Victoria could be next to revamp stamp duty

Victoria has been tipped to be the next Australian state to consider stamp duty reform, with the state government expected to keep a close eye on New South Wales’ proposal to replace the tax with an annual levy.

The NSW government this week announced a proposal to scrap stamp duty and replace it with a smaller annual tax, in a bid to boost the state’s flagging finances after it recorded a $16 billion budget deficit. 

Under the proposed system, homebuyers as well as residential and commercial property investors would be given the choice of paying upfront stamp duty and annual land tax or swapping to a new yearly property tax.

Pitcher Partners tax advisory partner Craig Whatman said he expected the Victorian government to analyse the proposal prior to its State Budget being released next week.

Mr Whatman said while there was potential for the reform to achieve its goal of reducing barriers to home ownership, there were also market risks due to the complexity of having two systems run in parallel.

“The NSW Government is selling the mantra that the changes will place downward pressure on house prices over the longer term,” Mr Whatman said.

“But lower barriers to entry and the ‘buy now, pay later’ nature of the proposed annual property tax could ultimately increase property prices.

“Revenue neutrality is one of the principles underlying the proposed reform but there is a concern that the property tax rate could be increased over time, especially when the government needs more tax revenue, which creates uncertainty over property owners’ ongoing costs under the new system.

“Although they are only indicative, the rates of the annual property tax suggest that the new system will most benefit owner-occupiers above other types of property purchasers.”

CFMEU Victoria secretary John Setka called on the Victorian government to go a step further by removing the state’s 8 per cent Foreign Purchase Additional Duty in addition to restructuring stamp duty.

“Forecasts for 2021-22 indicate the FPAD policy completely hamstrung the economy,” Mr Setka said.

“New developments have slowed to the point where our city will face major house supply issues, and local purchasers are being disadvantaged.

“Construction is vital to the economy and if stamp duty remains in Victoria but not NSW, investors will take their money to NSW, meaning we will lose out massively as a state.”

Mr Setka said scrapping the Victorian government’s FPAD policy, which was introduced in 2015, would likely result in a significant increase in apartment presales.

Data from the Urban Development Institute of Australia showed that in the year to November 2019, new apartment sales activity was 76 per cent below the market’s early 2016 peak.

Foreign investors, Mr Setka said, account for 71 per cent of pre-sale purchases in Victoria, while apartment pre-sales averaged 134 per month in 2015-16 and fell to an average of 33 sales per month in 2019-20.

“Foreign investment is desperately needed,” he said. 

“Although this policy may have been justified under a period of economic growth, the pandemic has shifted our economy dramatically.

“The current market is no longer palatable to international buyers, and the revenue generated from the increased stamp duty levy does not compensate for the reduction in revenue generated from fewer sales.”