Director of Research Danny Spring, Policy Coordinator Jesse Hermans

The Queensland government has backed down on nation-leading land tax reform after backlash from other states and an opposing media campaign waged by big property. The tax reform was modest, impacting few investors, and was aimed only at untaxed properties.

Currently, interstate investors don’t have to pay tax on their Queensland properties if they are worth less than $600,000, and Queenslanders don’t have to pay tax on any investment properties they own in other states. Despite its modest impact and self-evident fairness, the proposed tax changes were heavily opposed by the property industry, with anti-tax articles in the mainstream media far outnumbering articles in support of the tax. It’s unfortunate that states were not able to work together to close the $20m land tax loophole.

Although the sums involved are small, the change itself has special significance as a small first step towards capturing some of the trillions of dollars of windfall gains made on Australian property. Those windfall gains have made it much harder for people without property to own their own home, forcing many of them into a lifetime of renting. Many of those people will one day need rental assistance, as ever-increasing rents drain their life savings and superannuation balances.

Australia’s enviable reputation as a great country to live in is at stake.

The problem

In recent years, Queensland has become popular with residential property investors and interstate landlords seeking to capitalise on the sunshine state’s growing appeal as a lifestyle destination. Another drawcard is the tax minimisation strategy available to property investors, to avoid progressive state land taxes by diversifying investments into different states.

While the impact of property purchases by interstate investors on Queensland dwelling prices is not yet known, any increase in prices would have pushed the dream of home ownership even further out of reach for the average Queenslander.

Interstate landlords were not the only ones spared the need to pay the Queensland land tax. Local investors could avoid it simply by diverting their additional property investments from Queensland to other states. The importance to local investors of staying under the Queensland tax free threshold of $600,000 is highlighted by the large number of Australians who own multiple properties. In the 2019-20 financial year there were 2,226,841 property investors in Australia, amounting to around 20% of Australian households. Almost a third of those investors owned more than one property, and almost 10% owned 3 or more properties.

The net effect of Queensland’s land tax regime has been to encourage interstate investment in Queensland residential property, while encouraging Queenslanders to invest in other states. The proposed change to the land tax is for Queenslanders to be assessed for the tax free threshold on the total value of their national property holdings, instead of only the value of their locally owned properties.

Although this may sound onerous, the tax is modest for Queensland investors because instead of paying a tax on their interstate properties, they will only have to pay tax on the share of their national property value held in their Queensland properties. Interstate investors with multiple properties will have to pay tax on their Queensland properties.

In sum, these changes mean that for the first time, Queenslanders who own investment properties in other states, and interstate landlords who own an investment property in Queensland, will have to pay land tax on their investments.

Not surprisingly, the property industry was unhappy about the proposed land tax changes and has filled the mainstream media with self-serving articles predicting doom and gloom for renters and first homeowners. The overwhelming majority of articles (predominantly from the Murdoch and 9/Fairfax papers) were against the tax, including several editorials.

The irony of this is that the large commissions earned by property industry advisors and agents, and the large windfall capital gains made by property investors, have come at a heavy cost to those people whom the property industry purports to be defending in their anti-tax media barrage. In particular, average Queenslanders who don’t own their own home (let alone multiple investment properties) now face much higher residential property prices and increasing rents.

It’s understandable that the property industry would do all it can to make a case against a tax that will disadvantage its members, however, it’s less understandable that the editors of mainstream news outlets would oppose the tax based on such limited and self-serving evidence. Not surprisingly, the only evidence provided was on the tax’s costs, not its benefits. This reporting of highly selective evidence in the mainstream media matters for two reasons. Firstly, many of their readers don’t own property and would benefit from the tax changes, and secondly, those changes address one of Australia’s most urgent social problems, the rapidly declining affordability of housing.

While property investors enjoy windfall gains from owning land, an ever-shrinking proportion of Australians will enjoy the security of owning their own home. We have just experienced one of the single largest wealth generating events in Australia’s history, with property owners reaping close to $2 trillion dollars’ worth of capital gains within two years. According to the Australian Bureau of Statistics, the value of Australia’s residential property jumped from a pre-Covid $7.1 trillion to a whopping $9.1 trillion by the end of 2021. This increase in property wealth within a 2-year period exceeds all the gains made over the previous decade.

Most of those massive windfall gains were allowed to slip through the fingers of the Australian Tax Office. We highlight in our past blog how little was captured in 2018-19. While those gains were swelling the net worth of property owners, ordinary Australians without property continued to pay their income tax and other taxes on the fruits of their hard work, further delaying any chance they had to save a deposit to buy their own home.

The contrast between taxes on productive activity versus taxes on windfall gains (“taxes on making versus taxes on taking”) could not be starker. One of the taxes reduces the size of Australia’s economic pie by reducing incentives to work and make things, while raising the barrier to home ownership and condemning more Australians to a dependence on welfare to help them pay their rent after retirement . The other tax (the land tax or the “tax on taking”) captures a small percentage of pure windfall gains in ways that are likely to increase, rather than reduce beneficial economic activity.

To understand these advantages of a land tax over Australia’s other taxes, it’s helpful to look more closely at Australia’s residential property boom. 90% of the increase in QLD property values in 2020-21 arose from an increase in the unimproved value of land, which excludes the value of dwellings and relates only to land. People build dwellings, not land. This highlights that most of the property market gains have been a gift from God, or more accurately, the Australian community, since the land was once held either publicly or in common.

Importantly, those gains were not the result of productive economic activity, which implies that if those gains were taxed, this would not reduce productive economic activity. For that reason, and also because the windfall gains to property owners came at a heavy cost to other Australians by reducing their chances of owning their own home, a land tax is the closest thing we have to a perfect tax (together with a resource rent tax).

It’s not surprising that the most vocal opponents of the tax are the property industry and cashed up property investors. Media support for their case is also not surprising – the ever-declining loss of readers to free online sources of news and opinion have made mainstream media mastheads more dependent on marketing revenue. The challenge is not to allow those commercial imperatives facing the mainstream media to worsen Australia’s housing affordability crisis by persuading readers that a land tax is bad for them when, for many of them, the opposite is true.

It’s too early to know how investors in Queensland’s property market will respond to the tax but we know their main options, and none of them seem likely to harm ordinary Queenslanders.

Options for interstate investors

They could reduce their Queensland tax liability by selling one or more of their Queensland properties. Local investors could also sell their Queensland properties or they could reduce their tax liability by selling their interstate properties. Any sell-off by local or interstate investors would add to the number of residential ex-rental properties listed for sale.

Many Queensland media outlets have described any potential sell-off of ex-rental properties as a disaster for renters. Before getting alarmed by their rhetoric, we need to ask, who will buy those ex-rental properties?

It’s possible that most ex-rental dwellings offered for sale in response to Queensland’s land tax changes will be returned to the rental market after being sold to other first time investors not subject to the tax. If that happens, it’s unlikely to have much (or any) effect on rents because of the small share of properties involved compared to the size of the market.

It’s also possible that current property investors will sell to first homeowners who would otherwise have rented. That would reduce the supply of rental housing, but it would also reduce the number of people looking to rent. For those reasons, it’s difficult to see how Queensland’s land tax changes would make local renters any worse off.

In addition, the revised land tax will increase the cost to those investors currently holding vacant properties, including vacant land and vacant dwellings. This increase in property holding costs increases owners’ incentives to sell those properties. If those properties were vacant land, there would be an increased chance of it being developed for rental housing or first homes, both of which improve outcomes for people who currently rent. If those properties were vacant dwellings, there would be an increased chance of them being upgraded to a rentable condition or sold to someone who would do the upgrading or replacement needed to boost the supply of housing. It’s hard to see how renters would lose from any of those changes.

A third option is for landlords to simply live with the new tax. This would ensure the tax achieves its intention of ensuring that cashed up property investors pay a tax on an asset that has been a source of over two trillion dollars of pure windfall profits to its fortunate owners, all of which was earned from the comfort of their living rooms without making any productive contribution to the economy. At a time when you would think that property investors would be celebrating their good luck, they are instead spending their time trying to stop the rest of the community sharing in their good fortune. Apparently, the $20 million of new tax revenue forecast by the Queensland Treasury as a result of the Queensland land tax changes is expecting too much from property investors, after their $2 trillion in recent gains.

It is good that the Queensland Treasurer stands by his support of land tax reform. This sort of gumption from state treasurers is what Australia needs. But more needs to be done to bring other states on board and overpower the property lobby. For now, Queenslanders will continue to be short-changed $20m from big property owners. Hopefully this doesn’t curb appetite for further land tax changes across Australia, but becomes the catalyst to start the tax shift for a more fair, prosperous and liveable country.