In welcome news for New South Wales property buyers, stamp duty reform is back on the agenda as part of a bold plan to overhaul the state’s tax system.
A recent NSW government-commissioned report placed one of the state’s biggest revenue sources on the chopping block as part of a bold 15-recommendation plan to boost post-pandemic activity.
But according to one major consultancy firm, it could come at the cost of a broadened GST.
PwC analysis released on Tuesday found that raising the GST rate to 12.5 per cent and broadening its scope to include fresh food, health and education would add between $14 billion and $40 billion to state government coffers.
That would be enough to offset the loss of revenue from abolishing stamp duty ($19 billion in 2018-19).
But what is stamp duty? And why could replacing it with a broad-based land tax be a major boon for prospective first-home buyers?
What is stamp duty?
Stamp duty is a tax levied by state governments on property purchases and is usually paid within 30 days of settlement.
In Sydney, owner-occupiers buying a million-dollar property pay roughly $40,000 in stamp duty, according to Commonwealth Bank’s calculator.
This rises to $55,000 in Melbourne and $48,830 in Adelaide, but drops in Brisbane ($30,850) and Canberra ($36,950).
Owner-occupiers in Perth ($42,616) and Hobart ($40,185) pay a similar amount to Sydneysiders.
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Most state governments waive stamp duty for first-home buyers purchasing homes valued below a certain threshold – and the exact amount a buyer pays varies according to:
- Whether they are an owner-occupier or investor
- Whether they are a first-home buyer
- Whether the buyer is purchasing an established home, a new home or vacant land
- The property’s sale price.
Why do tax experts and economists want to abolish it?
Economists dislike stamp duty because it discourages movement and drives down productivity.
This is because it imposes such a large upfront cost on prospective buyers that it distorts people’s decision-making.
Treasury modelling also shows that Australians’ welfare falls by 72 cents for each one dollar raised in stamp duty revenue.
“Stamp duty is the most inefficient of all the taxes in Australia, so it has the biggest economic costs,” said Robert Breunig, director of the Australian National University’s Tax and Transfer Policy Institute.
Professor Breunig told The New Daily that abolishing stamp duty would more efficiently stimulate housing activity than the federal government’s $688 million HomeBuilder program.
“You’re getting rid of inefficiency and not artificially propping up a market – in fact, you’re ridding it of something that stops the market from functioning well,” Professor Breunig said.
And it can promote a short-term uptick in house prices, partly because people can take the money set aside for stamp duty and add it to a downpayment in order to get a bigger loan.”
His comments come after non-partisan think tank the Grattan Institute said that removing stamp duty could boost productivity by $17 billion.
The think tank says charging annual levies of between 0.5 per cent and 0.7 per cent of a home owners’ land value would be a more efficient way of raising property taxes.
Why have we not seen reform?
State and territory governments have struggled to abolish stamp duty for two key reasons.
Firstly, it is a big source of income – contributing roughly $20 billion a year to the eight states and territories.
This is why some economists believe it is easier to abolish stamp duty now, when the property market has slowed down.
Secondly, it is politically challenging.
This is because an overnight change would mean asking home owners who have already paid stamp duty to pay more tax on their property.
Grandfathering the current arrangement for existing properties wouldn’t work, either, as those who stay put would avoid the tax and those who move would pay it.
University of Tasmania political scientist Richard Eccleston says the answer lies in a gradual transition.
He has put forward a four-stage transition process in a paper for the Australian Housing and Urban Research Institute.
Have any of the states made the change yet?
The ACT passed legislation in 2012 to phase in property taxes, with existing home owners who had already paid stamp duty now paying rising rates of land tax.
New home buyers are still paying stamp duty, but the rate is decreasing over a 20-year period.
Professor Breunig said this long-term transition has turned the issue into a political football that could have been avoided if a property tax was phased in over 18 months, with many Canberrans now complaining of punishing property taxes.
However, other states could still learn something from the ACT.
“To address concerns from those asset-rich, income-poor home owners, the ACT put in place a deferral plan, which helped prevent the changes from driving those with very valuable blocks of land out of their home,” Professor Breunig said.
“So for those without cash to pay [property tax], the government would track how much they are owed, and then when the property is sold, that’s when the government retrieves those accumulated taxes.”
CORRECTION, JUNE 15, 2020: An earlier version of this article incorrectly stated that Treasury modelling shows it costs governments 72 cents to raise one dollar in stamp duty. In fact, the modelling shows that Australians’ welfare falls by 72 cents for every one dollar raised.