It’s been a big week for property tax.
On Sunday we learned the new NSW government was extending stamp duty concessions for first home buyers and will introduce legislation this week to scrap the former government’s ‘opt-in’ stamp duty to land tax scheme. We don’t think that’ll do much for first home buyers – they’ll bid up sale prices by the amount of the concession, and no longer have the option to spread payment over time via land tax.
It seems NSW first home buyers get their housing costs served fast and hard and straight to the vendor – the ‘tequila shot’ approach to paying for property.
In Victoria the slower, gentler ‘tequila sunrise’ approach is now in vogue, at least for business. Tuesday’s Budget announced the abolition of stamp duty on commercial and industrial properties and its replacement by a recurrent land tax, in what is effectively a ‘switch on sale’ model for this reform.
Here’s how it will work.
On 1 July 2024 the game commences. From that date, the next transaction brings that property into the land tax net. The clock starts ticking on the sale date, and after 10 years, no matter who owns the property, a 1% tax on unimproved land value applies to the site.
Here’s the kicker: the first transaction after 1 July 2024 also pays stamp duty. That duty payment will be the last ever on that site, and it will buy the purchaser those 10 years free from the new land tax. The purchaser also gets the option to spread that duty payment over those 10 years via a state-provided loan (a tax deferral on commercial interest terms, just as we recommended in our 2019 transition report).
It’s a good model for the transition: the final stamp duty payment keeps the revenue rolling in, while the deferred payment scheme spreads out the cashflow impact for the purchaser – something especially helpful for small business buyers. After that first purchase, there’ll be no more tax to discourage faster turnover of property.
We’re applauding this reform. Freeing up business land transfers is likely to improve productivity and encourage investment, and the flat rate tax is the best possible design of a stamp duty replacement. On commercial land as for housing, land taxes are not borne by the buyer but are capitalised into lower prices, so we’re never really serving any equity goal by levying lower rates on lower-valued property.
Speaking of which…
The Victorian government has served 380,000 landlords and second home-owners with a new tax in the form of a significant (albeit temporary) flattening of the state land tax rate schedule, which is being described as the “COVID debt levy (landholdings)”. Owner-occupiers and primary producers will remain exempt, but most other property will now pay land tax, with the tax-free threshold dropping from $300,000 of land value to $50,000 and low-value properties paying a $975 fixed charge. It’s expected to expand land tax revenue by about one-fifth.
There will no doubt be fear of rent increases linked to the policy change. We should remember that landlords are not at liberty to charge more than the market will bear. If they can lump their tenant with an additional $1,000 or so in higher taxes, why hadn’t they done so already?
Prosper recently released a report on Melbourne’s rental market dynamics which charted rental price growth and responses to excess supply over the course of the pandemic.We saw rents fall over the first year of the pandemic, then grow quickly as the population recovered, but in neither direction was this anything to do with landlords’ costs. This was about demand-side change. Rents are set by demand and supply – not by wishful thinking
Repaying debt taken on during the pandemic through efficient and fair taxation of land wealth is the right approach. The government has opted to raise the necessary revenue in the most economically efficient way, as almost universally supported by economists and tax reviews.
Asked to find extra revenue in a recent survey by The Conversation and the Economic Society of Australia, Australia’s leading economists “overwhelmingly back land tax, increased resource taxes, an attack on negative gearing and extending the scope of the goods and services tax.”
Furthermore, rents have risen rapidly and second home owners received a fillup with unexpected price growth through the pandemic. As we said in our 2022 preBudget submission, there is no good economic or social benefit rationale for retaining a land tax free threshold that effectively exempts small landholdings. This is a good move.
