Developers, land tax to pay for SRL as $6.7b contract locked in

Parking levies, existing land taxes and developer charges will be used to plug an $11.5 billion gap in funding for the first stage of the Suburban Rail Loop, with Victoria awarding a new $6.7 billion contract for the project.

Details of the government’s “value capture” strategy were released on Thursday, publicly outlining for the first time the full tax mechanisms the state intends to use to fund one-third of SRL East’s $34.5 billion construction costs.

Despite a backlash from the property industry and questions about the strategy’s merits, Premier Jacinta Allan was unapologetic as she spruiked the underground line between Cheltenham and Box Hill and announced the awarding of the $6.7 billion contract to the TransitLinX consortium to build the trains and rail infrastructure.

Under the plan, existing land tax levied on property owners within the six SRL precincts will be hived off to fund project construction, raising an estimated $5.75 billion. Windfall gains taxes will raise $450 million. This carve-up of existing taxes was first revealed in The Age in July and will run for 40 years.

A developer charge of $11,350 per new dwelling built in the areas immediately around each SRL station will apply from 2027 and jump to $33,924 from 2032, which is expected to raise $2.9 billion. The new rail line is set to open in 2035.

This means that by 2032, a new home built in an SRL precincts could include $33,924 in developer charges, which may be passed on to the consumer, alongside stamp duty.

Victoria will raise another $1.6 billion by developing government-owned land, and $800 million by implementing a car-park levy from 2035.

Allan said it “makes sense” for developers who were able to progress new projects unlocked by SRL to “make a proportionately small contribution to the delivery of this project.”

“Value capture is not new. Value capture, to fund projects like this, has been used around Australia and around the world.”

The state government has branded the SRL East “Australia’s largest housing project” and says it will unlock 70,000 homes around the six new stations.

SRL Minister Harriet Shing on Thursday said the project would help take some the housing burden away from Melbourne’s north and west, which have “for too long, have borne the brunt of unchecked growth”.

But Urban Development Institute of Australia CEO Linda Allison said the developer contribution announced on Thursday would discourage new builds.

“The Suburban Rail Loop precincts will include the highest taxed property in the state,” Allison said.

“At a time when apartment development is already unaffordable for developers and buyers alike, these precincts need to be incentivised, not punished with new taxes.”

Property Council Victoria executive director Cath Evans said the proposal would effectively kill the ambitious housing project.

“It cannot credibly claim the SRL precincts will deliver Australia’s biggest housing project while simultaneously imposing the highest development taxes in the country,” she said.

Experts have previously cast doubt on the state’s ability to raise $11.5 billion through so-called “value capture”, presenting a major risk to the project.

Although the infrastructure contributions and car park levy provide clear pathways to raise money as new charges, the siphoning of existing taxes that were already collecting revenue to fill more than $6 billion in the government’s funding gap has raised concerns.

Joe Langley, an urban planner and expert in value capture schemes, said the proposal to carve out $5.75 billion from existing land tax revenue was “just robbing Peter to pay Paul”.

“You’re just taking it out of consolidated revenue – it’s not value capture,” he said

“Land tax is currently paying for services that will continue to need to be paid. So if that’s hypothecated, then how do they make up the difference?”

Langley also said the windfall gains tax was a missed opportunity, with a projected contribution of $450 million – just 1.3 per cent of the project’s total $34.5 billion investment.

“It’s not an effective windfall gain because we know these stations will cause at minimum a 300 per cent increase in land values,” he said.

Former treasurer Tim Pallas last year told a budget estimates hearing that hypothecated taxes were not his preferred method of raising revenue.

“Ask any treasurer, and it does not matter what their political colour is, they will tell you they do not really like hypothecation of taxes because it cuts down the capacity and the ability of governments to respond to the needs of the community at any given time,” he said.

Opposition Leader Jess Wilson said the extra charges would worsen affordability and the land tax revenue the government planned to siphon for the project was essentially a $5.7 billion hit to the budget.

“We need teachers in classrooms, paramedics, more hospital beds, but now $5.7 billion is being quarantined to fund the Suburban Rail Loop,” she said.

Treasurer Jaclyn Symes disputed this logic, arguing that land taxes and other existing measures already paid for government projects.

“This is just the first project that we’ve outlined it in detail for you … It’s just an outline of where the revenue will come from for this project,” she said.

Independent economist Saul Eslake said he didn’t see an issue in principle with capturing the windfall gains in land values from a government decision and using them to pay for the project.

However, he said, this depended on whether the government could accurately measure how much of the increase in land value could be directly linked to the project.

Victoria has claimed the project will be funded evenly, with the state and federal governments and value capture taxes each contributing one-third of the cost.

The Albanese government has so far committed $2.2 billion but has pledged to contribute more in the May Budget.

In January, Infrastructure Australia said it did not have confidence Victoria could raise $11.5 billion from value capture.

The federal body said the Albanese government should not put more funds to the SRL East until Victoria could demonstrate how this would be possible.

The $6.7 billion “linewide” contract announced on Thursday includes 13 four-carriage trains to be built in Dandenong. They will be the first driverless trains used in Victoria, and have metro-style side seating to create more standing space for passengers.

Rail Tram and Bus Union Victoria secretary Vik Sharma said drivers would still be needed to ensure trains operate safely – even if they are highly automated.

“‘Automation’ is not a single technology. It ranges from assisted driving to fully unattended operation,” Sharma said.

“Despite the automation rhetoric, we will ensure drivers play a key role in delivering safe operations. Dressing this up as ‘driverless’ is misleading and risks undermining public confidence from day one.”

TransitLinX is made up of construction giant John Holland – which also built the Metro Tunnel and West Gate Tunnel – along with French public transport operator RATP Group, train builder Alstom, engineers WSP and technology group KBR.

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