The year of 2020 was a shocking year for many reasons, from the bushfires to a global pandemic. But there were some positives too, especially for land tax reform. Here are some of the developments that should give us some cautious optimism for the years ahead.
NSW’s public consultation on Stamp Duty to Land Tax reform proposal
More than a decade since it was proposed by Australia’s Future Tax System (Henry) Review, replacing Stamp Duties with a broad-based Land Tax is on the agenda for the states. Until recently, only the ACT has been able to make a transition (given its unique political environment). Now NSW is likely to make the transition, and has released a consultation paper for feedback on their proposed transition model.
How does their model stack up?
The NSW Treasurer, Dominic Perottet is at pains to make the transition politically palatable. He proposes giving people the option to pick a permanent land tax instead of stamp duty upon purchase. In turn the property remains on land tax forever.
The NSW proposal also entails grandfathering all existing properties, meaning that properties will ‘switch on sale.’ Because only a small percentage of properties are sold each year the transition will be very slow – over 50 years. Grandfathering involves large current revenue losses as Treasury weans off large lumpy stamp duties, for smaller annual payments. Grandfathering is one way to overcome double taxation (the ACT chose a 20 year phase in-phase out model). Unfortunately it creates large intergenerational inequities. It preserves the tax privileges of long held properties, giving existing landholders a free ride at the cost of the wider public.
The cost to the NSW budget and public would subsequently be significant. To counter this, the Government intends to restrict eligibility so the top 20% of properties do not qualify, given they bring in the lion’s share of stamp duty revenue. Even with the top 20% of properties still paying stamp duties, the transition could still cost up to $2bn p.a. for 50 years conservatively. This is an enormous hit to the state’s budget and could be used for other investments. Not to mention the extremely lengthy transition time.
Despite these drawbacks, the proposal is a workable and pragmatic first phase for the transition. The proposed land use differentials, deferral system (at market rates), and rating structure are reasonable starting points. Beyond this the transition is unclear. The top 20% of properties will undoubtedly need a different model that doesn’t include grandfathering due to the massive costs involved, and as well as a much more progressive rating structure to make up the revenue.
These reforms (without grandfathering) could be more politically feasible once the majority of properties and voters are already paying land tax, and view with discontent the privilege of those who do not fairly pay. We look forward to seeing NSW develop a proposal that works.
VIC retains Site Value Rating option for Local Government
After more than a year since the Local Government Rating Review final report was handed down, the Victorian Government has delivered its response. To our great surprise and relief, the government rejected the recommendation to abolish the option for Site Value Rating. The Government has reaffirmed the importance of the autonomy of local government, including in how it sets the valuation base for rating. See our submission here.
Additionally, the government has accepted a recommendation for a valuation averaging mechanism to reduce the volatility for ratepayers, and increase the predictability of rates. Prosper supports this measure in the hopes increased predictability of rates will reduce hostility to paying rates (without deviating too far from market values).
Notably, the more politically difficult reforms that affect the distribution of rates e.g. removing outdated exemptions and concessions were avoided due to “COVID-19 uncertainty”. Overall the government has made some improvements, and we thank them for their commitment to maintaining site value rating.
For now Site Value Rating remains secure. But it has been under sustained pressure for its abolition since the introduction of CIV’s favourable differential rating in the 1960s, and the 1990s council amalgamations. There is a long road ahead for reversing this decline.
ACT Government re-election and continuation of land tax transition
The ACT Government was returned despite the opposition’s campaign against further rate increases. The ACT is unique in many ways, with cost of living issues (i.e. rising rates) apparently barely registering with voters as an issue – electoral concern is focused on transport and city planning.
We analyse the progress and changes of the stamp duty reforms here. The picture looks positive overall, with the reforms on track for successful completion. Overall the ACT shows that pragmatic tax reform is possible, although we agree that a one-size-fits-all approach is not suitable. Clearly the states will need to forge a different path as NSW is considering, but whether they will reap the same benefits as the ACT during the transition remains to be seen.
2020 was a good year for structural land tax reform in Australia, ignoring the temporary COVID-19 waivers and concessions etc. What might 2021 bring? We at Prosper have some optimism. Currently Victoria’s investigation into property corruption could be set to recommend a betterment tax, and NSW could well become the first state to make a land tax transition. We will be busily advocating for these changes. Perhaps we will then see other states begin to follow suit? But with the property market looking to fire off again with changes to responsible lending laws, rock bottom interest rates, the HomeBuilder scheme and returning confidence, we will be watching for further prudential deregulation, rezoning giveaways and general property-based rent seeking in 2021.