Broad-Based Land Tax Could Replace Stamp Duty

September, 2020

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State Governments are looking to reform stamp duty. Calls for reform have been heightened by the impact of COVID-19 on property markets.

A recent review of Federal Financial Relations conducted by the NSW Government recommended that stamp duty be abolished and replaced by a broad-based tax on land.

 

State Governments are looking to reform stamp duty. The calls for reform have been heightened by the impacts of Covid-19 on the property market, which has resulted in a reduction in stamp duty collection.

 

Stamp Duty revenue across Australia for the 2018-19 year was $25.7billion, and other forms of tax are being investigated to replace the revenue.

 

 

Authors

Grant Jackson

Chairman & Director

View Profile > VIC
Amita Mehra

National Director - Research, Marketing & Strategy

View Profile > VIC
Kate Elkington

Associate Director

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Stamp Duty vs Land Tax

Stamp Duty Collection Remains Volatile

  • All states with the exception of QLD experienced a decline in stamp duty during 2018-19. In comparison to 2017-18, VIC and NSW experienced a decline of 13.3 per cent and 11.8 per cent respectively.
  • Volatility of revenue collection from stamp duty makes it difficult for states to manage budgets.
  • During the property market boom in 2017-18, NSW raised almost 28 per cent of taxation revenue from stamp duty – one third greater than a decade prior – before revenue dropped by 14 per cent the following year.
  • South Australia abolished stamp duty of commercial real estate transactions progressively between 2015 and 2018. This has successfully stimulated transactional activity, resulting in a reduction in overall stamp duty collections in the State of just 7 per cent by 2018.

 

 

Land Tax Provides Consistent Revenue Collection

  • Land Tax revenue increased in all states over the financial year 2018/19 with the exception of WA. VIC experienced the highest land tax revenue increase of 30 per cent.
  • This chart shows the fairly steady collection of land tax revenue as opposed to the volatility of the stamp duty collection chart above.

 

 

Potential GST Reform

  • The GST now raises around $65 billion a year, which is approximately 13 per cent of Australia’s total tax collected.
  • According to the Organisation for Economic Co-operation and Development (OECD) report, Australia’s GST rate of 10 per cent is well below the OECD countries Value added tax rate average of 19 per cent.

 

 

NSW review of Federal Financial Relations Report Summary

The NSW government last August commissioned a review of the State’s revenue system in relation to federal funding and the state tax system and tasked an independent Review Panel headed by David Thodey to deliver a roadmap to more sustainable funding and financial autonomy for the state.

A draft report was delivered in July 2020.  The report made 15 recommendations including phasing out “unfair and damaging taxes” by harmonising payroll tax, broadening and increasing land tax and modernising road use.

 

Key Recommendations

  • A broad-based land tax is more efficient and equitable than stamp duty. Therefore NSW should reform its tax system replacing stamp duty with a broad-based land tax.
  • The transition needs to be transparent, carefully modelled and managed so that the transition is fair, efficient and minimises the amount of revenue foregone.

 

Summary

  • According to the report, there were 2.8 million properties in New South Wales in 2018-19, but less than 200,000 of their owners contributed to the funding of essential services via stamp duty. The Henry Review estimated that some 26 per cent of owner-occupiers have remained in the same property for at least 20 years. Most of these people have benefitted not only from the services provided by the state over that time but also from a once-in-a-generation land price windfall.
  • According to the NSW Federal Financial Relations report, four types of reform options are described to replace the existing state taxes with an aggregate neutral property tax. The options are outlined in the table (right).
  • The NSW Government should seek assurances from the Commonwealth that it will not be disadvantaged with a lower GST share as a result of undertaking major productivity-enhancing tax reforms such as replacing stamp duty with a broad-based land tax.

The draft report detailed four different transition models from Stamp Duty to Land Tax originally proposed by the Henry Review with various trade-offs inherent in all. Most significantly, governments will have to balance equity for existing owners against the revenue cost of providing land tax concessions and have access to thorough modelling of budget impacts and distributional effects.

Stamp Duty reform options

 

According to the report, Options 1 and 3 are best in terms of Efficiency and Simplicity.

 

Transition Strategy

According to the report, there are four options to transition from stamp duty to broad-based land tax.

 

Case Study – ACT

In 2012, the ACT government began phasing out stamp duty as part of its 20-year plan to reform the territory’s property tax system. Key measures of the 20-year plan included:

  • Abolishing Duty on Insurance taxes over five years;
  • Phasing out Conveyance Duty over 20 years;
  • Abolishing commercial Land Tax and combining it with commercial General Rates;
  • Making General Rates more progressive;
  • Making residential Land Tax more progressive;
  • Reducing the amount of Payroll Tax paid by businesses; and
  • Legislative changes, including aligning the landholder provisions with NSW.

 

Stage 1 (2012/13 – 2016/17)

  • Abolishing duty on insurance taxes – abolished on 1 July 2016
  • The ACT Government didn’t increase the “tax take” although changed the “tax mix” from inefficient transaction taxes like conveyance, to efficient taxation on land values.
  • Over the first stage of tax reform, inefficient taxes (conveyance and insurance duties) were reduced from 24 per cent to 16 per cent of overall tax revenues in ACT.
  • Implementation of the phasing out of Stamp Duty and phasing in of higher land tax during the first five year period.
    • The reduction in the marginal tax rate was focused on the lower tax brackets (threshold under $500,000).
    • The table below shows the impact on higher saving levels for
      lower value properties.

 

Stage 2 (2017/18 – 2021/2022)

  • Conveyance Duty rates will continue to be cut every year with the revenue foregone replaced through the general rates system.
  • The Government is committed to keeping taxes as low as possible and will not be increasing the overall amount of tax revenue raised through its tax reforms.
  • Commercial conveyance duties removed for most transactions from 2018-19.
  • Properties below $500,000 account for about 60 per cent of residential transactions.
  • By 2019-20, conveyance duty revenue is estimated to decline to about 14 per cent of total tax revenue, a decrease from 20 per cent in 2011-12, and general rates are estimated to increase to about 29 per cent of tax revenue.

Residential Conveyance Duty

The table below shows the reduction in Conveyance Duty based on property value and the percentage saving pre-tax reform to completion of stage 1 and forecast completion of stage 2.

The conveyance duty payable on transactions on property below $500,000 will decrease by 51 per cent or by the end of stage 2 of tax reform.

 

Observations

  • Stamp Duty is an inefficient tax and a volatile and unreliable source of revenue for State Governments.
  • A broader-based land tax would create greater revenue certainty for State Governments.
  • Transitional measures would be critical to any change.
  • The land tax base must be broadened to include a wider range of properties.
  • Tax reform should not be an opportunity for the Government to seek to increase revenue.
  • Abolishing stamp duty would create a more liquid property market.