There’s never been a better time to reform stamp duties

The Federal Government is to shortly release a white paper on taxation reform.  Plenty of recent inquiries and taxation documents have specifically noted that the taxation treatment of property should be reviewed and if ever there was a good time to look at changes to stamp duty it would be now.

Given where the property market now stands any changes to stamp duty should be implemented sooner rather than later especially given home value growth is slowing and transaction volumes are trending lower.  Of course, state governments are heavily reliant on stamp duty revenue and are therefore reluctant to have it removed although we will discuss how these issues can be overcome.

Stamp duty is a tax which is payable when someone chooses to purchase a home.  Home owners will generally move home because their current home is too big or too small for their needs or because they have changed jobs and need to move elsewhere to be closer to employment.  The impost of stamp duty discourages people from moving to more appropriate accommodation.  If you don’t yet own your home and are considering purchasing your first home, stamp duty is an additional upfront cost which can make purchasing a home even more difficult.

Chart 1

The above chart tracks home sales over time and as you can see, after transaction activity peaked in the boom of 2001 to 2004 it has trended much lower ever since.  Although home values have been increasing over the past two and a half years and sales volumes have increased, the rise has been moderate.  When sales hit a low point in October 2011 there had been 409,582 house and unit sales nationally over the year.  Transaction volumes rose to as high as 490,326 sales over the 12 months to July 2014 which represents an increase of 19.7 per cent.  The recent peak in sales was -22.9% lower than the all-time peak of 635,661 sales over the 12 months to May 2002.

Chart 2

 

While increasing home values may make home owners feel wealthier, when you buy your next home stamp duty is calculated based on the purchase price so you have to also pay a higher amount of stamp duty.  Over the past, two and a half years, home values have increased by a total of 20.7% across the combined capital cities.  Most of that growth has occurred in Sydney and Melbourne however, values have risen across all capital cities.  What this means is that when people are buying homes the increase in value is also increasing the stamp duty burden for the next purchaser and subsequently providing additional taxation revenue to government. The impost of stamp duty is also a further barrier to market entry for first home buyers despite some states offering discounts and incentives to first time buyers.  Furthermore, stamp duty is acting as a disincentive for home owners from moving (eg. upgrading or downsizing) to more suitable or appropriately located housing.

Chart 3

Data released last year by the Australian Bureau of Statistics (ABS) showed that across the state and territory governments there was almost $36 billion in taxation revenue from property (note this is both residential and other property types) over the 2012-13 financial year.  Stamp duty was the second largest source of tax revenue at $12.841 billion with only municipal rates at $14.192 billion being higher.  Over the year, as home values and sales rose, stamp duty revenue increased by 16.9%.  Home values moved even higher during the 2013/14 financial year and sales rose further so it is reasonable to expect a further significant increase in stamp duty revenue.  At CoreLogic RP Data we have noted a reduction in sales over recent months and the rate of capital city home value growth is slowing, while this may not be enough to impact stamp duty revenue in 2014/15 it will probably start having an impact by 2015/16 (of course different states will see the impact at different times).  The point is because stamp duty is a tax collected on the purchase of a home it is collected from a relatively small proportion of the population and is an unreliable source of tax reliant on demand for homes at any given time which can ebb and flow substantially.

Although I am an advocate for stamp duties removal I do realise that state government will need to raise that revenue elsewhere.  I am also not an advocate for more taxes however, a blanket land tax, paid by all home owners, would seem to make more sense.  It is a way of guaranteeing revenue each year as well as broadening the tax base for this revenue rather than just relying on those purchasing properties.  Over the 2012-13 financial year $12.841 million was collected in stamp duty, the ABS estimates that as at June 2013 there were 9,226,900 residential dwellings.  Based on this dwelling count, land tax of $1,391.69 annually per residential dwelling would cover the cost of this foregone revenue.  Keep in mind that stamp duty is collected from any property transaction so revenue would be higher when you include land sales and sales of other property types.  This would potentially allow for a reduction in the overall land tax rate per household.

By broadening the base of tax collection governments would provide themselves greater surety of revenue as well as assisting the housing market by reducing the costs associated with those who consider it necessary to move home.  Given the concerns about investor activity in the market and considering they already reap the benefits of negative gearing perhaps a higher rate of land tax for investment properties should also be a consideration for any stamp duty reform.

With home value growth slowing and sales volumes falling, now would seem like the right time to reform stamp duty.  Although the impact of a slowing market won’t be felt straight away, no doubt that in years to come Governments will be left with a revenue hole as the effects of the housing market slowdown hit their tax revenue.  Providing governments with a higher level of guaranteed revenue would seem like a good idea even if it unfortunately would mean an additional tax for everyone rather than for just those buying property.

Note that the ACT is already going down the track of removing stamp duty.  In last year’s budget the government announced a plan to phase out the tax over the next 20 years with rates gradually increasing to make-up for the revenue shortfall.  Over the period stamp duty rates continue to fall.  While the phasing out is commendable I still feel that now is the time to remove stamp duty across the board.

About Cameron Kusher

Cameron Kusher is Head of Research at CoreLogic, specialising in primary and secondary data analysis, property market commentary and consultancy. Cameron has a thorough understanding of the fundamentals such as demographics, trends, economics and spacial analysis and is a regular keynote speaker for property-related groups, regulated industry bodies, corporations and the government sectors. Follow Cameron on Twitter @cmkusher

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14 Responses to There’s never been a better time to reform stamp duties

  1. Scott Hochgesang January 24, 2015 at 7:46 pm #

    Cameron,
    What is your solution for all of us that have paid stamp duty over the years? If you subject us to a new land tax on every property, do we get our money back? Otherwise we are paying both taxes…

    There are many simple solutions for the States to reduce their reliance on property related tax revenue. The easiest would be an increase of the GST up to rate of New Zealand’s-which is 15%.

    Interestingly, their country is booming. They balance their budgets. We might be wise to send a scouting mission over to see how the Kiwis do it…

    Cheers,
    Scott

    Scott Hochgesang
    Balmain Property Guy
    (on Facebook)

  2. Russell Murphy January 27, 2015 at 2:58 pm #

    A number of foreign markets welcome offshore investors but charge them a premium on stamp duty/transaction charges as a means of lifting the tax burden from locals whilst ensuring offshore speculators, who often inject little else into the local community, pay their way.
    Myopic Australian governments have been asleep at the wheel & I can only hope a review highlights the sadly lost opportunity.

  3. Richard Goddard February 12, 2015 at 12:48 pm #

    How do you deal with the additional cash outflow of nearly $1400 per year that you are proposing. Stamp duty is levied at the point of sale and included in the property settlement, so it is usually added to the mortgage borrowing. Who has an extra $1400 laying around? Also, I have already paid stamp duty on the properties that I now own, so either they should be exempt from the land tax increase, or the state government should refund the stamp duty that I paid. Sorry, I don’t see this idea getting a run.

  4. Dan Murphy February 12, 2015 at 1:09 pm #

    When you look at the origins of land tax it is hardly applicable these days. Not too many people making money by running animals and farming on their land now?

  5. Adrian February 12, 2015 at 1:53 pm #

    A terrible idea on so many levels.

    For starters. Your land tax solution – ridiculous, terribly unfair on all of us who have paid hundreds of thousands of dollars stamp duty over the years on our portfolios, you now want to implement another operating cost. Which by the way, would be tax deductible, annually instead of stamp duty which is only an offset in a capital gains event. This would further decrease the federal budget, which is in tatters as it stands, which by the way covers a lot of the states cost. So I suggest you go back to the drawing board on your alternative. And I have more ammo on this should you wish to debate. But I assure you will come off looking silly.

    The next major issue with this article is that stamp duty prevents property being traded like a currency. Having the cost of stamp duty imposed deters people from buying and selling properties at every little small peak and trough in the market. For this reason removing stamp duty would cause absolute chaos in the market, people would be moving in and out of properties like there is no tommorow. Sure the real estate agencies would do well out of it, because their clearance rates would go through the roof, but what about our tenants? How would they be protected?

    Taxation reform regarding property is not required. There exists fair and equitable wealth building mechanisms within the system already. Leave it alone!

    I would accept a reduction of stamp duty. But not a total removal. And no new bloody land taxes for goodness sake

  6. Barry Turvey February 12, 2015 at 3:19 pm #

    So what you suggest is people who have bought and sold homes all their lives and paid the stamp duty each time and have now settled into their permanent home to retire are now going to have to pay a new tax–land tax . I do not think that is very fair and maybe unaffordable for older people.
    Why not make a one percent stamp duty on home purchases and a higher stamp on investment properties.
    Pensioners buying their home should pay no stamp duty–they have paid their dues over many years–this is a burden they cannot afford when purchasing their last home to retire in

  7. Paul Browning February 12, 2015 at 6:54 pm #

    I don’t see why we need to tax land at all and it seems it just creates unnecessary distortions in the market. Kusher’s proposal would certainly impose onerous liabilities on older people quite happily retired largely on fixed interest in their family homes bought with the sweat of their brows decades earlier.

    What I’d like to know is how much either the GST or Personal Income Tax has to rise to meet the $12 billion shortfall.

  8. Paul Browning April 14, 2015 at 12:07 pm #

    Great comments from everyone above. But I think we’ve all missed the point – we don’t have a tax problem in Australia, but we do have a spending problem by all Australian governments who simply blow our dough on non-solutions to problems best dealt with at either a local level or not at all. From what I can see, the more taxpayers money thrown at a problem the worse it gets, with very few exceptions.

  9. Laura Katrib April 24, 2015 at 8:43 am #

    Australia is known to be either the highest or one of the highest tax collector in the world with staggeringly high costs of living, especially foods putting so much pressure on the low and middle income families.

    How is introducing or raising the land tax on these already harmed families is going to affect them when the costs of the regular groceries is constantly rising with the volume of the nutrition shrinking, besides the quality of the nutrients afforded per family.

    The government considering imposing laws and regulations on families who allow their children to gain weight, but not considering the quality of nutrients are being purchased simply for affordability causes?

    What about the property owners who have just or will purchase property in the near future already struggling to make ends meet in order to own a family home and just paid nearly $20,000 in stamp duty alone. How is imposing further annual land tax is going to affect them? Are they going to pay it once more throughout the years? Or

    Will there be reservations for them?

    How about the government plan to grant every citizen the right to own a piece of land to build own home before they impose further land taxes that are going to cause further pressure on the already suffocated families?

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