only the lots that are the subject of a given subdivision certificate need to be the subject of a contribution.

A contribution required by a development consent for a manufactured home estate must be paid before the installation of the first manufactured home on a dwelling site (if no construction certificate is required in connection with the development).

In any other case, the contribution must be paid before the issue of the first construction certificate in relation to the development — or before the commencement of any work authorised by the development consent (if no construction certificate is required).

Three components of contribution

A single development may be subject to three different components of ‘housing and productivity’ contribution.

Since the passage of the legislation, the NSW Premier, Chris Minns, has made a public statement indicating that the Government was looking to go beyond the contribution amounts announced in the lead-up to the parliamentary debates.

The draft ministerial order, and its associated implementation guide, paves the way for these additional contributions.

In brief terms, the housing and productivity contribution will be divided into three components:

• the base component;
• a strategic biodiversity component (initially limited to development on Cumberland Plain Conservation Plan biodiversity certified land); and
• a transport project component (initially limited to the Pyrmont Peninsula).

The base component rates will initially be as follows.

In Greater Sydney:

• Residential subdivision — $12,000 per new dwelling lot
• Residential strata subdivision — $10,000 per new strata dwelling lot.
• Development for the purposes of build-to-rent housing — $10,000 per new dwelling.
• Seniors living (consisting of a group of independent living units) — $10,000 per new dwelling.
• Commercial development — $30 per square metre of new gross floor area.
• Industrial development— $15 per square metre of new gross floor area.

In the Central Coast, Illawarra-Shoalhaven and the Lower Hunter:

• Residential subdivision — $8,000 per new dwelling lot.
• Residential strata subdivision — $6,000 per new strata dwelling lot.
• Non-strata multi-dwelling development — $6,000 per new non-strata dwelling.
• Manufactured home estate — $6,000 per new dwelling site.
• Commercial development — $30 per  square metre of new gross floor area.
• Industrial development — $15 per square metre of new gross floor area.

The Cumberland Plain Conservation Plan strategic biodiversity component will initially be as follows:

• Residential subdivision — $10,000 per new dwelling lot.
• Residential strata subdivision — $10,000 per new strata dwelling lot.
• Non-strata multi-dwelling development — $10,000 per new non-strata dwelling.
• Commercial development — $60 per square metre of new gross floor area.
• Industrial development — $30 per square metre of new gross floor area.

The Government has flagged that a strategic biodiversity component may be introduced for other areas.  However, such a component can only be imposed for measures required for biodiversity certification of the land.  For this reason, it seems to us that it is unlikely that it will be extended to developments within well-established urban areas.

The Pyrmont Peninsula (Sydney Metro) transport project component will initially be as follows:

• Residential subdivision — $15,000 new dwelling lot/
• Residential strata subdivision — $15,000 new strata dwelling lot/
• Non-strata multi-dwelling development — $15,000 new non-strata dwelling/
• Commercial development — $200 square metre of new gross floor area.

The Government’s ‘Implementation Guide’ says that the transport project component is an additional contribution for new development on land near significant transport infrastructure investment that increases development potential. The Government says it will determine a ‘transport project component’ of the contribution based on a ‘capacity to pay’ analysis.

All of the above rates will be indexed quarterly, starting from 1 January 2024, in-line with the ‘Producer Price Index (Road and Bridge Construction (NSW))’ published by the Australian Bureau of Statistics.  At times, this index has increased at a faster rate than the consumer price index.

Transitional arrangements

The new regime does not apply in relation to a development consent if the development application was lodged before 1 October 2023 —  even if development consent is granted after the commencement.

(A housing and productivity contribution is required for a complying development certificate if it would be required when development consent is granted for the development.)

If a housing and productivity contribution is paid:

• before 1 July 2024 — the amount otherwise payable (apart from any transport project component amount) is reduced by 50 per cent;
• between 1 July 2024 and 30 June 2025 — the amount otherwise payable (apart from any transport project component amount) is reduced by 25 per cent.

If a transport project component is paid at any time before 1 July 2024, the amount is reduced by 25 per cent.

It is important to emphasise that — to be eligible for the relevant discount — the contribution must be paid in the nominated timeframe.  The discount will not be available merely because a development consent has been obtained by a certain date.  This distinguishes the new scheme from some past discounting/concessional arrangements.

Land in the Western Sydney Growth Areas and Western Sydney Aerotropolis special contributions area will be excluded from the new housing and productivity contribution until 1 July 2026 (and the old special infrastructure contribution regime will continue to apply in the interim).  This seems intended to ensure that those areas do not benefit from the initial discounting that is on offer.

Bottom line

The bottom line is that the NSW Government is introducing a new broad-based scheme of taxation for new development.

The scheme has been designed so that it can be readily expanded in areas that benefit from new transport infrastructure investments. Prudent developers may decide to factor in the possibility of additional levies where this may be an issue.

In areas where biodiversity certification is expected, prudent developers may also want to consider the likelihood of a further levy, by way of a strategic biodiversity component, being imposed.

Developers of conventional residential apartments who want to avoid the new levy (who have not already obtained a development consent or complying development certificate for strata subdivision) should consider ensuring that a formal application for strata subdivision is formally lodged before 1 October 2023.

Postscript 7 September 2023

The Department of Planning and Environment has reversed course on the transitional arrangements for the new ‘housing and productivity contribution’.

The Department has updated its webpage with the following new information:

‘Applications for high-density residential developments (residential flat buildings and shop top housing) that have been made before this date and did not seek approval for strata subdivision at the same time, will not be charged a contribution when the subdivision application is subsequently made.

‘Amendments to the Ministerial Planning Order will clarify these transitional arrangements. Changes will also be made to ensure a consistent approach to the timing of payment for these high-density residential developments.’

If this is accepted at face value, it seems that there will be no need to rush through applications for strata subdivision before 1 October 2023 (to avoid the new ‘housing and productivity contribution’ on conventional residential apartment development).