Stamp duty reform crucial for economic rebound
COVID-19 has placed stamp duty reform back on the agenda in Victoria, New South Wales and Western Australia, with state governments expected to face tumbling revenue due to a sharp reduction in transaction volumes during the crisis.
While the notion of stamp duty reform has been kicking around for decades, economic forecasts post COVID-19 have most experts agreeing that for Australia to return to its previous prosperity, tax reform is urgently needed.
SMATS Group chairman Steve Douglas told Australian Property Investor Magazine that stamp duty was the obvious target, largely because it had become a massive deterrent to home ownership, with the hurdle even higher at a time when finance is difficult to obtain.
Mr Douglas said while the federal government had been concerned in recent years with bracket creep on income tax, it had not considered that stamp duty of four to six per cent was an enormous burden at current day property prices.
“In New South Wales, for example, almost every property is up towards the higher end of the scale now,” Mr Douglas said.
“If you look at the quantum of revenue that the government should collect, there is no real justification to say they should be receiving such significant quantums on a per transaction basis compared to what they used to receive.
“If you look at property prices 10 years ago, the difference on the stamp duty on the new price versus the old price is significantly more than inflation adjusted growth.”
Momentum for reform is building quickest in New South Wales, with a broad review of the state’s taxation base launched last year by Treasurer Dominic Perrottet.
Stamp duty in NSW is calculated on a sliding scale, and was expected to create $6.88 billion in state government revenue in 2019-20.
A transaction in 2010 at Sydney’s median price of $500,000, as reported by RP Data-Rismark in March of that year, attracted a transfer duty of $17,990.
At the most recently reported median price of $889,992 in Sydney, applicable stamp duty would be $33,539.
“In the old days, you were fairly assured that a property’s value would double every seven to 10 years, so the cost justified the value,” Mr Douglas said.
“But these days, we’ve seen property markets give more and more suppressed growth, Sydney excluded, but generally speaking in the markets of WA and Queensland, the growth forecasts are not going to be as optimistic going forward.
“So if i now have a higher annual cost and i’m not getting compensated for risk through growth, there is a whole different justification.”
NSW is considering abolishing stamp duty and replacing it with an annual land tax, with tax reform receiving bi-partisan report from both the Liberal government and its Labor opposition.
Urban Taskforce chief executive Tom Forrest welcomed the political unity earlier this month, saying that previous attempts to replace stamp duty with a broader land tax system had been derailed by political scare campaigns.
“What is needed now is a common-sense approach, and it appears that we might just have that,” Mr Forrest said.
“Dominic Perrottet is leading the charge for tax reform here in NSW.
“This is a brave move, but if politicians across the spectrum can hold their nerve and resist the temptation to play politics, this much needed reform to the tax system could be a long-lasting positive legacy of COVID-19.”
While there has yet to be an official stance taken by the Victorian government, Pitcher Partners tax consulting executive director Craig Whatman said the state’s Treasurer, Tim Pallas, appeared to be supportive of replacing stamp duty with a broader land tax system.
"It’s been around and on the backburner but it seems to have gotten more momentum in the last couple of months because of the impacts of COVID-19 on the economy and the impacts on state and federal governments’ bank balances," Mr Whatman said.
"This has effectively given them more impetus to take a serious look at these issues, more seriously than they have ever looked at it before, because they have to restructure their revenue bases going forward in order to balance the bottom line."
However, Mr Whatman said speculation over whether this would actually occur was creating uncertainty in property markets.
“Coming out of the other side of COVID-19, we’d much prefer to have certainty rather than uncertainty given the impact that COVID-19 has had on the property market and probably will continue to have for some time in terms of sales volume and prices,” Mr Whatman said.
“This sort of reform has been talked about for a long time, there has been a view for a long time that stamp duty is an inefficient tax in the sense that it effectively gets in the way of people moving between places for work, for example, because it puts a cost barrier in terms of them having to buy a new house in the new place that they are going to live.
“The issue is that if you are going to look at replacing stamp duty with land tax, then what that effectively means is you’ve got to broaden the existing land tax.
“One you have already got land tax on investment properties, the general view is that if a government is going to replace stamp duty revenue from residential property as opposed to commercial property, and you are going to replace that with land tax, then you would have to apply the land tax to people’s main residences.
“That’s where the uncertainty comes in, because you have got people that have either just purchased properties, or they are about to purchase, and it is unclear how they would be affected in terms of making the system equitable in the sense that you’re not taxed twice.”
SMATS Group’s Mr Douglas said he found the concept of replacing stamp duty with land tax to be “offensive”, particularly in NSW.
“If you look at the amounts of land tax, they are not justifiable against the rental or the revenue potential of the property,” Mr Douglas said.
“We’ve seen that creep up to horrific levels. There are some properties in New South Wales where the land tax can be 60 per cent of the rental, because you’ve got a high value plot of land with an old house on it.
“You could argue that it is to encourage them to sell it, subdivide it or improve, but it seems beyond fair.
“To me, I would have thought land tax should be moved onto a rental value not a land value.”
In Western Australia, stamp duty reform has become a 2021 election issue, with opposition leader Liza Harvey including a $50,000 stamp duty cut on the purchase of new homes for six months as part of her suite of policies.
Earlier this month, however, Premier Mark McGowan ruled out any reform of stamp duty, instead saying wide-ranging changes to WA’s planning and approvals system to fast-track major and minor projects would help the state emerge economically from the pandemic.
Real Estate Institute of WA president Damian Collins said stamp duty remained the biggest barrier to home ownership in WA, with a tax system that would act as a catalyst for transactions sorely needed for the state’s recovery.
Mr Collins said with property transactions expected to remain low for the foreseeable future, the level of government revenue from stamp duty would be the lowest level it has been at for more than a decade.
WA’s 2019-20 state budget indicated the government was expected to rake in $1.16 billion from transfer duty prior to the COVID-19 crisis, with forward estimates for 2020-21 forecasting stamp duty revenue of $1.26 billion.
“According to Deloitte, removal of stamp duty could lead to a 60 per cent uplift in transactions, generating an additional $1 billion to the economy,” Mr Collins said.
“There has never been a better time to take this step.”