avoidAs the Fairfax papers reported on April 14, the NSW government has rejected yet another recommendation to replace conveyancing stamp duty by a broad-based land tax. That is the effect of the “stamp duty replacement tax” recommended on page 13-4 of the Lambert Report, delivered in September and quietly released in February.

It is often said that replacing stamp duty by land tax would discriminate against recent home buyers (who have recently incurred stamp duty). The remedy suggested by Lambert is to apply the land tax from the next sale of each property, so that current owners would not be affected. As Lambert himself acknowledges, this would cause a hiatus in revenue, because the flow of stamp duty would stop immediately, but the land tax revenue would build up slowly as properties entered the new system.

I was therefore unimpressed to read in the Daily Telegraph that the NSW government might allow first home buyers to pay their stamp duty over three years. That would cause a revenue gap (somewhat like Lambert’s transitional arrangement) without the efficiency gains of replacing stamp duty by land tax!

A more viable transitional arrangement would involve two steps. The first step is to replace the purchaser stamp duty by a vendor duty on the capital gain. This avoids discriminating against more recent buyers, because their capital gains (if any) are smaller. As a political sweetener, this step could be accompanied by the abolition of the existing, narrow-based land tax. The second step is to introduce the broad-based land tax as a pre-payment of the vendor duty. This would not cause any interruption of revenue. The pre-payment could be optional in politically sensitive cases (such as the “family home”), but compulsory in others.

Even the first step by itself would be an improvement on the status quo. It would improve the position of first home buyers relative to repeat buyers, because the former would no longer pay duty up front, while the latter’s capital gains would no longer be untaxed. The duty on the capital gain would not greatly discriminate against more frequent movers, whose capital gains would accumulate in larger numbers of smaller steps. And because each transfer of title would only realize, rather than create, a tax liability, the “lock-in” effect would be smaller than that of a duty on the transfer price.

Nevertheless, the record clearly indicates that governments will not give up the present stamp duty until they have no choice. Accordingly, I point out that the existing stamp duty is highly avoidable.

If you’re a home owner, you don’t have to pay stamp duty just because you move or “downsize”. If you let your old address to tenants, and rent your new address, there’s no change of ownership, so you pay no stamp duty, no conveyancing fees, and no agent’s commission. And if the interest on your old address exceeds the rent, you can start claiming “negative gearing”.

Yes, you might start paying land tax and rental management fees. But that’s all tax-deductible too — unlike the costs of selling your principal residence and buying another.

Yes, if you live away from your property for long enough, you’ll become liable for capital gains tax. But only if you actually make a capital gain! No such safeguard applies to stamp duty, conveyancing fees or agents’ commissions.

If everyone adopts this strategy for avoiding stamp duty, governments will be forced to find an alternative; but early adopters will save a fortune in the mean time.