By Aaron Gadiel, Partner

The NSW Government has published a new ministerial direction paving the way for increased local council levies on new housing.

The levies are commonly known as ‘section 94’ contributions.  The contributions can be imposed on new housing under a development consent.  Typically these levies are paid to a local council prior to the issue of a construction certificate (for apartment development) or occupation certificate (for subdivision creating new residential lots).

What are the caps?

Until 28 July 2017, the caps limited the monetary amount of ‘section 94’ contributions.

While there are some exceptions, generally speaking, local council development levies have been limited to a maximum of:

• $30,000 in greenfield areas; and
• $20,000 in infill areas,

(per dwelling or residential lot).

Why were the caps originally introduced?

Until 2010, there were no express limits on the level of development contributions in NSW.   The only safeguards against excess were:

• a requirement that each development contribution be authorised by a ‘contributions plan’ prepared by the local council; and
• a right to appeal a contribution imposed on a development in the Land and Environment Court on the basis that it was ‘unreasonable in the particular circumstances of that case’.

However, contributions plans did not have to be approved by the Government before coming into effect.

By 2010, it was becoming increasingly apparent to the Government that council development contributions were snowballing beyond their traditional levels.

A 2011 report by the Federal Government’s Productivity Commission (Benchmarking of Australian Business Regulation: Planning, Zoning and Development Assessments) identified some reasons for the more rapid rate of increase:

• increased popularity of the ‘user-pay’ approach to public policy;
• financial constraints on local councils —such as NSW’s system of rate capping;
• urban expansion pushing development further from existing infrastructure networks and, in turn, increasing the cost of connecting new developments to those networks;
• community expectations of a broader range and higher quality of urban infrastructure (when compared with what was previously acceptable); and
• the temptation for local councils to ‘gold plate’ or ‘over spec’ infrastructure requirements.

As a result of its work in 2010 and 2011, the Productivity Commission found that Sydney had the highest residential development levies in Australia — at an average of $37,300 per lot for greenfield developments.  This would be around $44,000 in today’s dollars.

The Productivity Commission also found that — in infill areas — Sydney’s local council development levies hovered around $15,000 per dwelling in 2009/10.  This would be around $18,000 in today’s dollars.

However, at the time, some Sydney councils were pushing for even higher levies.  In one prominent example, the Draft Ku-ring-gai Contributions Plan 2009 set out levies of up to $34,000 for each new apartment.  This would be around $40,000 in today’s dollars.

As a result, the Government introduced the $30,000 greenfield/$20,000 infill cap over the course of 2010 and 2011.  The Government justified this decision on the basis that local councils were showing insufficient restraint.  It was concerned that high and increasing levies were reducing housing supply and making the new housing that was able to be produced more expensive.

How well has the cap worked?

The $30,000/$20,000 cap on compulsory levies has not been applied uniformly.  There are various exceptions for areas already the subject of historical levy arrangements (or where a special case could be made).

In many areas, these caps have been circumvented by local councils ‘downing tools’ on proposed rezonings unless/until developers chose to enter into ‘voluntary’ planning agreements.  These agreements have often included development contributions well in excess of the caps.  However, this generally only works for councils when a whole precinct has a single owner — or at least a small number of owners.

In urban release precincts (and where land ownership is fragmented) local councils have been preparing development contributions plans that would —but for the cap — result in levies well over $30,000 per residential lot.

For example, Blacktown City Council sought approval for a contributions plan for Riverstone and Alex Avenue in December 2014.  It proposed notional development levies of $83,000 per residential lot.

However, under the policy framework then in place, Blacktown City Council was not actually able to impose levies that exceeded the cap.  The contributions plan had to be assessed by the Independent Pricing and Regulatory Tribunal (IPART).   When the IPART supported the plan, it was then up to the Government to fund the difference between the amount that the council was permitted to levy ($30,000 per lot), and the actual costs set out in the approved contributions plan.  These works were funded, initially, by the Government’s ‘Housing Acceleration Fund’ — and more recently under the Local Infrastructure Growth Scheme.

Why have the ‘hard’ caps now been abolished?

In April 2013, the Government released its white paper: A New Planning System For NSW.

In this policy paper the Government said that the caps on levies were ‘artificial and inefficient’.  It said that ‘[d]evelopment contributions in some areas are too high while other areas do not sufficiently contribute to recovering infrastructure costs’.

The white paper promised that the cap would be removed.  This aspect of the white paper has been ‘pending’ for the last four years, but has now been implemented as a result of the ministerial direction published on 28 July 2017.

It seems that the Government’s willingness to keep paying for the gap between the cap and the contributions plans actually supported by IPART has come to an end.   The Government has announced that the Local Infrastructure Growth Scheme will be closed, with a limited pool of funding for existing approved schemes only (certain precincts in Blacktown and The Hills local council areas).  It seems that certain other areas may also still secure funding (certain precincts in Wollongong, Bayside, Blacktown, Camden and Liverpool local council areas).  However, even these funds will dry up by 1 July 2020.

What is the key change?

As a result, from 28 July 2017, the ‘hard’ cap has now been abolished in all areas — other than the ‘transition areas’ that are (or will be) funded by the Local Infrastructure Growth Scheme.

In the greenfield ‘transition’ areas, the ‘hard’ cap will be phased out, with levies increasing as follows:

• $35,000 on 1 January 2018;
• $40,000 on 1 July 2018;
• $45,000 on 1 July 2019; and
• no cap from 1 July 2020 (provided that the levies are in-line with an IPART reviewed contributions plan).

In infill transition areas (i.e. the ‘Rockdale Urban Renewal Area’) levies will be allowed to increase as follows:

• $25,000 on 1 January 2018;
• $30,000 on 1 July 2018;
• $35,000 on 1 July 2019; and
• no cap from 1 July 2020 (provided that the levies are in-line with an IPART reviewed contributions plan).

Is there still a ‘soft’ cap on local council levies?

There is still a ‘soft’ cap on local council levies, set at the $30,000 (greenfield) and $20,000 (infill) level.

(The use of the word ‘hard’ and ‘soft’ to describe different types of cap is a Mills Oakley invention to make the explanation easier.)

A local council cannot impose a development consent condition that levies more than a ‘soft’ cap in an area unless one of either two situations applies.

Firstly, the ‘soft’ cap does not apply in an area expressly nominated in the 2012 ministerial direction (as amended up to 28 July 2017).

Secondly, the ‘soft’ cap does not apply if:

• the IPART has reviewed the relevant contributions plan;
• the Planning Minister has supported the outcome of IPART’s review; and
• the local council has adopted the contributions plan (if need be, with amendments) as endorsed by the IPART/Planning Minister.

When the IPART reviews contributions plans, it assesses them against the ‘key concepts’ of reasonableness and accountability.  This means that, among other things, the IPART considers:

• whether there is a connection between the development to be levied and the proposed works to be funded under a contributions plan;
• whether the infrastructure will be provided within a timeframe that meets the demand created by the development to be levied; and
• whether levies only seek to cover the cost of works that are attributable to the demand created by the new development (leaving the proportion attributable to the existing population to be funded from some other source).

IPART also limits the works to be funded to those on an ‘essential works’ list.  These are:

• land for open space (for example, parks and sporting facilities) including base level embellishment;
• land for community services (for example, childcare centres and libraries);
• land for and facilities for transport (for example, road works, traffic management and pedestrian and cyclist facilities), but not including car parking;
• land and facilities for stormwater management; and
• the costs of plan preparation and administration.

This range of essential works is considerably narrower than the facilities funded under most existing contributions plans in, say, infill areas.  Such plans, would typically include, for example, the cost of construction of community facilities such as libraries.

This means that if local councils want to exceed the ‘soft caps’ the scope of public facilities that they can fund under their contributions plans is reduced.

Is this an issue in infill areas?

When the cap was introduced in 2010, it was (in part) a government response to efforts by local councils in infill areas to boost their residential development levies well-above traditional levels.

Since 2010 there has been little incentive for infill councils to produce contributions plans with nominal contribution rates that exceed the capped amounts.  This is because the Government would probably not have provided gap funding from either the Housing Acceleration Fund or the Local Infrastructure Growth Scheme.

However, now that the ‘hard’ cap has been converted into a ‘soft’ cap, local councils will not need Government funding.  Once IPART has reviewed a contributions plan (and it has been endorsed by the Planning Minister) local councils will be able to recover the levies directly from developers.

We can expect that some local councils will now adopt a more aggressive approach to new contributions plans.

A sign of things to come may be Bayside Council’s efforts to get IPART to approve its contributions plan for the ‘Rockdale Urban Renewal Area’.

This area comprises Wolli Creek and Bonar Street precincts — 67.8 hectares of land.

So far, this is the only infill contributions plan that the IPART has looked at.

Rockdale Council (now Bayside Council) had sought nominal contribution rates (in 2016 dollars) of close to $33,000 for each two-bedroom apartment and $40,000 for each three-bedroom apartment.  The IPART ended up supporting nominal contribution rates of close to $25,000 and $30,000 respectively (with a note that this could increase further once Bayside Council came back to the IPART with an acceptable stormwater infrastructure program).

Under the pre-28 July regime, the ‘hard’ cap could not be exceeded.  This meant that the levies would still have been kept to $20,000 per dwelling — and the local council would look to the Government to fund the difference.

Now, when IPART carries out an assessment such as this (for other infill contributions plans), any levy it agrees to, if supported by the Planning Minister, will be imposed on new development as a condition of development consent.

It is reasonable to think that, going forward, some infill areas are likely to see levies well above the ‘soft’ cap.  However, it may take some time (perhaps 1-3 years):

• for local councils to complete the preparation of new contributions plans;
• for these plans to be assessed by the IPART; and
• for the plans to be then approved by the Planning Minister.

Is there any retrospective effect?

No. The adoption of any new contributions plans will not affect development consents that have already been granted based on old contributions plans.

However, new contributions plans may affect modifications to existing development consents that add additional dwellings.

New contributions plans may also affect developments (such as large-scale subdivisions) that are to be carried out in a staged manner under different development consents. (Later development consents will generally be subject to the contributions regime that applies at the time those consents are granted.)

How can I manage my liability?

If a developer and a local council is willing, a planning agreement can be used to ‘contract out’ of the ‘section 94’ contributions regime.   This may be useful if a developer is looking to carry out a large development over a long timeframe (say three, five or ten years).  That is, a developer and a council can secure certainty by agreeing on, say, a monetary contribution regime that would apply instead of any future regime adopted under a new contributions plan.

Alternatively, when development consents are granted with (what you believe to be) unreasonable contributions in the circumstances, you can consider appealing the imposition to the Land and Environment Court.  The Court may disallow an unreasonable contribution even when it is consistent with a contributions plan.

The upshot is …

The 2010/2011 settlement on development contributions has now been overturned.

The scene has been set for increases in both infill and greenfield residential development levies.

While these increases may take time to become apparent in a formal sense (say one to three years) they may immediately affect negotiating behaviour of councils and developers in relation to planning agreements.