Recent research suggests that it may be possible to implement value capture taxes on a more equitable basis.

There is currently considerable interest in value capture as a means of funding public infrastructure. While opinions differ regarding the contribution that value capture can actually make to the funding task, there seems to be broad consensus to the concept – that those who financially benefit from the provision of publicly funded infrastructure should make an appropriate contribution towards the cost of it.

Taxpayers already contribute to the cost of our publicly funded roads, railways, light rail, hospitals, schools and other infrastructure via the taxes that they pay. And those who use certain infrastructure, such as toll roads and public transport systems, pay tolls, fares or other user charges that help to fund the cost of providing such infrastructure.

But when new public infrastructure is built, significant financial windfalls can fall to some who make no additional contribution towards the cost. In particular, people who own land within walking distance of new train and light rail stations often benefit from significant uplifts in the value of their land.

The Commonwealth Government has made it clear that it wants these landowners and other beneficiaries to share this incremental value with government, to help pay for the infrastructure that creates the additional value. Indeed, the Commonwealth Government has indicated that the funding that it provides to state and territory governments for such projects will soon be conditional upon the relevant state or territory government ensuring that these landowners and other beneficiaries make an appropriate contribution towards the cost of providing the infrastructure. Infrastructure Victoria is referring to these contributions as beneficiary charges. Others have called the concept value capture or value sharing.

Value capture mechanisms - why doesn't government imposed a value capture tax?

We've explored various ways in which value capture has been implemented, including betterment taxes, tax increment financing, joint property development and voluntary contributions. However, none of these mechanisms implement value capture in a manner that perfectly aligns with the theoretical basis of the concept. In order to do so government could impose a new tax that requires the owner of each property that goes up in value as a result of publicly funded infrastructure to pay a percentage of the incremental value created to the government, to help pay for the infrastructure that created the value uplift.

But if it was this simple, governments would have implemented such a tax long ago. So what are the difficulties, and how might they be addressed?

First, there is the cash flow issue for property owners. A property may have gone up in value, but this capital gain won't be realised until the property is sold. What if the owner has no intention of selling anytime soon? No problem – this issue could be solved by only requiring the tax to be paid if and when a property is sold or transferred.

Secondly, who should pay the tax? Only landowners within a particular area, close to the new infrastructure facility? But what about landowners just beyond the boundary of the defined area? Why should they not pay the tax if the value of their land also increases as a result of new infrastructure facility? No problem – this issue can be solved by imposing the tax on every landowner whose land goes up in value as a result of the new infrastructure facility.

Thirdly, how does government determine the amount by which the property has increased? No problem – government presently assesses the unimproved value of land at regular (usually annual) intervals. Simply compare the Valuer General's assessment of the unimproved value as at the time funding for the project was first committed, with the assessment as at the time the land is sold. And while the Valuer General's assessments could be a little off the mark, let's assume that near enough will be good enough for the purposes of the value sharing tax.

Fourthly, what about other factors that may have contributed to the increase in value over this period? The tax should only apply to the increase in the unimproved value that is attributable to the publicly funded infrastructure – it should not apply to increases in the unimproved value attributable to other factors. Is it possible for government to isolate the value uplift that is attributable to the publicly funded infrastructure? Recent research (discussed below) suggests that it is.

Fifthly, which publicly funded infrastructure projects should the tax apply to? Just the mega projects? Why not smaller projects? Surely the basic principle applies equally to all publicly funded infrastructure improvements? From an administrative perspective, the line will need to be drawn somewhere. There's no point in extending the tax to projects where the costs of collecting the tax would exceed the revenue raised. Where the line is drawn is a matter best left to our elected representatives. If we don't like their choices, we can elect someone else next time.

Finally, from what time should the uplift be measured? From when the project is first announced, you say. But some projects are announced many times before they actually proceed. For example, the Gold Coast light rail project was first proposed in 1996, 14 years before construction commenced. Again, this is a matter best left to our elected representatives to determine.

Can the value increase attributable to the publicly funded infrastructure be isolated?

Of the above issues, the most challenging appears to be the fourth – isolating the increase in the unimproved value of land attributable to the publicly funded infrastructure from the increases due to unrelated factors. It is this issue that has previously lead to betterment taxes being levied within defined geographic areas on a basis other than the actual increase in the unimproved value of the land – and the inequities this can give rise to. However, recent research published by LUTI Consulting and Mecone Planning (with support from the NSW Government and the Cooperative Research Centre for Spatial Information) suggests that our ability to isolate and quantify such increases in value has improved.

This research analysed land values surrounding transport projects undertaken within the Sydney metropolitan area between 2000 and 2014. The analysis identified the value created by investments in transport projects can be characterised into three consecutive phases:

  • Phase 1: improved accessibility leads to an increased willingness to pay for land in proximity to the transit infrastructure;
  • Phase 2: increased willingness to pay leads to demand to change the zoning of land parcels, to their highest and best use; and
  • Phase 3: increased demand in the newly rezoned areas unlocks higher development density (ie. higher floor space ratios), commensurate with the higher willingness to pay.

The research suggests that it is now possible to isolate and quantify the increase in the unimproved value of a parcel of land created by a publicly funded transport infrastructure project, thereby enabling government to implement a more equitable value sharing tax.

Monetising future tax revenues

Of course, another challenge for government is to immediately access the cash needed to pay for construction of the new infrastructure. Any value capture tax will only generate cash flow for government when the tax is paid. Under the model discussed above, the tax will be paid progressively, as the relevant properties are sold, which could be many years after the infrastructure has been built. But if these future taxes can be forecast with reasonable certainty (which they can) then someone will be prepared to pay a lump sum today, for the right to receive the future taxes as they are collected. So government can sell the right to receive these future taxes in return for a lump sum that it can apply towards the cost of building the infrastructure.

A role for City Deals?

Finally, Australia has three levels of government. Betterment taxes have traditionally been levied by local or state governments. Funding for the construction of the infrastructure might be provided by a different level of government to the level of government that benefits from a value capture tax. For these schemes to work, it may be necessary for the different levels of government to reach an agreement.

The Commonwealth Government has already flagged its intention to make its funding for infrastructure projects conditional upon value capture mechanisms being employed. The "City Deals" proposed in the Commonwealth's Smart Cities Plan will almost certainly require Local and/or State Governments to expend some of their political capital by implementing value capture taxes in return for Commonwealth Government funding. They might also provide a vehicle through which the Commonwealth Government might agree to share a portion of any incremental Commonwealth taxes raised as a consequence of new infrastructure that has been partially funded by state or local government.


Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.