Prosper Australia

The tax unit for an asset-holding tax should be the asset!

Gavin Putland

Recommendation 10 of the Draft Report of the IPART Review of State Taxation suggests “changing the tax unit for land tax from joint ownership to the individual” as a means of reducing complexity caused by aggregation of site values.

That raises the question: As land tax is a tax on site values, wouldn’t it be simplest if the tax unit were the site? Our first submission to this Review proposed a mechanism which would indeed make the tax unit the site, without creating winners and losers in the transition to the new system. With a little elaboration, the transitional arrangement can account for the effects of aggregation before doing away with it.

Origin of the problem

Because the acquisition of major assets requires income in excess of necessary consumption, the distribution of major assets, including land, is more unequal than the distribution of income. And because land tax (in NSW and other Australian jurisdictions) exempts owner-occupied residential land, the ownership of taxable land is more concentrated than the ownership of land in general. For these reasons, land tax would be strongly progressive even if applied at a flat rate with no threshold. The purpose of a threshold is not so much to make the tax more progressive as to limit the number of taxpayers, especially among swinging voters. But a threshold, by itself, creates the opportunity for landowners to minimize tax by holding a large number of low-valued sites, this strategy being especially viable for urban speculators who “buy at the fringe and wait”. To close the loophole opened by the threshold, site values are aggregated before the threshold is applied.
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