How to abolish stamp duty

By Leith van Onselen

The Property Council of Australia (PCA) has provided a submission to South Australia’s review of state taxation, which repeated its call to abolish stamp duty in exchange for a broad-based land tax. From The Canberra Times:

Daniel Gannon, the executive director of the South Australian division of the Property Council says stamp duty is a drag on an economy in transition like South Australia, which needs a much more mobile labour force and as much flexibility and productivity as possible.

But he says a smart model needs to be developed which delivers a honeymoon period for people who’ve bought properties in the past few years and paid out large lump sums in stamp duty under the system now.

“We want to ensure a honeymoon transition takes place carefully and effectively to remove any chance of a double whammy impact,” Mr Gannon says…

Homebuyers who have made purchases in recent times… will be hit hard if they were forced to immediately transition to paying an annual payment under a broad-based flat land tax, and naturally be highly resistant to the change.

I won’t go into all of the reasons why abolishing stamp duties in exchange for a broad-based land tax is a sound idea, since this has been covered previously.

What I will say is that the obvious solution to the PCA’s concerns is to provide a credit to anyone that has purchased a home in the past 10 years, equal to the amount of stamp duty paid, and then subtract the hypothetical land tax that would have been paid since the home was purchased.

For example, if I purchased a home in Adelaide in late 2011 for $500,000, paying stamp duty of $21,000, and my theoretical land tax bill would have been $2,000 for each of the four years since purchasing the home, then my tax credit would be as follows:

  • $21,000 minus
  • $2,000 (2012);
  • $2,000 (2013);
  • $2,000 (2014);
  • $2,000 (2015).
  • equals $13,000 tax credit to be carried forward.

Does anyone have any better ideas of how to deal with the transition from stamp duties to a broad-based land tax?

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Comments

  1. You need to take it back 20 years. You purchased your home for $500,000 in 2000 and paid $20k in stamp duty.

    In 2000 the land tax was: $1500
    2001: $1600
    2002: $1650
    2003: $1600
    Etc…..

    Over the past 15 years you should have paid a hypothetical $25,500

    The government is feeling nice and will not back charge you for $5,500 that you owe.

    Its all a sales pitch need to make people feel like they are lucky.

    • I can’t see retrospective taxation being popular, even if only a hypothetical amount. Better off just giving a tax credit equal to the amount of stamp duty paid at the time of purchase. Might hit the revenue hard at first but will soon sort itself out.

      • A credit for a hypothetical SLT against past SD paid is not a retrospective tax, cornflakes. You torture logic to arouse the beast. It is a scrupulously fair way of washing SD and resentment out of the system. SD is a very bad tax. While many hate ALL taxation, we want children educated and anticipate police attendance when we call 000.

        Other arguments here that inflation ought be considered too – in a low inflation era – is just noise. SD costs $1.35 for every $1.00 collected. Time government stopped wasting money and people’s lives.

      • Just playing Devil’s advocate; it will be a hard sell if you reducing the credit for retrospective time.
        Giving Credit for Stamp Duty paid will be popular, reducing it by time will not.

  2. ceteris paribus

    I think the principles of your proposal are spot on, UE. I have no suggestions about formula, except to say that, because stamp duty is such a hard hit, compensation for previous recent payment would need to be adequate.

  3. That $13,000 tax credit to be carried forward…..Does that expire when you sell your current holdings? ie: you take that tax credit into account when you sell what you have, or does that get carried forward to your next purchase? My point being, that where there is a tax advantage of any sort….it will be exploited….
    My suggestion is “what you paid, is what you paid”. Scrap Stamp Duty as at, say, 30/6/15 and head straight to a Land Tax….end of story. Someone will always be at the wrong end of a pointy tax stick. Trying to compensate them is going to create problems….

  4. Tassie TomMEMBER

    A question for anyone who knows the answer:

    If a state introduces land tax instead of stamp duty, and it generates more revenue than stamp duty does, then does this count as “ability to generate own revenue” and decrease their GST distribution proportion in the same way that mining royalties do?

  5. Philly SlimMEMBER

    Question for UE. How do you cover the loss of income (for the State) from the transition? I think this is the hardest thing for State Treasuries to get their heads around.
    Presumably you set the land tax rate at the % you need to replace the revenue from Stamp Duty. But with the credit for stamp duty previously paid there will be a revenue shortfall during the transition period. Does the State just need to ‘suck it up’ and hope that the differential between the efficiencies of a stamp duty vs land tax will create economic growth? Should the land tax % be higher at the start and then get reduced over time?

  6. Anyone else stuck on the mobile version today? Cleared cache no luck.

    There used to be a button down the bottom to revert to desktop. Any ideas to fix without that?

  7. The first problem with that equation is that it uses nominal values not real.
    So each of those numbers should be adjusted by the CPI index.

    Secondly, and more importantly, Land Tax is as popular as rabies with the voting public.

    To have a remote snow balls chance in hell of getting a Land Tax introduced you would need to.
    a) abolish Stamp Duty
    b) grandfather ALL existing properties where stamp duties have already been paid.

    i.e. the only people who pay Land Tax are those people who move home after the legislation is introduced. Of course they won’t like it BUT the removal of Stamp Duty sweetens the deal.

    The average Australian moves home about once every 10 years (as near as I can gather from some quick research).
    So in order to be revenue neutral in the long term the Land Tax rate prospectively needs to be 10% of the current Stamp Duty rate.
    You still have a short term cashflow problem for the States that introduce it however as their revenue stream will crash by 90% of the original value in the first year, 80% in the second and so on. In a rising real estate market, assuming land tax is levied on current market valuations, it should take less than 10 years for the revenue stream to stabilize.

    The secondary problem is HOW do you stop home buyers from blowing their immediate cash windfall on the property auction i.e. bidding up house prices in the same fashion as the FHOG, only worse!

    Yes, yes, yes, I know that in THEORY home buyers should factor future Land Tax obligations into their purchase price ceiling. BUT come on…. do you really think the average punter is that financially savy? Most buyers will be saying to themselves “property capital gains every year will cover my Land Tax. No worries mate”. That’s how the real world works.

    So although Stamp Duty is possibly the dumbest of the dumb taxes, I think getting rid of it in a bull housing market is very problematic.

    • @Paul

      “The secondary problem is HOW do you stop home buyers from blowing their immediate cash windfall on the property auction i.e. bidding up house prices in the same fashion as the FHOG, only worse!”

      That is a huge risk and it is never properly discussed here.

      “Yes, yes, yes, I know that in THEORY home buyers should factor future Land Tax obligations into their purchase price ceiling. BUT come on…. do you really think the average punter is that financially savy? Most buyers will be saying to themselves “property capital gains every year will cover my Land Tax. No worries mate”. That’s how the real world works.”

      Exactly, we don’t have a rational market so you can’t expect rational outcomes. What’s worse is that in states where you currently have both stamp duty and a land tax, keeping only the land tax shifts some of the tax burden from investors back to home owners. E.g. NSW:
      1. Home-owners currently only pay stamp duty
      2. Investors pay both stamp duty and land tax
      3. If you abolish stamp duty and make land tax the same for home-owners and investors, the maths works out that the tax burden is now lower for investors and higher for home-owners.
      I don’t know why anyone would want to further encourage speculative investment and further the marginalisation of first home buyers.

      “So although Stamp Duty is possibly the dumbest of the dumb taxes, I think getting rid of it in a bull housing market is very problematic.”

      And do you wonder why the property industry is pushing for it? It’s pretty obvious!
      1. It will add some more fuel to the fire of the speculative frenzy
      2. It will shift tax burden away from investors

      You’ll never see any of this properly discussed on this site.

      • melbourneguy: “You’ll never see any of this properly discussed on this site.”
        Bull. You and I have gone over this before. Sure, we may not have agreed, but a cut and paste restatement of previously challenged views is not a new argument.

        Yes, it is correct PPOR do not pay SLT while investor property pays SD and SLT. From this, you conclude there is an advantage to investors in them no longer paying SD. A terrible, terrible, terrible outcome that ought stymie reform.

        I say – again, melbourne guy – this is the correction of an unwarranted distortion, not the introduction of a fresh one. Given the fluidity with which property can be used for investment or own occupancy, government has an obligation to treat both forms equally to remove biases that influence behavior on the margin.

        The little people are terrified of tax reform. Their lived experience is that all reform enrich the wealthy. This change would not be so.

        Here AGAIN is the AHURI modelling of the consequences of the Henry Review proposals for Melbourne.
        http://www.ahuri.edu.au/downloads/publications/EvRevReports/AHURI_Final_Report_No182_The_spatial_and_distributional_impacts_of_the_Henry_Review_recommendations_on_stamp_duty_and_land_tax.pdf
        If SA manages to overcome anticipated stiff landowner opposition and enact this reform, the state will take off like a rocket. Construction will be higher, rents lower, all will be better housed, traffic congestion will fall and economic activity overall will be higher.

        And you worry about investors being marginally advantaged. Poppycock!

      • Why wouldn’t you just levy land tax at a higher rate for investors?

        For example, if owner-occupiers have to pay 1%, make investors, businesses etc pay 3% instead of the current 2%.

  8. Well, assuming an average SD receipt of $20k, sales volumes of 30k p.a. and a land tax of 2k this would take 18 years to be net positive for the SA government and would result in a peak funding deficit of $2.7b after 8 years. Given that politicians are unable to look beyond a 2 year period this has no chance in hell of ever getting up! A shame as when it has fully transitioned the state coffers would be up $2.4b p.a.

  9. How about getting the Stamp Duty fee you paid as credit toward future stamp duty payments. This would effectively mean that you got however many years you’ve owned the property land tax free – a nice kicker to placate the land-owner voters.

  10. Ha! Provide it as a tax offset to income tax. Why not? Almost every other bloody thing is.

  11. The ACT is doing this by slowly decreasing the rate of stamp duty and slowly increasing the rate of land tax… I think the perceived benefit of this approach is that it’s less scary for people (easier politically)

    • Fabian AlderseyMEMBER

      Exactly – bringing it in gradually over 20 years seems like a good approach.

  12. I must be missing something here. If I pay a one off $20-25,000 that is it until I move, so if I stay put no more taxes, or a land tax that is set by State Government at around $2,000 p.a. for ever, plus all the justifiable increases for the under paid and underworked Public Servants. Who would benefit? Builders would factor in more renovations of primary residence as its untaxed, renovators would do the same and so would developers, it would massively reduce their tax bills (no stamp duty)- could this be why the Property Council backs it – surely not.
    Why should I pay each year, I bought the land and paid the transfer, if it shifts to annual payments, then that’s me into rented accommodation as I age, land tax, on top of rates and maintenance could well be too much.
    I sold my rental property when we had the land tax here, it just eat into the margin too much with the new water and sewerage charges. That is fine, but what is the point, to ensure land is used wisely?
    What is the object, to raise revenue? OK, but we are an ageing population, not all rich, add another tax and it will see many pushed into poverty or at the least cut discretionary expenditure.
    The fairest way would be charge an annual Luxury Tax on top of rates for all houses over $1 million, set at a sliding scale. The ordinary person should not be taxed on land ownership, unless the money is quarantined for public amenity and barred from general revenue.

  13. Set a land tax of $1/sqm/yr for metropolitan areas, 50c/sqm/yr for outside. Get Council’s to collect this via the rates notices, Council’s then forward the money onto the states. Easy.

    Retain stamp duty for non principal place of residence purchases (ie for investors). I’ve read this blog’s arguments for abolishing stamp duty and replacing it with land tax however all the reasons are related to principal places of residence (labour mobility, up/down sizing). Stamp duty acts as a break on speculative activity – in my NSW postcode alone i have seen many houses flipped for 30%+ gains (without even adding a coat of paint) within the space of 18 months of purchase. I shudder to think how many more would have been flipped like this without stamp duty deterring speculators.

    • Stamp duty acts as a break on speculative activity – in my NSW postcode alone i have seen many houses flipped for 30%+ gains (without even adding a coat of paint) within the space of 18 months of purchase. I shudder to think how many more would have been flipped like this without stamp duty deterring speculators.

      Why is this actually a problem ?

      • Seriously? As a twenty-something renter all I can do is be grateful I have employment that doesn’t require me to live in Sydney.

        I’d be very interested in UE or David Collyer’s views on if maintaining SD on investment properties only would be worthwhile in reducing speculative investor demand, or would be easily avoided/discretionary, with speculation better managed by other means that have been discussed here previously.

      • drsmithyMEMBER

        Seriously?

        Yes. If houses are increasing 10% a year regardless, why are a minority of people buying and selling frequently in this environment causing a problem.

    • Stamp duty only for investors – Chino this is a good idea.

      Unfortunately you won’t see it considered here. UE and DCs positions are anchored and ignore the kind of risks you mentioned.

      Remove stamp duty for investors and my goodness see the speculator frenzy take it up another notch or two.

  14. Why not calculate the number of years the most recent stamp duty payment on a house is worth in terms of the land tax that would apply, and grant a honeymoon on land-tax until that number of years has elapsed. This would have the effect of perhaps having some people hold their properties slightly longer (until the end of their honeymoon period) but otherwise eliminate any unfairness?