States dump stamp duty for a land tax

A proposed change in the way revenue is raised makes economic sense but it’s political dynamite

WHY WOULD THEY DO THAT? The idea of replacing an irregular tax like stamp duty with a tax that automatically applies every year has long appealed to state governments. While stamp duty can be a gold mine when the housing market is running hot, this income stream shrinks dramatically during the inevitable slowdowns. A broad-based annual property tax would deliver more stable and certain revenue.

There is also an economic argument that land tax is more efficient than stamp duty as it is broad based and doesn’t depend on people’s behaviour. In a 2015 report, the Grattan Institute argued that a land tax of $2 for every $1000 of capital improved land value could generate $16 billion a year for the states and territories and add up to $9 billion a year to gross domestic product. It said land tax was more efficient than stamp duty as it doesn’t discourage activity such as mov- ing house or jobs (due to longer commutes from the current home).

There is also a fairness issue as taxpayers who move house more often foot a higher proportion of the tax bill than those who stay put.

So far only the Australian Capital Territory has made the leap. It is phasing out stamp duty over a 20-year period though it has the advantage of being able to simply increase municipal rates rather than introducing a new tax. But in other states, councils control rates so this is not an option.

The idea has also been recommended by the Rudd government’s Henry tax review and the Abbott government’s 2015 tax reform discussion paper. In October, the Productivity Commission threw its cap into the ring. It cited a recent Treasury report which estimated that each additional $1 collected in stamp duties on residential property reduces the living standards of Australian households by 72¢ in the long run due to the effects of lower investment and mobility.

BUT ISN’T THAT TAXING US TWICE? I ALREADY PAID STAMP DUTY WHEN I BOUGHT MY HOME! That’s the main reason state and territory governments have shied away from the idea, fearing a voter backlash. They could, like the ACT, phase in the change but existing owners would still be hit by some degree of double taxation.

In a recent policy brief for the Australian Centre for Financial Studies, Monash University’s Kevin Davis proposed a way around this. He said state governments could abolish stamp duty immediately and only apply the new land tax to properties bought free of stamp duty. Existing properties where stamp duty had been paid on purchase would be exempt. To make up for the shortfall in state revenues, he said, future property taxes could be securitised and sold to investors like super funds who want a long-term income stream.

Fairness issues also arise to ensure households that may be asset rich but cash poor – such as owner-occupier retirees – are not adversely affected by the change. While abolishing stamp duty might encourage retirees to downsize, the Grattan Institute and Productivity Commission said welfare measures would need to be considered so that people are not forced to move. These could include allowing retirees to defer the tax to be paid from their estate or the sale of the property (if it was not exempt).

WON’T WE END UP PAYING MORE TAX OVER THE LONGER TERM?

It depends on the rate of land tax and whether any exemptions are granted. The Henry Review, for example, suggested that while all land should be included in the tax, a tax-free threshold per square metre could be set to ensure no tax was paid on most agricultural and lowvalue land.

The Grattan Institute argued that a flat rate tax on property values with no minimum threshold would be the simplest way to go as any progressive system could result in some people paying more. For example, if the tax was calculated on a per square metre basis, owners of smaller inner-city apartments would pay much more while owners of similarly priced outer suburban houses could pay less.

The Productivity Commission pointed to a 2011 NSW Financial Audit which proposed an annual rate of 0.75% on unimproved land values of less than $775 per square metre and 1% above this threshold. The Grattan Institute estimated a rate of about 0.4%.