A new white paper released by the National Housing Finance and Investment Corporation (NHFIC) has weighed the potential benefits from cutting stamp duty in favour of a broad-based land tax.
According to the report, families across all states and territories except the ACT are paying substantially more stamp duty when they move house than they were 20 years ago, knocking back mobility and the “efficient use of the housing stock”.
In Australia, transfer duty is around $43,000 or 20 per cent of the upfront cost of the median property purchase – but the relatively large cost becomes even more of a drain when a household moves multiple times.
A person or couple who had bought a median price house in Sydney four times over the last two decades would have paid more than 10 times the amount of duty than if they had only made one purchase 20 years ago.
The transfer duty rate would have increased from around 3 per cent of the median house price to 13 per cent in the 20-year period, creating a total amount of $121,500 in duty paid by the household. In contrast, the same household buying once at the start of the period would pay $11,900 at purchase – 10 times less than if they moved four times.
Victoria now has Australia’s largest effective rate of transfer duty on a median property at around 5.4 per cent (around $45,000), in contrast to 4.2 per cent (around $12,000) back in 2002.
In contrast, the ACT has the lowest effective rate of duty, after a decade of transitioning to a broad-based land tax.
The NHFIC noted that transfer duty regimes have not been adjusted to keep pace with rising house prices – resulting in higher tax revenue than necessary.
In NSW, a 5 per cent per annum average rise in dwelling prices over 20 years would generate 2.2 times the amount of duty revenue than if prices had risen by 2 per cent per annum.
But for state governments, transfer duty is a volatile source of tax revenue that can make managing finance difficult.
“The property market goes through large cyclical swings in both dwelling prices and the number of transfers, and this introduces volatility into government revenue,” the report noted.
“It could be argued this makes the tax counter-cyclical and useful in managing property cycles. However, experience shows that it hasn’t stopped financial stability concerns in the past and to this extent macro-prudential policy is a much more appropriate policy tool to manage the cycle.”
Transfer duty contributes around 13 per cent of state and territory tax revenue but is paid for by around 4 per cent of households per year.
Households better off with land tax: NHFIC
The NHFIC has argued that replacing stamp duty with a land tax in all states and territories would help improve economic efficiency.
NHFIC chief executive Nathan Dal Bon commented that encouraging household mobility would mean people could better adjust their own housing arrangements in line with their personal preferences, as their lives shift through different stages.
“Households that are considering downsizing and upsizing or just seeking more space when they are working at home during COVID-19 wouldn’t be penalised under a broad-based land tax compared with the current stamp duty arrangements across most states,” Mr Dal Bon said.
The paper calculated a NSW household would have to pay a land tax for more than 14 years to be worse off than if they had paid stamp duty, which is longer than the 12.4-year average holding period of a property.
The NSW government reported on its intentions to allow home buyers to choose between paying land tax or stamp duty in a recent progress paper, which included the results of its public consultation.
The government has estimated that the reform could improve housing affordability, boost home ownership by 6 per cent, increase average household income by around $3,300 and create a further 70,000 jobs.
The next step for the state is to assess feedback on the progress paper and to provide an update later in the year. NSW has joined the ACT as the only two jurisdictions angling to replace stamp duty with land tax.
On the other hand, Victoria increased stamp duty for properties over $2 million in its May budget, to the ire of industry groups.
States reforming property tax face challenges
For states considering a transition towards land tax, the NHFIC has said a short phase-out period will cost taxpayers less and provide more certainty about government revenue. It could also limit the impact of house price growth.
Using just new transactions, phasing in a new land tax was estimated to take around 23 years, provided new buyers decided to pay the tax in preference to transfer duty (assuming 4.4 per cent of properties’ turnover each year).
However, home buyers purchasing property just before the reform commences may need to be compensated, and this could cause a large fall in tax revenue for state governments.
Broadening the tax base would also mean an additional tax burden for households who own their home with no mortgage, and investors, some of whom have already paid duty years ago.
A land tax imposes an additional cost on households that on average would be around 75 per cent of current municipal rates – but the NHFIC believes the cost will be offset by a positive short-term impact on prices from removing duty.
Another option is to allow retirees and low-income earners to be paid a rebate on the land tax liability, analogous to a similar rebate for those cohorts around municipal rates expenses.
States could also legislate against landlords passing on the cost to tenants. The NHFIC has warned that as property investors have relatively shorter property ownership period compared to owner-occupiers, the additional turnover generated by removing the transfer duty may disrupt rental agreements and tenure for tenants if there isn’t some protection implemented.