Housing affordability continues to be a hot topic and the often-raised suggestion of replacing stamp duty on the sale of a property with a universal land tax is back on the table again.
The idea has been around for more than a decade after former Treasury secretary Ken Henry claimed that stamp duty not only is a disincentive for people to move, but also gives state governments erratic income – their coffers overflow when the property market is booming but withers away when the market slumps.
The NSW government is dusting off the idea again by commissioning a consultation paper and inviting interested parties to provide their views until July 30.
The proposal envisages that a homebuyer could either opt to pay stamp duty on a property purchase price, or an annual land tax that would be based on a property land value that would then be attached to it forever. In other words, once a purchaser opted for the annual land tax option in lieu of stamp duty, there would be no going back.
In the event of the scheme proving popular, the paper envisages a price threshold based on the value of the property. If that was the case, a buyer of a $5 million property could still be liable for stamp duty on its purchase and could not opt to pay land tax instead.
State governments receive more than $20 billion a year from stamp duty, so any introduction of a new scheme would need to be phased in.
The proposal floats the possibility of the amount of stamp duty forgone being capped at, say, $2 billion a year in the early years, with the cap changing over time as the number of people opting out of stamp duty increases.
Proponents of the scheme claim that the property market would boom because buyers could use the extra money now required for stamp duty to increase their home deposits and qualify for bigger mortgages. However, this begs the question, do we really want to encourage homebuyers to take out even bigger loans? After all, interest rates are at rock bottom and must rise in the future.
If you think mortgage stress is bad now, imagine what a 2 percentage point rise in mortgage interest rates would do.
The biggest problem with a tax based on land values is that, in many states, it is common practice to leave the rate of land tax unindexed, which means that each time a property increases in value, the land tax bill increases, too.
A homeowner who chose the land tax option would most likely be faced with an increasing land tax burden as the years passed. This could be particularly hard on retirees, who could see their home costs increase while their capital decreases.
Another major flaw in the proposal is that it would likely provide a “free kick” for property speculators. It is generally accepted that speculators competing with regular homebuyers has been a major reason for property prices soaring to record highs.
In NSW, a person who buys a property today for $800,000 would pay stamp duty of $31,335, irrespective of whether or not it is their primary residence. This large upfront cost is a major disincentive for speculators who want to buy property now and quickly flip it.
However, speculators may have a field day if they could choose an annual land tax bill instead of stamp duty. If they held the property for only a short time, there may be no land tax at all payable.
There is a further complication with the land tax proposal.
Investors already pay land tax on rental properties and this cost is usually passed on to their tenants.
It would be manifestly unfair if stamp duty – which is a capital cost, not a deduction – was waived on property purchases for investors, while continuing to allow them to claim a tax deduction for the land tax, which had already indirectly been passed on to tenants.
The land tax proposal is merely in the consultation stage. Let’s hope there are further deep discussions of all the pros and cons to avoid any potential property market disasters.
Article Source: www.brisbanetimes.com.au
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