V. Development Gains Tax

23.78. Certain types of gains on land have characteristics distinguishing them from gains on other assets. Three main varieties of gain can occur with land:

  • (a) Gains from carrying on a business in land dealing or development. These are essentially the same as any other business activity, with the land forming the trading stock of the enterprise and the gains, as now, normally being taxed as income. (It should be noted that the Committee's recommendations in paragraph 23.76 will ensure that such profits are taxed as income even if the transaction is an isolated one.)
  • (b) Gains arising from the realisation of the land by its owner where there has been no change of permitted use. These gains would emanate from inflation or from the normal operation of rising market demand when a commodity is in fixed supply. Such gains would normally be taxed as capital gains.
  • (c) Gains arising from the actions of public authorities in permitting change of use of the land together with any gains arising from associated or consequential development carried out upon that land. These mainly take the form of gains upon the re-zoning of land or the granting of development approval for a large project and gains resulting from subsequent sub-divisional or other development operations.

23.79. The third category of gains has one main characteristic distinguishing it from other capital gains. The change-of-use gains are made possible, not by the efforts of the individual, but by the planning decisions of public authorities. As such, they should enure more to the benefit of the whole community than they do now or would

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do under a capital gains tax of the kind proposed. Where the actions of the community give rise to a sudden increase in land values, as in the case of population growth leading to the re-zoning as residential of outer suburban or rural land, the community has a right to a greater share in such increases. The taxation system should if possible be brought to bear on such gains by taxing them more severely than if they were ordinary capital gains.

23.80. A tax on the gains arising from the disposal or deemed disposal of land with development potential was foreshadowed by the Conservative Government in the United Kingdom in late 1973 and a Bill to give effect to this was then introduced by the present United Kingdom Labour Government in the early part of 1974 and enacted as a part of the Finance Act 1974. This Act was extremely complicated in its provisions and application and was subject to considerable debate and criticism. The Australian Government's Budget proposals for taxing land gains of this type appear to be a somewhat simplified version of the United Kingdom provisions. However, it is understood that the United Kingdom Government will now not be giving effect to the recent legislation but intends instead to introduce a special development land tax. Details of this latest proposal are not yet available.

23.81. The Committee has been unable to undertake a full study of the ramifications and difficulties of the various systems for taxing the increment in land value attributable to changes in the permitted use of land. While the equity arguments for a tax of some sort on these gains in addition to a capital gains tax are impressive, any such tax must undoubtedly be extremely complex, difficult to administer and productive of some inequities and anomalies. Accordingly, the Committee makes no recommendations in this area but suggests that any proposals for such a tax should be subject to the widest possible public debate before their introduction.