Property Council calls for an end to stamp duties

By Leith van Onselen

The Property Council of Australia (PCA) has called on the Government to dump stamp duties in exchange for raising the GST or broadening land taxes. From The AFR:

“South Australia has already shown its willingness to take on tax reform, including stamp duty. The other states and territories should now step up to the mark. Stamp duty is an inefficient, volatile tax – contrary to all best principles of taxation – and the states should not be relying on such a volatile income stream to fund essential services like health, education, infrastructure and transport.”

“The most obvious solution would be to broaden and increase the GST, but we are open to discussion on a broad-base, low-rate land tax or other revenue options.”

You will get no disagreement from me. As I have argued many times before, stamp duties are one of the worst taxes going around.

Not only do stamp duties hinder labour mobility by discouraging workers from relocating closer to employment. But they also unnecessarily penalise people that move to homes that better suit their needs. Obvious examples include baby boomers downsizing from large family homes and young growing families upsizing to bigger family-friendly homes. Such disincentives inevitably lead to an inefficient use of the housing stock, such as empty nesters occupying large homes with multiple spare bedrooms.

Stamp duties are also highly inequitable. As shown in the below RBA chart, between 4% and 8% of the housing stock is transacted annually. As such, we have a bizarre situation where a small minority of the population are paying taxes that support services for the whole community – all for the privilege of moving to a home that better suits their needs!

ScreenHunter_3497 Jul. 28 09.03

Treasury’s discussion paper on tax was clear in its dislike of stamp duties and support of a broad-based land tax. Whereas stamp duties are incredibly inefficient – creating a large marginal excess burden – land taxes are one of the most efficient taxes around, actually creating positive efficiencies:

Conveyancing stamp duties… have a high excess burden because they discourage the exchange of residential and business properties…

ScreenHunter_6774 Mar. 30 10.24

Stamp duties are some of the most inefficient taxes levied in Australia… they are levied selectively on activities or products and are taxed on the total transaction value, rather than the ‘value added’ component. Such transaction taxes are more likely to discourage turnover of taxed goods, as taxpayers attempt to reduce or avoid paying the tax…

Because revenue growth is driven by property prices and numbers of transactions, stamp duties on conveyances are a highly volatile tax, with revenue collected from stamp duties on conveyances fluctuating by over 50 per cent in previous years. Stamp duties on conveyances add to the costs of buying and selling property and can discourage businesses from undertaking productivity enhancing purchases of existing land and capital. The outcome can be retention of land for relatively unproductive purposes…

Stamp duties also impact on consumers by increasing the cost of buying and selling houses. As house prices increase over time, unadjusted progressive tax rates also increase the tax burden associated with stamp duty. For example, the burden of stamp duty on a median-priced house in Melbourne has almost doubled over the past 20 years — from 2.67 per cent of the sale price in 1988 to 5.16 per cent in 2011.

This clearly adds to transaction costs and contributes to Australia’s high (by international standards) costs of moving. These costs can discourage householders from moving to housing that best suits their needs and can be an important barrier to labour mobility. A number of reviews have found that, by dampening the number of house sales, stamp duties can also add to commuting times.183 Stamp duty can also be inequitable — those who move more frequently face higher costs than those who move less frequently, even if their circumstances are otherwise similar…

Modelling also suggests that broad-based land taxes, such as municipal rates, have a low economic cost (Chart 2.9). This is because land is immobile (unlike other capital) and cannot be moved or varied to avoid tax. The model applies this assumption to both domestic and foreign ownership of land. Land taxes paid by foreign and domestic landowners are only redistributed to the domestic households, providing a benefit to Australian households and generating a negative marginal excess burden for a broad-based land tax shown in the chart.

As argued previously, there are also broader reasons to endorse the implementation of land value taxes in place of stamp duties. First, a broad-based land tax would help make infrastructure investments self-funding for governments, since any land value uplift brought about through increased infrastructure investment (e.g. new roads, trains, etc) would be partly captured by the government via increased land tax receipts. Accordingly, governments would be more likely to facilitate development, rather than act to restrict it in a bid to save on infrastructure costs. Second, an broad-based land values tax would penalise land banking and vagrancy, effectively increasing the supply of land in the process and bringing new homes to market more quickly.

The Productivity Commission agrees:

Past Commission inquiries have recommended replacing stamp duties with a more efficient form of taxation, such as a broad based land tax, as this will improve flexibility and efficiency in the housing market (PC 2013b). A more flexible housing market will also support geographic labour mobility, allowing more workers to move to areas with better employment opportunities…

RECOMMENDATION 12.2
State and Territory Governments should remove or significantly reduce housing related stamp duties, and increase reliance on more efficient taxes, such as broad based land taxes.

David Collyer from Prosper has made similar arguments:

If taxpayers are to endure the upset of tax reform, then the change should be to best practice – the tax bases economists have identified as causing the least harm…

Right next to Stamp Duty sits the ideal base: State Land Tax. A uniform SLT has deadweight losses and an average excess burden of zero. It causes no harm – a rare and special virtue among taxes, as KPMG Econtech clearly identifies:

ScreenHunter_45 Aug. 28 14.53
The HIA should embrace a shift of property taxes from SD to SLT, as REIWA President David Airey has.

Builders, who buy land and sell homes, would bear only the holding cost for the time it takes to construct the house. The most efficient builders pay least. Removing the transaction charge would also make buy-renovate-sell more profitable and enhance our housing stock.

While it is clear that stamp duties are a horrible tax, equity and efficiency considerations demands that they be replaced by a broad-based land tax, rather than a less efficient and regressive increase in the GST.

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Comments

  1. I agree that Stamp Duty is one of the dumbest of dumb taxes.

    HOWEVER it does represent helpful sand in the gears of specufesters.

    I think removing SD in the current climate is problematic.

    Would-be home buyers are just going to take the windfall saving and use it to bid up housing prices.

    Under NO CIRCUMSTANCES should GST be increased or broadened. Regressive tax for which the poor are never compensated in the long run.

      • That’s an assumption.
        I very much doubt that future land tax liabilities play much role in the psychology of today’s home bidders.

      • Stamp duties were supposed to be removed or reduced when the GST was introduced. The states all reneged after the fact and kept the extra loot. And most are still broke!

        “The States agreed to abolish these stamp duties in return for GST revenue under the original GST
        Intergovernmental Agreement. While this commitment was renegotiated following the exemption
        of food, there was nevertheless an expectation that these State taxes would be abolished once
        GST revenues grew to a level to replace them. Under the revised Intergovernmental Agreement,
        the States agreed to review (by 2005) the need to retain them.”

        Read on:
        http://www.propertyoz.com.au/library/SUB%2003%20Priorities%20for%20New%20South%20Wales.PDF

      • “I very much doubt that future land tax liabilities play much role in the psychology of today’s home bidders.”

        Perhaps not, but it would figure in the banks’ serviceability calculators.

      • “I very much doubt that future land tax liabilities play much role in the psychology of today’s home bidders.”

        Perhaps not, but it would figure in the banks’ serviceability calculators.

        BECAUSE Australian banks always lend prudently and responsibly /sarc

        Alright then, take the banks out of the equation.
        In a bidding war where two cashed up buyers have an extra $40,000 to spend, thanks to no Stamp Duty, that money just ends up in the Vendor’s pocket.

        With or without leveraging, removing Stamp Duty will raise the price point at which homes are sold.

      • ” In a bidding war where two cashed up buyers have an extra $40,000 to spend, thanks to no Stamp Duty, that money just ends up in the Vendor’s pocket.”

        And these two bidders are not going to take in to account the holding costs of the property to figure out what the property is actually worth? They’re just happy to spend every single dollar that they have? Lucky vendor I’d say.

      • No worries, property always goes up maaate.
        This little ripper will pay for itself.

        Land Tax? Pffft.

      • AB

        I doubt very much that a buyer would take into account a SMALL yearly tax when considering the value of a property.

        It’s just another yearly expense among many others Eg school fees, petrol, electricity and lunch money.

        Given that it’s a tax, perhaps something else has to give…. give up on discretionary spend while affording more on housing.

        I’m not saying the whole of the stamp duty will be reflected in the price of housing when it’s abolished. But it would stand to reason that some or most of it would.

        Especially where it becomes easy to buy and sell, then you may find some people thinking “F it” Let’s just buy the house (at an extreme price) knowing they can easily sell at some other time.

        Happy to know if stamp duty has been removed anywhere else in the world.

    • I’d stamp duty is replaced by land tax, the effect on property prices should be about neutral. While no stamp duty would mean the borrower don’t have to divert part of the borrowing towards stamp duty, his borrowing capacity would reduced because of extra expenses per year associated this owning the property.

  2. Removing stamp duty and implementing a land tax would see a boom in renovations as old people can now move with little penalty and speculators can fix up the older housing stock. Speculators will just need to be a lot more savvy because they won’t be able to rely on massive uplifts from the market to make a return.

      • I think it would increase renos that actually add utility/value to a property.

        It would reduce renos that are only done because of the inability to move house.

        Seems like a good outcome to me.

  3. I’d like to know how much a board based land tax would be per household for the change to be revenue neutral to state governments. Even just a ball park figure. Anyone seen any analysis?

    I would take more comfort if it was a couple of hundred a year but would be sceptical if it was a few thousand. I feel that it would be too difficult politically.

    • The NO LAND TAX Party scored 1% to 3% of the vote in every electorate where they ran a candidate in the NSW election.

      Enough to a scare into any politician sitting in a marginal seat.

      And bare in mind, in NSW were are talking about an existing tax that ONLY applies to investment properties and holiday homes!
      What electoral impact a Land Tax on the sacred principal place of residence, I wonder?

      • The No Land Tax party was also the donkey vote in the senate.

        Any party with no and tax in their name is going to get votes. I doubt politicians are that concerned about them. As a party they have imploded over the last few weeks. Be surprised if they are around for the next election.

      • Whether the NLTP are a credible political force or not is irrelevant.

        My point was more that any NEW tax is going to be a hot button issue and political lightning rod.
        For heaven sake, as a country we couldn’t even succeed in introducing a tax on pollution (a no-brainer) without it being demonized as a “great big new tax on everything”.

        Whatever the merits of a Land Tax (and I admit there are many), it is political suicide.

      • “Whatever the merits of a Land Tax (and I admit there are many), it is political suicide.”

        Agreed unfortunately. I’d even be happy to personally write off the (nearly six figures) of stamp duty that I paid 2 1/2 years ago if it meant the introduction of a sensible tax reform like LVT.

      • The ACT is already phasing out stamp duty and replacing it with land tax. If it can be done there, it can be done anywhere.

        A big mistake of the pollies is to assume “it cannot be done” simply because they think its politically unpopular. Such policies are not actually that unpopular, their popularity is rising, and will become even more popular as the debate enters the mainstream.

        Woe betide those who don’t recognise that political change has started.

    • Doing a back of a napkin, one eye closed calculation.

      In NSW the rate of Stamp Duty on a median value property is 4%
      On average, Australians move about once every 10 years http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4102.0Main+Features30Dec+2010

      Therefore, to be revenue neutral, a Land Tax would have to raise about 0.4% of the purchase value per year i.e. about $4,000 per year on a median dwelling in Sydney.

      Be prepared for a lot of SMH and The Oz articles about a “Sydneysiders Tax”.

      • BuyHighSellLow

        I would have thought you would take the current stamp duty collections (4.39bln for 2013) and divide it by the number of households approx 2.8Mil to get an average amount of 1567. Obviously this would be distributed according to property values.

      • TheJoneses, I share your concerns.

        This tax reform will end up being capitalised into higher prices. It is absolutely the wrong time to do it.

        As for it having a neutral effect on fundamental value. That is BOLLOCKS. Broadening the tax base means spreading it thinner. So in NSW it will mean removing SD for all and introducing LT fir PPOR only.

        Investors see a lower net tax burden. As we know they set prices.

        Our supporters here on this blog who cite are all home owners so would benefit from the increase in fundamental value.

        Apart from David Collyer (who agrees now would be the wrong time to do it ) anyone else who DOESN’T OWN A HOUSE support this reform?

        No?

        I didn’t think so.

  4. So how does this work for poor suckers like me that have just shelled out 22,000 in stamp duty. Assuming land tax comes in at about 3000/year, will I get credits against my stamp duty paid, or do I just get pillaged again?

    • Pillaged.

      At what point do you draw the line? 3 years? 5 years? Then someone who bought just before then would complain just like you and feel rorted.

      You should look at it this way: If you move within 7 years then you’ll pay less with land tax. If you move twice within 7 years you’ll be sitting pretty.

      • Pillaged.

        At what point do you draw the line? 3 years? 5 years? Then someone who bought just before then would complain just like you and feel rorted.

        Why not just credit everyone the stamp duty they paid on their last house to their land tax bill, regardless of how long ago it was ?

        Someone who bought fifty years ago would have their stamp duty credit overwhelmed by their land tax very quickly and start paying land tax pretty much from day dot.

        Someone who bought yesterday would probably not pay land tax for a couple of years.

        Would this not even out, broadly speaking, in fairly short order ?

      • DrSmith: Stamp duty raised over $1B last year in NSW alone. Go back a few decades and I think you’ll find that adds up to a huge sum for a state government, such a tax with stamp duty credits wouldn’t raise any reasonable amount of money for decades under your plan, while removing a very lucrative revenue source from cash strapped state governments dealing with massive population influxes.

        And would these land tax credits be inflation adjusted? Surely that’s only fair?

        I shudder to think of the admin costs involved to reimburse land tax bills from stamp duty purchases made 50 years ago.

      • To have Buckleys chance of being politically saleable you’d need to just grandfather anyone who has already paid Stamp Duties. Only charge Land Tax on properties transacted after the date that the new law becomes effective. Anyone who bought prior to then doesn’t face any change in circumstances until they decide to move again.

        Otherwise you can expect a deluge of articles about asset rich / cash poor widowed grannies being “forced out of their homes by land taxes”. Such is the quality of Murdoch journalism.

        One problem with this is there would be a short term plunge in the amount of revenue collected by the states but ultimately they may end up collecting more in the long run (or at least have a more consistent revenue stream). Some kind of financial engineering should be possible to bridge the gap i.e. borrow against future higher expected revenue etc.

      • My thoughts would be that all people who have bought a house and paid SD, do not pay any taxes, only those new to the property ladder, investors,flippers etc then go onto the land tax ladder. within 10 years it should have worked its way out of the system, although some people who live in a place for 40 years would be lucky.

    • Doing a back of a napkin, one eye closed calculation.

      In NSW the rate of Stamp Duty on a median value property is 4%
      On average, Australians move about once every 10 years http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4102.0Main+Features30Dec+2010

      Therefore, to be revenue neutral, a Land Tax would have to raise about 0.4% of the purchase value per year i.e. about $4,000 per year on a median dwelling in Sydney.

      Be prepared for a lot of SMH and The Oz articles about a wicked “Sydneysiders Tax”.

    • Depends on what they want to do. But theoretically it is simple to solve – compare the duty rate that applied to the proposed land tax rate (assuming base is the same).

      If duty rate is 5% and land tax rate is 1%, then duty is equivalent to 5 years land tax. Then treat duty payments as a prepayment of land tax, amortized over 5 years.

      So if you bought 5 years ago (or more) you pay land tax straight away. If you bought 4 years ago, you get 1/5th of duty paid as a credit for future land tax. If you bought 2 years ago, you get 3/5ths of duty as a credit, etc. simples.

  5. The ACT is already phasing out stamp duty and replacing it with land tax. If it can be done there, it can be done anywhere.

    A big mistake of the pollies is to assume “it cannot be done” simply because they think its politically unpopular. Such policies are not actually that unpopular, their popularity is rising, and will become even more popular as the debate enters the mainstream.

    Woe betide those who don’t recognise that political change has started.

  6. You’ll get rate cuts but no MP, you’ll get SD scrapped but you won’t get a broad-based land tax.
    You’re calling for lower prices, they want the opposite.

    We’re not crashniks, but theres only one realistic way to reset this mess now.
    It has to burn to the ground.

    • What might happen is scrapping of stamp duty as a horse trade for increased GST. States would probably see that as more paleta or as each one can say that they were coerced by the other states/Feds (whereas replacing SD with land tax they would have to take responsibility for).

  7. “Taxpayers call for an end to the Property Council”

    would be a better headline