Land Infrastructure Tax Concerns

the Summit
Creative Commons License photo credit: Dystopos



The Brumby government’s haphazard manner in dealing with Melbourne’s ‘urban sprawl forever’ attitude is straining government revenues. The desperate actions following from this with the $95,000 Growth Areas Infrastructure Contribution (GAIC) are the result of the ignorance of more efficient and equitable revenue raising systems. The GAIC has been called a Land Infrastructure Tax.

Such lump sum charges are a disaster waiting to happen. Similar to Sydney’s ‘Developer Charges’, lump sum taxes will be passed on. There is no doubt about it. Reports are coming through such as:

One caller to ABC Radio said his parents would be left with only a couple of hundred thousand dollars on a large property they had owned for more than 20 years.

Other landowners fear the proposed levy will dramatically reduce their property’s resale value.

These farmers will simply withhold this land until it’s price increases by at least $95,000 per hectare.

A fairer way to ensure that landowners pay for the benefits of a new rail link would be to charge a percentage on all land values. A Land Value Capture system would ensure that prime locations could not be speculated upon with reckless abandon. Nor could they be withheld until the landowner’s asking price is met. This would ensure that successive landowners over the life of the infrastructure contribute something back to the government in respect for this new service.

One generation of buyers is not hit with the full bill.

The above quote qualifies our addiction to windfall gains. Why should a handful of families benefit at the expense of people battling for a basic human right – for the right to a roof over their head? Who prefers being taxed for working but yet rewarded for owning large valuable tracts of land? At the same time we are sympathetic to the above landowners – Brumby is asking for trouble with this sort of slapstick charge.

The 2030 boundary is a farce. It forces up land prices inside the boundary, and forces them down outside the boundary – that is until lobbyists manage to bribe Brumby to extend certain sections. Why were land tracts bought prior to 2005 exempted from this new charge? One can only imagine…

This issue highlights the need for an educative process on the importance of Land Tax – especially with the Bailleu family lining up to storm into public office at the next election.

8 Comments

  1. Carmen16-06-2009

    Infrastructure New Tax

    I would like to bring to every ones attention an issue that is adversely impacting many Victorians.

    There is a new tax brought in by the government under the radar that no-one seems to know about and is still being pushed through. It is known as Infrastructure Tax.

    We have a small property of 5.5 hectares and it now falls under the Urban Growth Boundary category, which will result in our having to pay $85,000 per hectare upon sale. We are not alone in this predicament.

    This new tax is being back dated from 2005. I (and MANY others in my position) would like to know why the seller of the property should be forced to pay this ridiculous new tax when the developer should be having to pay as they are the ones to make money and be able to pass on fees to the new purchasers.

    We have owned our home for 26 years and have been watching as our farm is surrounded by urban development. Consequently, we now have 20 neighbors and have been fighting to sell our land since before 2000!

    In 2000 our property was put into what they called the “Green Wedge”, which meant that we could not sell to subdivide the property. In 2005 we were put in to the Urban Growth Boundary (UGB) and we are still waiting to be able to sell our land for subdivision as the government/council now say that a planning structure has to be drawn for the whole area which they say will take another 2 years. So now it seems we have to wait until 2011. Of course, we have no confirmation that we can indeed sell for subdivision after this time, only that we can not do this before that time.

    Also, across the road and quite a way down away from town, is a hugely developed area. In fact, around 500meters AWAY from town on my very street, is a new major shopping centre! Why should they be able to develop yet we can not?

    On top of this horrific wait for some of us (not all of us clearly), and these obvious hypocrisies, we have now been been advised on a new “tax” where we have to pay $85,000.00 per hectare upon sale of our land to a developer. This would mean that we would have to pay approx $450,000.00 for this tax ALONE which we could not pass on to anyone else (as the developers can).

    We (the many land-owners who just want to sell their property at a reasonable price) are being held to ransom by the government and we cannot do anything about it. Does any one have any ideas what we can do or what avenue we can take? All we want to do is sell our property at a reasonable price, just as so many others have been able to.

  2. Gavin R. Putland16-06-2009

    Dear Carmen,

    You complain that you will have to pay $450,000 when you sell your land. That raises four questions:

    (1) What price do you expect to get when you sell the land, and how much did you pay for it 26 years ago, in today’s dollars? In other words, how much is $450,000 when expressed as a percentage of your real “capital gain” on the land?

    (2) Would you be satisfied if the tax were explicitly set at a fraction (e.g. a third) of your real “capital gain”, so that it could not cause or magnify a real capital loss, but would merely reduce your windfall?

    (3) If not, why not? Why should you get the whole capital gain? What did you do to earn it? Did you cause Melbourne to grow so that your land would be wanted for residential purposes?

    (4) Shouldn’t you be complaining about the compliance costs of the GST instead? See my website (http://grputland.com/).

  3. jeanette04-07-2009

    Dear Gavin,

    Most of the properties affected by the GAIC proposal are already subject to capital gains tax. This proposal is discriminating against a small number of property owners. Vast numbers of home owners in Melbourne have enjoyed very healthy capital gains on their properties in the past decade but you are happy for them to keep their “whole capital gain”. This tax is grossly unfair. Some landowners will be paying 20% of their sale price in GAIC, some will be paying 80% and some unfortunate owners, if forced to sell out early may end playing over 100% of their sale price. Don’t sell then, I hear you say. But what about the impact of increased municipal rates. Some landowners in the 2005 UGB have had their rates increase from $5000 to $48,000 in the space of 5 years, but no developers are interested in their land. Can’t afford to stay, and now thanks to the GAIC, can’t afford to sell. The sooner this government gets voted out the better.

  4. Therese04-07-2009

    Your site talks about people being “privileged” for owning large tracts of land. Many of the landowners affected by the GAIC proposal are hard-working families, many of whom have worked for generations to afford the land they live on. Or they are farmers who produce the food we eat – remember it doesn’t just appear on supermarket shelves by magic. Local farmers are in their 12th year of drought and battling competition from cheap imports. This is just another kick in he guts. I thought we lived in a country where everyone got a fair go, but I’m starting to doubt this.

  5. Gavin R. Putland04-07-2009

    Jeanette and Therese:

    I never said the GAIC was fair. I merely wish to clarify why it is UNfair: it is unfair because it is not apportioned to the unearned uplift in the land value since the land was acquired; thus there is nothing to stop it from exceeding that uplift or even exceeding the sale price.

    Now let’s deal with the loose ends:

    Jeanette wrote:

    > Most of the properties affected by the GAIC proposal are
    > already subject to capital gains tax.

    And the associated concessions, which are not available for earned income or even for income from capital. How fair or sensible is that? If the GAIC were like a surcharge on capital gains tax, it would tip the playing field in a more sensible direction. Unfortunately it isn’t.

    > This proposal is discriminating against a small number of
    > property owners.

    True.

    > Vast numbers of home owners in Melbourne have enjoyed very
    > healthy capital gains on their properties in the past
    > decade but you are happy for them to keep their whole
    > capital gain.

    Where and when did I ever say that? If I did say something like that, it was probably in the context of explaining that a holding tax on land values or on uplifts in land values is an alternative to a capital gains tax and has certain efficiency advantages over a capital gains tax. (And it lets people keep their “whole capital gain” in the sense that instead of taking a declared fraction of the “capital gain”, it prevents part of the uplift in the land value from appearing as a “capital gain” in the first place; but perhaps that’s getting a bit technical.)

    Or perhaps I was explaining that certain shared-equity schemes proposed as a solution to the housing affordability problem would allow the passive partner to impose what amounts to a private capital gains tax on the home — and asking why a private capital gains tax is acceptable if a public one isn’t.

    But I have certainly said that if we are to retain anything resembling stamp duty on conveyancing (a big “if”), it should look more like a capital gains tax. That reform would include home owners would not be “discriminating” against a narrower category of owners.

    > This tax is grossly unfair. Some landowners will be paying
    > 20% of their sale price in GAIC, some will be paying 80%
    > and some unfortunate owners, if forced to sell out early
    > may end playing over 100% of their sale price.

    I’ll take your word for it. Such outcomes are indeed unfair.

    > Don’t sell then, I hear you say.

    Ah, no. What I would say is: If you’re an AGRICULTURAL land user, and if you’re having trouble paying rates or land tax calculated on valuations that take account of the potential RESIDENTIAL use, then sell — and realize your capital gain, and use the proceeds either to retire or to buy land further out of town.

    But if the GAIC stops you from selling, therein lies the unfairness.

    Therese wrote:

    > Your site talks about people being “privileged” for owning
    > large tracts of land.

    The privilege consists in the fact that one person’s land increases in value in consequence of OTHER PEOPLE’s efforts.

    > Many of the landowners affected by the GAIC proposal are
    > hard-working families,

    Yep. And the present system taxes them on their hard work. We think that’s unfair.

    > many of whom have worked for generations to afford the
    > land they live on.

    Yep. And as they worked, their capacity to save for that land was systematically eroded by taxes on their earned income and necessary consumption. Meanwhile the land they wanted to buy was getting more expensive, eroding the purchasing power of their savings, while those who already owned that land got preferential treatment from the tax system. We think that’s unfair.

    > Or they are farmers who produce the food we eat…

    Yep. And the present system makes them pay income tax on the fruits of their production, and payroll tax on the labour that they hire; and it forces them to incur compliance costs in collecting and reclaiming GST, collecting income tax payable by their employees, and assessing their own income tax liabilities. We think that’s unfair. Indeed I (speaking for myself) have gone so far as to say it’s unconstitutional; see http://grputland.com/tribune/2009/06/making-tax-system-comply-with-s82-of.html .

    > Local farmers are in their 12th year of drought and
    > battling competition from cheap imports.

    Well, one advantage of taxing land values or uplifts in land values is that droughts and cheap imports reduce the value of agricultural land, so that farmers automatically get compensation. They get no such compensation from payroll tax or GST.

    > This is just another kick in [t]he guts.

    The GAIC? Certainly. But if it were apportioned to uplifts in land values, that would be a different story.

    > I thought we lived in a country where everyone got a fair
    > go, but I’m starting to doubt this.

    When you don’t merely doubt it, but vehemently deny it, and marvel that you ever believed such propaganda in the first place, you’ll be starting to understand the problem.

    Kind regards,
    Gavin R. Putland.

  6. Tim09-10-2009

    A pretty late comment, I’m afraid, but I’ve only recently come across this site.

    A question for Gavin, or the author (Karl).

    It’s claimed that the GAIC will almost certainly be passed on, but I fail to understand very well how this will happen. The taxes are ‘nearly’ lump-sum taxes – the only thing the landowner can do to avoid them is to avoid selling (or subdividing) the land.

    Is it claimed that there would be a ‘lock-in’ effect (ie withholding of the land in order to avoid the tax) and that this would be the cause of the tax being passed through? In other words: a reduced supply of land for sale causes prices to rise above that which they would be in the absence of the GAIC?

    That seems like a plausible hypothesis at first glance, but I do wonder how big the effect actually will be.

    After all, the rezoning of this land to include it inside the Urban Growth Boundary will have caused the value of the land to rise enormously. The GAIC will take only a portion of that uplift. So the net effect of the rezoning / GAIC package will still be a higher cash amount received by the vendor than they would have received prior to the announcement of the policy package.

    So the owners of rezoned land still have a large incentive to sell. And unless they think that the rate of growth of the sale price will exceed the rate of indexation of the GAIC*, they should be equally happy to sell now as to sell later. (Selling now shouldn’t cause any liquidity issues, surely, since the windfall gain net of GAIC will still be positive).

    In the absence of a LVT at a high rate, it still seems like a good idea to claim some of the rezoning windfall. Sure, it’s been labelled as an infrastructure contribution rather than a windfall tax, but it amounts to the same thing (apart from the inequity in its implementation: the constant charge per hectare will correspond to a high proportion of the windfall for some land and a low proportion of the windfall for other sites).

    I’d be curious as to your thoughts as to how the GAIC will be passed through to land prices, and why it isn’t a good ‘second-best’ option, given that there is currently not a LVT at rates which would claim much of the windfall gain created by rezoning decisions.

    Finally, while I don’t understand why landowners planning to sell up are up in arms about the GAIC (has it not been well communicated that the joint impact of the rezoning + GAIC is a massive net gain for land sellers? or is it possible that the GAIC per hectare is so high that some sellers really will lose out?), I do sympathise with farmers forced off the land because the massive increase in local government rates is more than they can finance out of cash income. Some would argue that ‘if you occupy a valuable site you should pay society for the privilege’ (and I would agree), but if they had taken their previous zoning status, and the previous position of the UGB (which was promised to be ‘fixed in stone’, I thought) at face value, then they would have made plans and settled on those sites and in those communities in good faith. Being forced off the land, when the land is the only living and the only lifestyle you know, seems unfair. Deferral of rates payments until death or sale in these types of situations seems reasonable to me, in such cases.

    Regards,
    Tim

    *There is definitely a question mark over the indexation of the GAIC to a construction cost index, rather than a land prices index. If construction cost and hence the GAIC rise more slowly than land prices, then there is an incentive to withhold the land.

  7. JCW07-12-2009

    Correct me if I’m wrong, but on a transfer of land, the GAIC is paid by the purchaser, not the vendor. While this will naturally affect the sale price, the classification of land as within the UGB is known to dramatically increase property values. So, someone who has owned 5.5 hec of land in the UGB for 26 years should not be unhappy. They are going to realise a massive capital gain.

Leave a Reply

*
*

https://prosper.org.au/2009/05/29/land-infrastructure-tax-concerns/