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News Michael Pascoe: NSW has a cunning plan to abolish stamp duty. But it’s far from simple Updated:

Michael Pascoe: NSW has a cunning plan to abolish stamp duty. But it’s far from simple

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NSW Treasurer Dominic Perrottet has achieved a land tax double – a proposal that Baldrick would call “a cunning plan” and Sir Humphrey would describe as “very brave”.

Mr Perrottet has suggested a method of replacing real estate stamp duty with annual land tax that is indeed cunning – and might just succeed when other means have failed to jump the political pain threshold.

But it could still prove “very brave” when electors start feeling the end cost and vested interests start dealing with the complications of a two-tier property market.

Amid all the detail of the NSW budget on Tuesday, the Treasurer was offering little detail on the suggested switcheroo beyond the broadest of outlines:

  • Home buyers would be given the choice of paying a lump sum upfront – as they do now with stamp duty (or whatever it’s called in your state) – or cop an annual property tax
  • Once a property was traded with the “annual tax” box ticked, it would remain annually taxed for all subsequent owners. There would be a lower rate of property tax for owner occupiers than for investment properties.
NSW Treasurer Dominic Perrottet has offered little detail for his plan. Photo: AAP

There’s a bit of nonsense about “protections” being put in place to prevent landlords seeking “rent increases without a tenant’s agreement” because of the property tax – that’s not how rents work in the real world, landlords charge what the market will bear regardless of costs or windfalls.

But so far, so simple and politically painless, leaving it to individuals to pick their tax system.

What’s missing, though, is any indication of how expensive the annual tax would be. That’s because the answer has to be “a lot”.

Enter political pain down the track.

And then there’s the complication of a two-tier property market caused by the aforementioned “a lot”.

One of the many efforts to encourage politicians to make the stamp duty/land tax switch was a 2016 study by KPMG on behalf of the NSW Business Chamber, the NSW Council of Social Service and the Australian Manufacturing Workers Union – as broad a coalition as you’re ever likely to see.

The KPMG modelling found all sorts of employment and GDP benefits from the switch to a much more efficient tax, but it also estimated all NSW owners would need to pay annual tax of 1.3 per cent of the unimproved value of their land to replace stamp duty.

According to the NSW Valuer General’s 2019 report, the median unimproved land value in the Premier’s Willoughby local government base was $1.4 million. In the Opposition Leader’s Strathfield council area, $1.53 million.

To save you getting out your calculator, 1.3 per cent of $1.4 million is $18,200 a year or $4550 a quarter, $350 a week – all before tax for owner-occupiers but a tax deduction for investors.

And that would be on top of the usual quarterly local council rates.

Investors and owner-occupiers would be treated differently in terms of tax deductions. Photo: ABC News/Graeme Powell

States are expensive to run, but reminding voters of that expense every quarter can become painful. They tend to forget the stamp duty pain, accepting it as just part of buying a property.

The 2019 median Willoughby sale price was $2,254,500 – which meant a once-off stamp duty bill of $109,295 – six years worth of annual land tax at that rate.

And as the value of land increases, so would the annual tax bill. Over a period of years, that could build to another “lot”.

Given the choice, speculators and people hoping to trade up or down fairly quickly or subject to relocation in a few years would tend to avoid the upfront lump sum and go with the annual tax.

But all things being anywhere near equal, an owner-occupier looking to buy a property for the long term would rationally not consider a property subject to annual tax.

The NSW government suggests the property tax would be a combination of a flat fee plus an unspecified percentage of the land’s unimproved value.

As there’s not much of a land value component in the price of most apartments, the flat fee would still need to be considerable to make it all add up.

Yes, it gets complicated, which is why the change hasn’t been made by any state despite overwhelming economic opinion that it would be one of the very best taxation reforms. (The ACT government is in the process of compulsorily phasing the change in over many years – and many existing owners don’t like it.)

Not everyone is entirely convinced it’s such a great idea. Game of Mates author Dr Cameron Murray makes a good argument for the change not being worth the political capital it would cost: “Stamp duties don’t increase the cost of housing. They do reduce asset churn by investors and speculators, which is desirable for price stability, and the apparent economic costs from reducing household mobility are overblown.

Stamp duty is a necessary evil for most property buyers.

“The ‘revenue instability’ of stamp duties is actually a huge positive for the economy as a whole, and the economic analysis that has underpinned the talk of the high economy-wide costs of stamp duty is simply made up.”

We’re seeing the “revenue stability” issue play out now. The government collects less revenue during a recession, but that’s a good thing from an economic stimulus point of view.

Dr Murray misses another issue though: Equity.

There is no good reason why someone who moves house either voluntarily or through necessity should pay vastly more tax than someone who buys once and sits pat.

Both the immobile and mobile use the same roads, hospitals and schools, but the immobile get them much more cheaply.

It’s not entirely dissimilar to the other iniquitous tax state governments are addicted to – gambling.

Like the federal government’s tobacco excise, the “mugs’ tax” inherent in pokie machines is paid disproportionately by poorer, less-educated citizens.

Mr Perrottet may need to be both braver and more cunning yet.